eBusiness Weekly
Tapiwanashe Mangwiro
The decision by the Ministry of Finance and Economic Development to keep punitive interest rates tracking annual inflation until year end as a way to sustain stability, has triggered mixed views from different stakeholders with some calling for the need to strike a balance.
Conversations and arguments have been brought up regarding the level of lending rates currently prevailing in the market.
Bankers and industry have been calling for interest rate cuts, but economists have said, the industrialists were now used to cheap money that was also part of the problem the economy was facing.
Annual inflation slowed marginally to 280,4 percent in September from 285 percent in August. September month-on-month inflation was 3,5 percent, down from August’s 12,4 percent.
The Reserve Bank of Zimbabwe raised interest rates from 80 percent to 200 percent in June as inflation soared. Large businesses have called for a cut on rates, but Minister of Finance and Economic Development, Mthuli Ncube, said these will remain until inflation slows down to convincing levels.
“I think once we see that downtrend in month-on-month inflation being sustainable, maybe over a three- to four-month period, then we can begin to think about lowering interest rates. But for now, the tough monetary-regime stance and the tough fiscal stance also stands,” Mthuli told reporters at a press conference in Washington DC, recently. “That’s what it takes to bring stability and bring things under control.”
Economist Dr Prosper Chitambara said the interest rates are at the right level and Treasury is correct to say we need sustained period of stability until we think of a rate cut. He, however, acknowledges that it will come with its consequences such as failure to meet growth targets.
Chitambara accepts that higher rates may push up non-performing loans (NPLs), but they insist “it is also imperative to strike a balance and determine an optimum interest rate policy that complements the policy measures that have been put in place.”
The Confederation of Zimbabwe Industries president, Kurai Matsheza, said the deteriorating liquidity conditions were severely afflicting industry and commerce.
“Businesses are facing a funding squeeze and this has affected aggregate demand as there is no traffic in the shops and the industries,” Matsheza said.
Bankers Association of Zimbabwe (BAZ) chief executive officer, Fanuel Mutogo, said that the liquidity squeeze has affected agricultural lending.
“There is a need to strike a balance between containing inflation and exchange rate and allowing lending for productive sectors.
“In as much as we would like to contain exchange rate movements and inflation, industry and agriculture need working capital hence we are choking them and projected economic growth may be difficult to achieve if the current situation persists,” said Mutogo.
In the past, when the RBZ had an interest rate cap of 12,5 percent, economists argued that in view of the prevailing inflation, the interest rate framework did not allow banks to adequately compensate their investing and depositing customers.”
Back in 2019 when the RBZ wanted to introduce an overnight rate, banks argued that it was supposed to be high arguing that, monetary authorities must signal a tightening of monetary policy to anchor inflation expectations and also to support the exchange rate.
Everyone at the time agreed that in order to discourage consumption borrowing and support the continuing improvement in current account balance rates were supposed to be increased.
The BAZ president at the time, Ralph Watungwa said; “By now keeping rates capped after allowing the exchange rate to move, critics say RBZ is creating arbitrage gaps that could see borrowers increasing demand for foreign currency. Other bankers, however, say ultimately, higher rates will also drive up prices.”
Economist Prof Tony Hawkins argued that the interest rates were at optimal levels and the Treasury is holding the correct line. According to him lowering interest rates will see the parallel market running away again and more money searching value.
“In the end, this will perpetuate financial disintermediation and probable market bubbles on the stock market, as customers will look for alterative, non-bank based, investment options,” Hawkins said.
According to bankers, some banks have removed the overdraft protection to ensure that companies honour their obligations on time.
It also means that most local companies will find it difficult to start new projects or expand as they will not easily afford to take out credit, due to higher charges.
Economists have argued that banks and industry have been let off the hook many times to the extent of them thinking it is normal, whereas banks are saying as much as we want stability, the RBZ has overdone it with the interest rates.
