adminGift Mugano Business Correspondent
MOST Zimbabwean companies continue to reel from high costs of doing business largely due to the lack of long-term finance. The situation has been exacerbated by the lack of liquidity in the economy which has dampened demand. This situation has also been worsened by the influx of cheap imports from the region and abroad.
One wonders how companies like Edgars who meet institutional and administrative costs such as rent, pension, tax and salaries have been surviving the stiff competition from flea markets, which do not have such overheads and have the advantage of buying cheap merchandise from overseas markets.
As a result of the uneven playing field, a number of companies have been failing to service their debts.
The debt levels have been worsened by multiple debt ownership as debtors create new creditors to settle the old debt (borrowing from John to pay Peter).
This has resulted in the creation of unsustainable non performing loans which in some companies have outstripped the companies’ assets thereby undermining their ability to service the loans.
Companies which have managed to stay afloat have had to adopt strategies to raise sales against a background of low demand and worsening competition from foreign firms.
In some instance managing directors have turned into salesmen, who out of desperation have resorted to jumping the whole value chain (of wholesalers and retailers) to sell directly to the consumers.
In some cases, a number of manufacturers have opened shops and are now in direct competition with the same shops that they used to supply.
They are now living up to the old age adage “Desperate times require desperate measures”.
The current indebtedness among firms can be resolved by the private sector themselves in partnership with Government.
In managing the debt problems creditors have to exercise caution as the current hostile strategies of surrendering debtors to debt collectors, attaching of properties and litigation have yielded dismal results.
It is common knowledge that all property, which were auctioned in a bid to recover debt, have yielded far below 50 percent of the debt value.
There are a number of strategies which can be implemented by creditors to manage debt. However, two prominent strategies which are used internationally and even locally by reasonable creditors are refinancing and rescheduling.
Refinancing, involving making fresh loans to repay the old. Here, creditors give more credit to sound and promising debtors thereby raising their ability to service their debts. Alternatively, in refinancing, the amount of debt owed does not change, but the terms for repayments are extended, usually through longer repayments periods and low interest rates.
Rescheduling, is almost similar to refinancing, in that the original loans stay on the books, but the schedule of payments are altered to allow longer repayment and possibly lower interest rates.
In order to save the economic from catastrophic effects of debt explosion, Government must intervene by calling for moral suasion on creditors when dealing with debt management.
In the short term, Government needs to put in place capacity utilisation and re-tooling loan facility to encourage industries to increase their capacity utilisation and boost their efficiency and competitiveness.
In the medium term, Government must set up industrial bank mooted in the 2012-2016 industrial policy should come into reality.
The industrial bank objectives inter-alia includes the provision of long term finance to industry at concessionary rates for re-tooling. This will enable the country to build industrial capacity and address industrial viability.
Alternatively, the Government may consider setting up a sovereign wealth fund. International practice has shown that countries have used their minerals to create a sovereign wealth fund to build a national fund which they are using as support budgetary requirements and other pressing national matters.
These countries include Norway (US$656,2 billion), UAE (US$627 billion), Saudi Arabia (US$532,8 billion), Russia (US$149,7 billion), Botswana (US$6,9 billion) and Nigeria (US$1 billion).
The sovereign wealth funds for the countries above are anchored on oil, except Botswana, which is using diamonds and other minerals.
Gift mugano is an Author & Expert in International Trade & Development in Africa, PhD Economics (finalist) and a Lecturer of International Trade & Finance at Nelson Mandela Metropolitan University. He is based in Port Elizabeth, South Africa. Email: [email protected]
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