Leveraging productive credit support for economic turn around, growth

NOTWITHSTANDING the challenge of suppressed liquidity in the economy, the current sectorial credit patterns do not reflect structurally designed configurations for facilitating economic turnaround.

This is despite the fact that the mid-year statistics indicated that credit to the private sector recorded an annual growth of 3,94 percent in August 2018, compared to an annual growth of 4,80 percent in the previous month and on a monthly basis, credit to the private sector is said to have increased by 2,16 percent, from $3,646 million in July 2018 to $3,724 million in August 2018, with other recurrent expenditures accounting for 40,46 percent of the total outstanding loans and advances, during the period under review.

However, the general sectoral credit configuration or allocation in the economy during the same period reflected that overall, households (consumer credit) accounted for 26,84 percent of the credit allocation, followed by agriculture at 18,96 percent; distribution at 13,36 percent; services at 12,32 percent; manufacturing at 10,91 percent; financial organisations and investments at 7,40 percent; mining at 4,51 percent; construction at 3,14 percent; and transport and communications at 2,11 percent.

Naturally, household or consumer credit reflects increased money supply in the economy, that is; it puts more money in the hands of the consumers, raising the consumer propensity to consume goods and services that should be equally made available in the market.

The productive sector and businesses would then respond by acquiring more raw materials and increase production to meet or match the increased demand and propensity to consume. The marked increase in business activity raises the demand for labour and employment creation.

As I have alluded above the depicted credit patterns or configurations, do not resemble and reflect those of a post hyperinflation economy that is bound for recovery. A predominantly household or consumer credit-oriented economy cannot achieve meaningful growth.

In an economy such as ours while it makes a lot of business sense for the credit suppliers to focus on the consumer market for personal loans or lending as this market poses lesser risk, neglecting the productive sector hamstrings the needed economic recovery from hyperinflation.

The current sectoral credit allocation patterns indicate skewed pattern towards the non-productive sector, with a clear bias towards household or consumer credit at the expense of the productive sector notwithstanding the importance and need for household credit financing.The argument is that such structural lending or credit financing is not helpful for the country’s economic recovery and economic growth.

There is need to re-visit the credit financing and lending regime of the country and restructure the lending regime in line with the economic reforms and transformation for sustained economic recovery, growth and development.

A reform and transformation agenda that would ensure sustained development demands consented and deliberate financing of the productive sectors in the area of manufacturing, agriculture, mining and investment, and less of the household or consumer credit.

The banking sector of the country needs to appreciate that its long term business survival and sustainability hinges on the resuscitation of the country’s productive sectors. With the productive sectors of the economy thriving once again there would be increased employment and thus increased future potential for household or consumer credit by the banking sector.

Banks make their money through credit or lending to both productive and non-productive sectors of the economy. However, there is danger in focusing on the non-productive sectors at the expense of the productive sectors of the economy.

Productive sectors of the economy ensure and guarantee future and long-term sustainability of the banking business as well. The economy needs to focus on the credit to the private sector of the economy.

The austerity measures put in place backed by the requisite political will when managed well would free financial resources in the economy that could be channelled towards the productive sectors of the economy, particularly the private sector.

The country’s private sector has suffered crowding out or bottlenecking effect by the Government for too long.

With the potential external funding and external support for fiscal deficit becoming remote by each day, the Government resorted to domestic credit and the process crowding out the private sector and other productive sectors of the economy.

At the same time the banking sector becoming more and more reluctant to extend meaningful credit to the private productive sectors of the economy in preference of the household or consumer credit.

In conclusion, for meaningful economic turnaround and subsequent growth and development to take place the country’s domestic finance mobilisation and credit financing policies would need to change and focus on providing credit to the productive sectors of the economy as I have highlighted above.

Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow and can be contacted at nbongani@gmail.com