A Loan as an Inflationary Hedge
10 April 2008 at 15:17 dylanhiggins 3 comments
I’ve visited over 100 clients in the past two months and one of the most common responses to “how are you going to use this loan” is “I’m going to buy in bulk.” At first, it appeared to me that perhaps this is a common impulse to overstock inventory so a customer never walks away empty-handed. But, I was quick to learn that this bulk purchasing phenomenon is not driven by concern about product supply but rather inventory cost. Here, in Ghana, there is an omnipresent concern over creeping inflation. And with Zimbabwe in the news this week and the accounts of inflation rates exceeding 100,000%, it seems inflation is becoming a center of conversations here as well.
Officially, the government recently raised its benchmark interest rate for commercial banks to 14.25% as a result of inflation that had risen to around 13.2%. But, what has been more interesting is how it creeps into my daily life. Like every gas-dependent American, I at first noticed it in the rising gas prices at the petrol stations. Soon, the taxi drivers were trying to raise their fares (taxi fares are not metered, but highly negotiable). At work, the company’s cook insisted on a pay raise as the cost of her food was increasing. On the corner outside our office, the lady who sells me lovely bananas with small bags of peanuts started selling me three bananas for 20 pesewas instead of four bananas. And, now the President of Ghana is at the Africa-Indian summit telling the world that rising food prices threaten to stall Ghana’s development achievements of the past several years.
It is in this environment that a loan provides an important hedging tool for the working poor. By giving an entrepreneur the cash to stockpile their inventory they guard against these price hikes. I, of course, thought to myself – “what happens if the price goes down though.” Joshua, the Kiva Coordinator, only smiled at me, “prices never go down.”
Entry filed under: Ghana, KF4 (Kiva Fellows 4th Class), Sinapi Aba Trust. Tags: Dylan Higgins.
1. BJ | 16 April 2008 at 06:32
Hi Mate-your insights have been very interesting-keeping up to date on your experiences is certainly an eye-opener. Patty would be proud! Take care of yourself.
2. Drew Kinder | 11 April 2008 at 11:27
Excellent post. Very factual and perceptive.
When street peddlers in Ghana raise prices by selling 3 bananas for the price of 4, can WalMart be far behind? You may be spotlighting the leading edge of global inflation.
Your Kiva borrowers probably can’t explain the macro-economic implications of their actions, but from their position on the edge of poverty they have a keen understanding of what it takes to survive in business.
Thanks for this insight.
3. Michael Mallett | 10 April 2008 at 15:32
“prices never go down”…seems to be true enough of non-renewables like petrol ( I recall paying $.25 a gallon in my teens vs. $3.79 now as a spry 50-something) but in he case of renewables and technological breakthrough components, certainly lowered costs may occur. I wonder at what stage in an economy’s arising does this take a role? And how does it “tickle” the overall economy as it shapes specific product prices? Could a “bumper crop” of bananas drive prices down even as overall inflation rises? Are there certain bright spots in any economy that the savvy can expolit?