POLICY interventions by authorities to deal with resurgent inflation and currency depreciation have inadvertently put many businesses under the cosh, but the measures remain necessary to restore macro-economic stability, industry observers say.
A number of industry executives, including from the Confederation of Zimbabwe Industries (CZI), have expressed reservations on the impact of some of the interventions, especially the steep interest rate policy stance, which promoted a spike in bank lending rates.
The central bank, following a meeting of its Monetary Policy Committee earlier this year, hiked the bank policy rate to 200 percent from 80 percent, in an effort to stymie speculative borrowing amid then rapidly weakening domestic currency and rising inflation.
Zimbabwe’s annual inflation rate reached a post dollarisation high of 837,5 percent in July 2020, before plunging to a two-year low of 50,1 percent 12 months later, after the central bank introduced the foreign currency auction market to ensure structured exchange rate determination.
Amid the skyrocketing prices, Zimbabwe’s annual inflation rate quickened to 285 percent by August 2022, although this partly reflected the impact of the macro-economic dynamics of the recent past, given the monthly rate is now trending down.
After Zimbabwe reintroduced its local currency in February 2019, following a decade long hyperinflation induced hiatus, at $2,5/US$1 the domestic unit has depreciated considerably; and now exchanges at around $800/1 on the black market and $613/US$1 on the interbank market.
Notably, central banks across the world have raised interest rates to record levels to rein in raging inflation caused by tremors of disruptions to international trade after Russia launched a special military operation in neighbouring Ukraine.
Ukraine and Russia are major producers of commodities such as grain, fertiliser and oil and have been locked in a war since February 22, 2022, blocking crucial shipments and disrupting normal trade while the western Europe sanctions on Russia have sent energy prices soaring.
Zimbabwe has also seen tight liquidity conditions after the Government demanded that all line ministries, departments and agencies (MDAs) implement value for money audits to prevent overpricing in public contract invoicing.
This was seen as one of the major factors driving the flow of excess liquidity that upset the exchange rate and drove a run in inflation.
Zimbabwe National Chamber of Commerce chief executive officer, Takunda Mugaga, said the policy interventions by fiscal and monetary authorities to address problems in the economy were necessary, even though they had created new challenges for businesses.
“What we need to guard against is a spirit and culture of cry-babies,” Mugaga said.
“Honestly, for years I think our problems were clear. We had all been crying to say (excess) liquidity is causing challenges and in fact I want to compliment the central bank for doing that (hiking lending rates).
“This is what we wanted; unless people do not know what they are talking about. For me, the hope is that we continue maintaining a tight grip (on liquidity) into the last quarter of the year. People were used to cheap money; that is why they are crying.
“Conditions prevailing at the moment are quite commendable, those who are building a ‘cry-baby” kind of culture will end up losing credibility whenever they push the Government to act. Honestly, I do not see a challenge by that (hiking lending rates).”
Mugaga said dealing with excesses such as high inflation had standard instruments in economics, which explains why central banks across the world have hiked bank policy rates to decades long highs. “Go to Germany; the strongest economy in EU.
“They have the strongest currency; there’s nothing called a Deutschmark, they use the Euro, I am not telling you this from theory, I was in Germany, I came back three days ago, I was also monitoring the developments in that economy.”
Mugaga dismissed as baseless complaints that the tight liquidity situation had decimated aggregate demand, saying a volatile situation where demand is high while production is low, the case in Zimbabwe for many years, was not a sustainable situation.
He said if demand remained high while production was low “it builds inflationary pressures”, meaning there was no justifiable reason to “send out an SOS or cry out” for the Government to reverse its policy interventions.
“They (Germany) are posting trade surpluses, they are so efficient, while the exchange is (one) of the strongest in the world (but they have hiked interest rates). I think people are missing something here. This should be a wake-up call for us to measure ourselves to see where we are as an economy,” he said.
Economist, Professor Ashok Chakravati, who sits on the Monetary Policy Committee and also advises Finance and Economic Development Minister Mthuli Ncube, said the stringent fiscal and monetary policy measures were critical to contain inflation.
“Do not forget that there was a business community that was borrowing for speculation and arbitrage; in undisciplined ways. They were just using those borrowings to speculate on the currency market; so that (outcry) is not justified.
“Business must be done in a proper way not through speculation and arbitrage. So, now that speculation and arbitrage have come down; we have seen the impact of high interest rates and the parallel market and official exchange rate have almost converged,” he said.
Another economist, Professor Gift Mugano, however, differed saying that no business could borrow and make enough revenue and profits after borrowing at 200 percent, the lowest banks must lend in Zimbabwe dollars, in order to finance their operations.
“It is not sustainable; it is not profitable; it is not viable; it is not cost effective. In actual sense, it takes you out of business,” he said, adding that borrowing that cost could further fuel an inflation resurgence because the borrower has to “factor that in” the cost in the final price to customers.
“If you use the right business model; you can not pay back a loan on a 200 percent interest rate. The problem we have is inflation; we need to push inflation downward to guarantee a positive real interest rate, even at a lower (lending) rate”.
The problem also emnanted from the excess liquidity that found its way into the market after the Government settled overpriced public contract invoices who pegged prices using front loaded parallel market exchange rates.
But Professor Mugano said much as economic agents were wreaking havoc in the economy, the solution was not to drastically reduce or stop payment on public contract invoices, but to ensure competitive bidding for supplies to public entities.
He said suppliers to the Government charged extortionate prices by taking advantage of monopolies, “but if you bring in many players you have the luxury to choose from those who are cost effective”. Further, he said public entities should desist from using middlemen and buy straight from manufacturers.
“Honestly, if you buy from Mugano Holdings to supply dairy products; without bringing Dairbord and Nestle directly; you are looking for trouble; I will charge you a lot of money,” he said.
Prof Mugano also said the Government needed to push for a market led economy in agriculture.
“So, the commodity exchange becomes a vehicle for marketing and financing of agricultural commodities. The Government minimises involvement in funding commercial agriculture.
“The Government should only support vulnerable people through Pfumvudza and the Presidential Input Support Scheme; it is a common practice (globally), even in Malawi ‘’.
“I am not advocating for the Government to release money simply because people are crying; I am simply saying let’s fine tune these areas so that business takes place in a normal and market led way,” Prof Mugano said.
He said the Government must pay for supplies to public entities, but needed to keep an eye on the rate at which it pays (timeously), adding the authorities should also focus on making sure the parallel and official exchange rates converge.
“Because the reason why people are using the forward (exchange) rate is because the rates are not converging. Number 2, the Government is delaying to pay (suppliers); so the Government must also pay on time,” he said.