Commercial Farmers' Union of Zimbabwe

Commercial Farmers' Union of Zimbabwe

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Funding remains scarce for business

Eric Bloch Column: Funding remains scarce for business

Friday, 25 February 2011 09:17

IT is widely acknowledged that one of the many constraints upon Zimbabwe’s 
economic recovery is the lack of funding available to enterprise.

Almost all businesses have a pronounced insufficiency of resources to 
finance operations in general and, in particular, to maintain and increase 
volumes of production and sales, let alone adequately maintain fully and 
enhance holdings of operating stocks, plant, machinery and equipment, or 
even to pay adequate salaries and wages.

Expansion and diversification is far beyond the means of most, and very few 
can even contemplate new investment.  The paucity of finances not only has 
severe limitations upon the businesses, but also has negative downstream 
economic repercussions. These include minimal consumer spending power due to 
the inadequacy of employee remuneration, and poor inflows to the fiscus by 
way of direct and indirect taxes.

The initial trigger to the monetary drought was the cataclysmic 
hyperinflation that prevailed in 2008.  Inflation soared upwards at an 
accelerating pace never before experienced anywhere in the world. So great 
was that inflation that the then Central Statistical Office  became unable 
to determine its extent after July 2008, at which time it had assessed the 
annual rate of inflation to be 231 million per cent.  By November, 2008 some 
estimates placed inflation as high as more than 650 trillion per cent 
(highlighted by Zimbabwean currency denominations being as great as 100 
trillion dollar bank notes).

That rampant inflation necessitated that all required many trillions more 
working capital to fund holding of manufacturing and other operating inputs 
and stock in trade than they had previously required, and they were almost 
wholly unable to access such funds, let alone to fund the extension of 
credit to customers.

Their funding needs were therefore further intensified by the fact that most 
of their suppliers could no longer provide them lines of credit.  These 
greater working capital needs applied to virtually all within the economy, 
irrespective of whether they were engaged in manufacturing, wholesaling or 
retailing, farming, tourism or any other economic activities.

The under-capitalisation circumstances of 2008 intensified when on February 
3 2009 Zimbabwe’s currency was demonetised, and a multi-international 
currency system came into being.

What little monies were still held by enterprises were effectively rendered 
worthless, conversion to hard currencies being at an effective rate of Z$20 
trillion: US$1!  At that stage, virtually the only capital resources 
remaining for businesses, in all economic sectors, were their fixed assets 
(such as land and buildings, plant machinery, furniture, fittings and 
equipment), and the limited trading stock that they still held.

Primarily because of the demonetisation of Zimbabwean currency and the start 
of the international currency regime coupled with a belated — but 
nevertheless commendable —  recourse to partial fiscal frugality, Zimbabwe’s 
horrendous hyperinflation ceased in 2009.

That year’s inflation rate was less than 4%.  But that did not reverse the 
hyperinflation created need for vastly more business working capital than 
that required prior to the hyperinflation era.  It merely halted the 
escalation in funding needs.

However, other circumstances have continued to impose a growing need for 
greater business funding.  Most businesses had been sustaining losses in the 
years preceding the slow economic recovery that began in 2009.

The economic upturn enabled a slow diminution in the extent of the losses, 
but for many did not suffice to eliminate losses entirely and bring about 
profits.  On the one hand, the working capital limitations prevented 
businesses being able to operate fully, and as a result further losses were 
sustained, which yet further eroded capital resources.

Losses also resulted from there still being constricted consumer spending 
power and the resultant limited domestic market demand.

Concurrently, export market competitiveness had markedly decreased as the 
hyperinflation and low production rendered many Zimbabwean products 
non-price competitive against products of other countries.In desperation, 
business looked to the financial sector for funding, but availability has 
been extremely limited.

Not only had the sector also experienced the hyperinflation created erosion 
of its capital resources, but in addition the inflow of deposits from all 
economic sectors, and from the populace in general, was miniscule.  On the 
one hand, many were devoid of funds to deposit and, on the other hand, most 
were very wary of placing such monies as they had into the banks.

They feared that Zimbabwe would reconvert to its own national currency, with 
the depositors forfeiting any foreign currency held on their behalf by the 
banks.  Many also feared that there would be a recurrence of Reserve Bank or 
governmental expropriation of their foreign currency holdings, without due 
compensation being forthcoming, as is still the case of many funds of 
exporters, NGOs and others that were held by the Reserve Bank in the period 
prior to 2009.

These “expropriations” included the funds which were replaced with allegedly 
tradeable gold bonds due for redemption almost two years ago but still not 
redeemed because of the Reserve Bank’s bankruptcy, and the failure of 
government as yet to assume the debts.

On the other hand, the financial sector has had very limited access to 
critically needed international credit lines.  There are many international 
finance organisations, banks and other institutions that are willing, in 
principle, to provide substantial credit lines to Zimbabwean banks.  But 
that willingness is muted and contained by Zimbabwe’s exceptionally low 
creditworthiness rating, it being perceived as a very high credit risk, and 
most credit insurers being unwilling to insure against that risk.

That lending reticence has been exacerbated and intensified over the last 
year.  In part, that is due to the recurrent confrontational berating of the 
international community by some of Zimbabwe’s political hierarchy, in part 
by Zimbabwe’s prolonged default in settlement of debt arrears and, over the 
last year, by Zimbabwe’s declared intents and legislation for economic 

Understandably, there is a profound reluctance to lend to enterprises whose 
ownership and management may change to unknown parties whose business 
integrity and operational ability is unknown.

In like manner, most foreign suppliers to Zimbabwean businesses are fearful 
of extending credit to those businesses, being concerned that the country’s 
financial circumstances, and its policies, may well prevent timeous payments 
being forthcoming — intensifying the possibility of the suppliers sustaining 
bad, irrecoverable debts.

This is yet a further intensification of the capitilisation needs of almost 
all businesses, whatever their fields of operation in the economy.

Until Zimbabweans, and the world at large, feel assured that Zimbabwe will 
not revert to its own currency until it has a fully stabilised and thriving 
economy, and that the politicians will place the needs of the economy and 
the populace ahead of their megalomaniac and racist beliefs, substantial 
foreign funding, credit lines and supplier credits will not be forthcoming, 
and the monetary inadequacies of the economy will continue.


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