eBusiness Weekly
By Misheck Ugaro
Several countries have announced several stimulus packages in order to minimize the negative impact of the COVID 19 pandemic in their economies.
While capacities to sustain noninflationary measures vary from country to country, it is important that Zimbabwean authorities, in coming up with a localized response, take into account the potentially negative impact on the economy that measures could trigger. Quantitative easing measures in the developed world are more likely to be focused on asset purchases and credit expansion by the Central Banks.
However, Zimbabwe’s current negative real interest environment characterized by high inflation at 676% and a bank rate of 30% leaves no room to maneuver.
It is against a flurry of policy committee meetings across the world and in particular the meetings of The Federal Reserve Bank of America (The Fed), Bank of Japan (BOJ) and the European Central Bank (ECB) in the recent week that we must look at our own stimulus measures announced by the government.
In the recent cabinet briefing of Tuesday 28 April, the Zimbabwean authorities announced an initial measure granting a moratorium on rentals. This entails all tenants being granted a moratorium on their rental payments for the duration until the end of the lock down period. While this is a welcome relief to a wide section of the community ranging from the individual households up to large corporates and businesses, a careful analysis of this measure is necessary and the risk of negative repercussions post the COVID 19 era should not be ignored.
In addition, the impact this has on the other side of the community which is the real estate sector and financiers should be further scrutinized. It is our view that before we congratulate the authorities for such a package, we review the positives and negatives from such a measure.
While statistical details are still sketchy, the immediate implication of the measure is that credit has been granted to all tenants for the period of the lock down. It is important to emphasise that this is a moratorium, which is not the same as removing the liabilities of tenants.
It is possible that this announcement could be misinterpreted to mean no rentals will be paid during the moratorium. These will accrue instead. Authorities are urged to to provide clear explanations that tenants are still liable to pay their rentals at the end. The announcement is currently not clear and several variables, as summarized below, have not been explained and could potentially create unsustainable repercussions soon after the lock down.
• The lock down period is currently indefinite as no one knows when the right time for its removal will be reached. Learning points from two African countries that recently removed the lockdown measures, being Ghana in West Africa and Swaziland in Southern Africa are that both countries experienced an immediate upsurge of infections soon after
the removal of the lockdown measures. Ghana recorded 240 new cases inside 24 hours while Swaziland recorded 27 immediately soon after.
This shows the inadequacy of measures that authorities are adopting. In the two cases above, it would be too simplistic and incorrect to conclude that the rise in infection rates is a result of the removal of the lock down because these cases arose too soon after the removals.
It proves, on the contrary, that these infections occurred during the lockdown period and are manifesting only now at a time coinciding with the removal of lockdown, hence proving the misting of the relaxation.
A scientific method of determining lockdown duration is not yet achieved. It is not known whether this is because the removal of the lockdown has caused people to come out and be tested as there is no risk of iaolation, a very likely scenario, but which then begs the question of how long the lockdowns should remain in place.
Coming back to the Zimbabwe case, the question of how much longer the lock down and hence the moratorium will remain in force has to be addressed.
• The above question will determine the level of credit expansion created. This liability still has to be settled at the end with all the attended risks of default. Particularly vulnerable is the household sector which, under current lockdown conditions, is not earning any incomes and will likely face difficulties to settle. Government is therefore urged to adopt a forward looking approach and prepare an assistance package, which itself has difficult connotations for the fiscus.
• Any rescue package pauses the risk of fuelling money supply growth if funded inappropriately.
• All real estate business cash flows are impacted negatively for the duration of the lock down while their financial obligations to financiers such as banks, insurance companies and pension funds will continue on an accrual basis. What this means is that there will be a considerable reliance by the banks to the Central Bank’s window as all mortgagers postpone their scheduled installments.
• This is equivalent to credit creation and has its resultant impact on inflation. Prices of commodities had already started going up with a consumer basket for a family of 5 having jumped from ZW$4000 to ZW$6000 in the period between the start of the lock down to the third week of April. Without an attendant matching measure aimed at the productive sector to boost the supply of goods and services, the credit thus created is likely to worsen the inflationary pressures in the country.
• Finally, it is also necessary to clarify the parameters of how the installments for the amounts accruing during the moratorium will be paid. Will these be bullet payments or will be spread and thus the repayment period needs to be specified. This is potentially a back end loaded repayment plan that might prove insurmountable to the people who will anyway be coming out of a non-productive period of the lock down and hence will be low on incomes. This is a potential crisis in the making when after the lockdown, many tenants could be thrown out of their leased properties by landlords who themselves will be under pressure from financiers.
• While the moratorium touches on tenants and landlords on one side, it has not clarified on the position of the lenders who hold the mortgages for the properties and the funding solution thereto on the other side. It has also not touched on the productive sector in order to boost production.
It is therefore imperative for authorities to relook at the strategy and adopt a system wide policy matrix whose mix adequately caters for the whole economy taking into account all stakeholders. We expect however that further details will be provided in the forthcoming Presidential announcement on the policy direction in the National
Development Strategy (NDS) 2020-25. Meanwhile it is hoped that significant levels of donor funding can be unlocked. If that succeeds, there should be a matching improvement on productivity that will meet demand of goods and services. In short, the authorities have their work cut out and it is incumbent upon all of us to proffer solutions. The call by Mr. Strive Masiiwa on the international donor community to lift limitations against Zimbabwe and Sudan are particularly important in our environment and should be supported.
Misheck Ugaro
(263) 777052004/712808140 [email protected]
Linkedin: https://www.linkedin.com/in/misheckugaro
Twitter: @twitcagan.com
Misheck is a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society.
