Three men are stuck in an airtight room; one is holding a rotten fish. The man next to him complains about the stench of the fish. The man holding the fish passes on the rotten fish to the third man. The stench is still the same; just another man is holding the fish.
This is used to illustrate the effects of debt, it shows how all people in an economy are equally affected, whatever their level of personal exposure. Analysts such as Rachir Sharma at Morgan Stanley fear that the African middle-class boom may come to an end due to excessive debt.
The boom in Africa was caused by a number of factors; debt relief, an increase in aid, rise in commodity prices and deregulation of our economies.
The recent downturn has affected us in differing ways but the worst might be yet to come. The rise of the middle-classes was built on debt, debt secured on over-inflated assets and consumption paid by this debt.
This problem of debt for consumption instead of investment has been exacerbated by some of the policies we used. Credit was freely available to those with connections as opposed to those able to pay, hence default rates are high in line with interest rates.
The debt accumulated in the wake of debt cancellation was re-lent at a higher rate to this emerging political/economic class similar to how western banks did with securitisation.
Securitisation is when a debt is converted into an asset by bundling debts into investment vehicles and re-lending it to low-risk borrowers.
An investment vehicle is an instrument used to deliver liquidity to the market. However, in Rwanda an investment vehicle is a Prado or any similar 4x4. When you receive a loan of say Rwf20m, the bank incurs an accounting debt, no actual cash is transferred.
The bank then turns that liability into an asset in the form of monthly payments.
The privatisation of this national debt is the biggest threat to the emerging middle-classes who have driven the growth in Africa.
They are now stuck with higher payments for depreciating assets (Prado’s) inflated assets (land and houses) a tighter job market and tougher regional competition for goods and services. Debt is a crocodile, the more you feed it, the bigger it gets and the more you have to feed it.
Psychologists say that the middle-classes need a recession now and again to remind them of hard times. The reduced liquidity in Rwanda has made the middle-classes tighten their spending, loans now require tougher vetting unlike years ago when any connected person could get a loan for a car or house.
The actual amount of bad debt issued during those years of mismanagement is worrying. We do not know how much of it is still on the books and being paid by honest customers.
Our 18 percent interest rate is not a reflection of current risk but the risk posed historically by bad debts that might lurk in the books.
Nigeria is going through a shock at the moment, this will be replicated even here in Rwanda as banks clear out bad debt.