The world’s economic outlook in April 2020 looked gloomy for most countries as the International Monetary Fund (IMF) projected that the global economy was to contract sharply by 3% in 2020, much worse than 1.3% contraction during the 2008–09 financial crisis. The World Bank also predicted that the baseline forecast for China would sharply slowdown to growth of 1.6% in 2020, which would mark the slowest expansion for China since 1976.
Despite the adverse impacts of the Coronavirus disease 2019 pandemic (COVID – 19), the sluggish economic performance according to China’s yard stick, would remain one of the strongest if not the only economy recording positive growth at a time when most or all other countries were experiencing contracting economies.
China’s economy has defied all forecasts and been on a path of rapid recovery. In the last quarter of 2020, the Chinese economy grew by 6.5%, bringing the tally of the official economic growth recorded to about 2.3% for 2020, a tad higher than the World Bank projection. Additionally, the Chinese Statistics Bureau revealed recently, that the production giant grew by 18.3% in quarter one of 2021. The biggest jump in GDP since China started keeping quarterly records in 1992.
Much of this economic growth stemmed from stronger demand in the domestic market and continued government support for small firms. Furthermore, the strong economic growth was aided by exports that surged as factories in China raced to fill overseas orders in quarter one. Industrial production, consumption and investment all gained pace in the quarter.
To realise this economic growth, the Chinese Government took multiple steps to limit tightening in financial conditions, including providing financial relief to affected households, small and medium enterprises (SME’s) and regions facing loan repayment difficulties.
Firstly, they encouraged lending to the more than a million SME’s, with initiatives such as supporting uncollateralized SME loans from local banks. The Chinese Government further raised the target for large banks’ lending growth to SMEs from 30% to 40% and established an evaluation system for banks’ lending to SMEs to ensure the funding reached its target beneficiaries.
Secondly, the Chinese Government put a moratorium on loan payments for SME’s, with a deadline that has been extended to the end of 2021. Coupled with the delayed loan repayments, the Chinese authorities eased loan size restrictions for online loans and other credit support measures for eligible SMEs and households.
Zambia’s economy on the other hand, contracted by 3% in 2020 with negative growths of 5.9% in quarter 3 and 2.7 in quarter 4 as shown by the Zambia Statistical Agency (ZamStats). Key economic sectors like manufacturing grew by only -0.1% in the year, whilst demand was still low evidenced from the contraction of the wholesale and retail trade (-2.4), and accommodation and food sectors (0.6%).
With SME’s having been the worst hit by COVID-19 in Zambia, what lessons can Zambia borrow from China’s response to the COVID–19 pandemic, in order to ensure strong economic recovery and growth?
While the Bank of Zambia (BOZ) was able to deploy the Targeted Medium-Term Liquidity Facility (TMTRF) of K10 billion, to mitigate the adverse economic impact of the pandemic in Zambia on SME’s and households, there has continued to be slow uptake of the funds. As of 31 March 2021, BOZ had only approved a total of K8.7 billion out of which, K6.9 billion was lent to commercial banks, while K1.8 billion to non-bank financial institutions. The SME’s have faced challenges in accessing finance even before the onset of the COVID-19 pandemic and the TMTRF has been no exception.
The latest Zambian Credit Market Monitoring Report shows that credit conditions remain constrained for households and SMEs, with more stringent credit criteria being implemented during the pandemic. Unlike China, where some of these stringent criterions like collateral-based loans and strict loan payments were completely removed to address the liquidity needs. SMEs in Zambia still had to provide collateral to get financing and make loan repayments without Moratariums, whilst trying to navigate COVID-19.
The TMTRF funding therefore, failed to trickle down to the SME’s and households, for whom it was destined for. Furthermore, even though demand for working capital increased considerably to finance ongoing operations, the facility has been out of reach for most SME’s. Despite the TMTRF initiative reducing lending rates, the funding remains unreachable to most SME’s. Challenges to access the TMTRF are even exacerbated for women-led SME’s, who are already excluded from accessing traditional financing.
Thus, the major lesson is that strong growth in China is not just a result of availing funding to SME’s and households, but more so the flexible conditions which ensured that the SME’s and households accessed and used the financing. For the TMTRF to really have a strong effect on the Zambian economy and experience the economic growth evidenced in China, the funding needs to trickle down to the SME’s and households, and spur domestic production as well as local demand. Currently, the stringent conditions attached with accessing the TMTRF, in comparison to the financial support China provided for its SME’s and households, is limiting the impact the funding is supposed to have on the economy and economic growth.
