Zimbabwe: Resumption of Lending Must Be Carefully Plotted

Inflation is not hated by everyone, unfortunately, as there are an interesting group of people and businesses that welcome negative real interest rates and a currency declining on the black market, since this is how they make their money.

The suspension at the beginning of last week on bank lending was put in place largely to combat this crowd, and as banks are allowed to turn the taps back on we can expect some new measures and rules from the Reserve Bank of Zimbabwe that will make it difficult for speculators to borrow.

The most interesting point in that first week of the range of measures announced by President Mnangagwa to cramp the creation of extra liquidity is that the spiralling price rises suddenly levelled out, and the black market exchange rate stabilised.

Those measures did largely cramp the style of speculators so the underlying reasons, which were not structural, but man-made, that the authorities were zeroing in on were the correct reasons.

Over the weekend Reserve Bank Governor Dr John Mangudya carefully explained how the speculators operate, although his Financial Intelligence Unit is still digging into the extent of the problem. But while the exact numbers are still being dug up, there are a lot of people involved.

The basic concept is part of what can be called the Zimbabwean disease, a desire to make money by manipulation and speculation rather than by producing goods and services that people want to buy.

Becoming very wealthy through creating real wealth is laudable, a first class business person building their own assets by doing something useful for society, almost certainly employing a lot of people and paying taxes.

But creating wealth by speculation is what can lead us into serious economic and social problems. This is where the land barons came in, managing to get some sort of right to public land and then selling it off by getting people to sign agreements and hand over their money, even though the development of the essential services had not been done and was not going to be done.

And included in this sort of group are those who reckon high inflation and a manipulated black market for foreign currency are a route to wealth, regardless of the suffering that they cause on the way.

We need to remember that inflation is the opposite of Robin Hood: it transfers wealth from the poor to the rich and makes inequalities even worse.

The paper shufflers were borrowing money, according to Dr Mangudya, and then racing off to the black market to stock up on US dollars.

Normally this would not make sense because of the interest that would have to be paid. But if the black market was manipulated to produce rapidly declining exchange rates, and so driving high inflation, then money making opportunities arise.

Although Zimbabwean interest rates are high, they are, at the moment, lower than inflation rates, month-by-month, so interest rates are in real terms negative. The speculators can thus buy their black market currency using borrowed funds, hold it for a while and then sell for a large profit as a result of the black market exchange rates leading the inflation rates with an expectation for the next group on the merry-go-round believing that they can do the same.

This means there is a significant group that do not want stable exchange rates and low inflation. They want to keep jumping on an off the merry-go-round.

There have been complaints about the freeze on bank lending. Some businesses legitimately face problems without their normal banking services, although in just over a week are unlikely to be tottering as a result.

The larger group of complaints come from those who are barred from speculating.

Some perfectly respectable and decent individuals will be complaining that they cannot access loans, and on mild prodding will admit that they did not want to borrow much, “a couple of hundred thousand”, so they could buy foreign currency, hold it and sell it at a profit and then pay back the bank.

With these sort of levels of speculative borrowing and dealing, the high inflation and declining black market rates are self fulfilling. This is precisely the sort of behaviour that fuels both processes.

And that is the main reason why President Mnangagwa was prepared to back a loan freeze in the set of measures that he announced just over a week ago.

Dr Mangudya is now talking about reviewing this loan freeze this week. We agree that some lending needs to be allowed, but we hope that the Reserve Bank is building up the required set of rules required to ensure that this lending is 100 percent productive.

Banks are supposed to know their customers. This is the modern global process. It is fairly obvious that some in Zimbabwe will check out things like money laundering, but will not delve deeply into how customers use their loans or overdrafts.

We doubt that borrowers write on their application “to speculate on the black market” as the reason to seek a loan, so some sort of fiction writing must be in progress.

Banks, which earn the bulk of their income from fees rather than the gap between what they pay depositors and what they charge their borrowers, are now going to have to earn those fees.

The rules must compel banks to follow up on their customer and find out just what they are paying for with the money they borrow.

If necessary the Reserve Bank rules can even make the banks pay against invoices presented by a customer’s suppliers, so the money cannot even touch the sides of the customer’s bank account.

This would also have implications that customers with money in their account have to spend it, or anything above a certain level, before borrowing more.

This will be tricky, since the real businesses needing real banking for honest transacting need to have a fairly clear path, while the speculative businesses and those just climbing into markets need to have their liquidity clamped. But this is the sort of expert moves that the Reserve Bank is now expected to be able to develop.

The relaxation of the bank lending suspension need not be a return to what was there before.

It can be done in stages, with the most critical elements relaxed first while we continue to watch the inflation rates and black market exchange rates and then gradually eased further. Those who complain have only largely themselves to blame.

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