Zimbabwean businesses are cutting credit facilities to customers citing rapid depreciation of local currency and failure to access credit lines from the banks after the Government suspended bank lending in a bid to avert free fall of the currency.
Many businesses are now demanding Zimbabwean dollar cash upfront in response to policy measures announced on Saturday last week.
Last week, President Mnangagwa directed banks to suspend lending, a move he said was aimed at curbing speculation against the local dollar.
Zimbabwe re-introduced the local currency in 2019, 10 years after it abandoned its previous currency due to hyperinflation, which soared to a record 500 billion percent, according to the IMF.
Zimbabwe wiped out the hyperinflation figures in 2009 when it abandoned the use of the Zimbabwe dollar for a basket of foreign currencies, but mostly dominated by the U.S. dollar, leading to what is now generally called dollarisation.
At the last auction Tuesday, the Zimbabwean dollar was quoted at 165.94:US1, but is trading at between 350 and 400 against the US dollar. Businesses are pegging price using the black markets rates while some are totally rejecting the domestic currency.
Animal health care company Fivet, said in a note to customers that “the depreciation of our local currency” has forced the company to stop providing credit facilities in Zimbabwean dollars, adding “all purchases will be made cash up front with the requirement of funds to be reflected in our bank accounts first before the product is released.”
Meat processor, Surrey Group, said as a result of directive from the Government to halt lending by the banks “we advise are no longer in a position to offer credit terms.”
Sugarcane milling giant Tongaat Hulett, also suspended advance payments to farmers, saying the company is no longer able to access loan facilities from the banks.
“The situation is bad especially at this critical stage of harvesting,” Hippo Valley Sugarcane Farmers Association Patrick Muvhingi told Business Weekly in an interview.
Dairibord deferred dividend payment “due to changes in the financial operating environment and resultant uncertainty have significantly disrupted the credit markets.”
In announcing the new set of policy measures, President Mnangagwa blamed speculative borrowing for causing currency instability.
“Lending by banks to both the Government and the private sector is hereby suspended with immediate effect, until further notice,” President Mnangagwa said.
Government, the President said had also noted regulatory weaknesses in the custodial system of the Zimbabwe Stock Exchange sub-systems, which were fueling parallel market activities.
“The current system allows clients to sell shares and then transfer the proceeds to third parties for purposes of trading forex,” he said.
The Zimbabwe National Chamber of Commerce (ZNCC) said suspending lending was not an “ideal measure” to control the growth in broad money supply.
It said there were other measures such as moral suasion that could be arranged between the RBZ and commercial banks.
“By Government ordering suspension of lending, it has done the following: dented our rank of doing business since availability of credit is one of the key pillars.”
It added: “The Zimbabwe regulatory and supervisory system on the financial sector has resulted in the betrayal of the fiduciary responsibilities and loss of public confidence.
“Zimbabwe was ranked number 67 globally with a score of 65 in the 2019 Ease of Doing Business Report under the getting credit pillar. In short, the performance of Zimbabwe is poor when compared to most countries.
The move to close accounts is a vote of no confidence on resolutions the general public have been receiving from the Monetary Policy Committee (the interest rate policy is certainly ineffective – (it can’t tame inflation). The Government has suspended banking but banks remain intact.
This legitimises a parallel banking system with usurious interest rates and no investor would be attracted to such an economy where lending can be suspended overnight.
This is a step back in the ‘Zimbabwe is open for business’ mantra. There is a possibility that policy coordination between the apex banks and financial service sector players appears non-existent.”
“If the central bank was satisfied that KYC was being fully observed by banks then, there could not be a reason to suspend lending by banks – already such a seemingly strained relationship is a cause for concern,” the business lobby group noted.