Business Editor
The journey travelled by the local populace in the last decade has not been encouraging to say the least. Prior to dollarisation, citizens faced a scenario of scarce food commodities in a hyperinflation environment.
Company closures became the new norm whilst a booming black market for virtually all goods and a massive exodus by human capital erupted.
Soon after dollarisation which to many was a huge sigh of relief, the situation reversed with inflation pressures stabilising then later easing and most food items became accessible in retail outlets.
Disposable incomes were also rising across the economy and this stimulated consumption spending by households and investments by the corporate world.
Most businesses were revived including the lending business by banks and micro-finance institutions. Government coffers on the other hand though squeezed also improved marginally.
Such a scenario was likened by most as that of the children of Israel entering the promised land of milk and honey.
However sometime in 2011 due to persistent illiquidity in the domestic market and timid foreign capital, aggregate demand growth began to increase at a decreasing rate resulting in falling revenues and profits for companies.
The corporate world began to downsize whilst others closed shop due to viability challenges. Other corporates went under judicial management or liquidation. Households on the other hand became squeezed due to static or declining incomes leading to a shift in consumption from luxuries to basics.
Those who had taken loans for vehicles and mortgages finance, education and other personal reasons started to default.
This is partially explained by the huge non performing loans ratio of 17 percent in the banking industry according to official reports from the central bank. Unofficial reports however excluding foreign owned banks have the same ratio averaging north of 30 percent.
Consequently another new era though slow in the making has been formed characterised by deflation, squeezed disposable incomes (that is due to either retrenchments, pay cuts or half salaries paid in arrears) and fully stocked retail outlets.
Thus consumers are faced by a cruel reality where they are slowly failing to buy goods not because of unavailability as in prior tears but rather due to inability to pay.
Retailers have and are still reducing prices as a way to lure more sales but still consumers do not have the purchasing power. In such trying times, it is frightening and to a certain extent defies logic when households engage in consumptive borrowing.
The recently released quarterly Micro-finance industry report to March 2014 bears testimony as out of the total loans of $170 million disbursed, 71,22 percent of it was classified as consumptive borrowing.
The balance of 28,98 percent was categorized as productive borrowing. For the quarter to December 2013, statistics by the Reserve Bank of Zimbabwe also revealed that consumptive borrowing accounted 70,89 percent of the total loans amounting $164,20 million.
The most frightening part is the fact that such borrowings have been occurring when the auction business is booming and when media reports are citing cases of individuals and businessmen committing suicide due to failure to honour their debt obligations.
With households being an important fragment of the revival process in the economy, one is forced to question the rationale behind the huge appetite for loans.
Furthermore, is consumptive borrowing surely the best way to go in this environment for households?
One school of thought which explains the reason why individuals are borrowing despite the harsh environment is that they will be trying to supplement their squeezed incomes.
Though not an ideal scenario but most individuals have resorted to this route after failing to align their costs structures to the low income streams.
With most households’ earning below the poverty datum line, such an avenue has been justified as a supplementary source of income.
Worst case scenarios have however seen others living entirely on borrowings. Another school of thought for the huge appetite in borrowing by households has been the stubborn and risky approach of trying to maintain a particular lifestyle within the society.
Furthermore, research has also shown that the way the loans are structured and the quick processing time has also forced individuals to opt for micro-finance out of desperation and ignorance.
Absence of credit bureaus and aggressive marketing by most banks and MFIs to civil servants and other society members also has seen individuals opting for loans as it appears to be the only option rather than borrowing from relative and friends.
Overall, it appears with the government already in a debt trap and most companies with highly geared balance sheets, the society has also come to the realisation that debt may not as bad as it looks.
While acknowledging both the right and wrong reasons why individuals have resorted to borrowing, the current environment may not be conducive.
A deflationary environment makes existing borrowers worse off because it raises the inflation-adjusted value of debts and makes the debts harder to pay off.
So, it imposes a burden on borrowers ultimately becoming worse off. Without undermining debt, households in Zimbabwe need to be taught on the key issues to consider when borrowing.
Borrowing for productive purposes may be ideal as this may result in a profit subsequently boosting income streams.
The writer is also of the opinion that not only households have fallen prey to the same issue. The huge funding allocated to recurrent expenditure mainly for funding civil service wage bill ahead of capital formation also reveals how the government has also failed to revive the economy.
Other corporates have done the same through accessing borrowings which they have failed to account how the funds have been used.
A top-down cleansing process from top chefs in the government and the government itself to the lowest class in the society may prove helpful.
To sum it up, debt may not the best of options for all economic agents when aggregate demand is weakening resulting in deflation.
Households may need to redress their spending habits so as to align their costs to the income streams they face.
Similarly, corporates may also need to continuously probe their cost structures so that they may reduce wherever possible as currently there exists limited streams of generating revenues.
Households may need to avoid living on debt as one famous quotes states; “It is the debtor that is ruined by hard times.”