Zim needs to adapt to the ‘new normal’ to survive

I RECENTLY attended the inaugural financial sector indaba where the governor of the Reserve Bank, John Mangudya, talked about the “new normal”.

The Ritesh Anand Column

The term was popularised by Mohamed El-Erian, having been coined by Alan Watt, following the global financial crisis in 2008 and the aftermath of the 2008-12 global recession.

It gained popularity from the context of cautioning the belief of economists and policy-makers that industrial economies would revert to their most recent means post the 2007-08 financial crisis.

In a lecture titled Navigating the New Normal in Industrial Countries, former head of United States global investment management firm, Pimco, El-Erian, stated that the use of the term was an attempt to move the discussion beyond the notion that “the crisis was a mere flesh wound … instead the crisis cut to the bone”. A number of countries, especially in Europe, are still recovering from the financial crisis, almost six years after.

So how does the term the “new normal” apply to Zimbabwe and what does it mean to the average person on the street. Mangudya raised concerns over the increasing levels of non-performing loans (NPLs). NPLs have risen from less than 1,8% in December 2009 to over 20,1% (around US$1 billion) in September 2014. If you exclude the five troubled banks, this figure declines to 12,95%. He referred to this as the “unintended consequences of the victory of dollarisation over inflation”. What does this mean?

During the period of hyperinflation, both consumers and corporates had become accustomed to borrowing huge sums of money that would eventually become worthless by the time it came to repaying the loan due to hyperinflation. For example, one could borrow the equivalent of US$100 000 and have to repay less than US$100 after a year. This was a period in which to borrow as much as you could, acquire real assets that would hold their value in real terms and repay your loan after a year at significantly lower value.

This changed overnight when Zimbabwe dollarised in February 2009. It was no longer attractive to borrow money in a US dollar environment, especially as interest rates were initially as high as 20-25% per annum. Some were charging as high as 3% per month! This compares to a base rate of 0,25% in the US and lending rates as low as 2% per annum for corporates and 3-4% for consumers.

It is little wonder why default rates and NPLs have risen so quickly to over US$700 million in Zimbabwe. There is no way one can sustain borrowings at such high rates without eventually defaulting. This is especially true for consumptive borrowings, which makes up at least 25% of total borrowings. NPLs contribute to economic stagnation as resources are locked in unproductive projects. This hinders economic growth and economic efficiency and thus adversely affects the growth of the economy.

It seems that Zimbabweans have grown accustomed to borrowing money with no intention of paying back. Why? If you borrow money, you should repay it. These are depositors’ funds and include hard-earned savings of so many people.

During the hyperinflation era, it did not matter so much as inflation would take care of your borrowings. However, there is no place to hide when Zimbabwe dollarised in 2009. If you borrowed US$100 000 you would have to repay US$120 000 after the first year assuming a rate of 20%.

Furthermore, loans were typically short-term in nature — 30, 60 and 90 days and would come loaded with set-up and roll-over fees. This explains the high interest income banks have enjoyed over the last five years. So the “new normal” applies to the new environment we find ourselves in. We need to adapt to the new environment. We need to learn to live within our means and this includes government.

We cannot buy things we cannot afford and hope to fund them with expensive borrowings. We need to cut back on our expenditure and learn to save. We need to only borrow money if we can afford to repay it.

Banks need to lower their interest margins and cut back on their operating costs. Businesses need to become more efficient and become less depended on borrowings to fund their operations. We are living in difficult times and this calls for making tough decisions. The environment is unlikely to change in the short-term and we all need to tighten our belts.

We need to learn to adapt to the “new normal”. I’m not sure whether we ever adapted to the new environment we find ourselves in. I have long argued that no one realises the true value of a US dollar. We are using one of the strongest currencies in the world in what is widely considered to be one of the weakest smallest and economies in the world.

Dollarisation was both a blessing and a curse. A blessing in that it restored macro-economic stability and sanity (critical in attracting investment); a curse because we have limited control of monetary policy. Interest rates are too high and need to come down; borrowers need to start repaying their loans; and costs in general need to come down.

The financial conditions we are experiencing today are no different in many respects to the global financial crisis of 2008. The current crisis is not merely a flesh wound, but will cut to the bone. There are no easy solutions and the process of unwinding the bad loans will be long and painful.

The Reserve Bank chief is doing all he can to ease the process, including the establishment of the Zimbabwe Asset Management Company and all other interventions he has at his disposal.

We have to bear in mind that he has one hand tied behind his back as he no longer controls the supply of money. The rest is up to us. This is the “new normal” and we all have to adapt to this new paradigm to survive.