HARARE – The Reserve Bank of Zimbabwe will not mellow its tight monetary policy stance any time soon as it believes the stability currently being experienced in the country, is not yet “durable”.
The last month or so has seen the economy enjoying some sense of exchange rate stability on the widely used parallel market.
The parallel market exchange rate, between the Zimbabwe dollar and the greenback, has for several weeks now, remained stuck between the 700 and 800 range per US dollar.
At the same time, while prices are still unstable, they are no longer as volatile as they were a few months ago.
Month-on-month inflation peaked at 30,7 percent in June this year, but has since slowed to 3,5 percent, this month of September.
The September annual inflation which was expected to come out higher than in August, because of the lower base effect last year, was a big surprise, coming out at 280 percent down from 285 percent in August. However, monetary authorities are not yet convinced that it’s time to loosen the hawkish monetary policy stance, described by some economic commentators as damaging to economic growth.
Some say, the tight monetary policy stance, as characterised by high-interest rates, though bringing stability to the economy, has come at a huge cost to industry.
One of the resolutions by the Reserve Bank of Zimbabwe’s Monetary Policy Committee (MPC), following its September 23, 2022 meeting, was to maintain the Bank policy rate and medium-term lending rate at current levels of 200 percent and 100 percent, respectively.
Such high-interest rates, if maintained for longer, might even lead to a recession, some analysts say.
An executive with a local manufacturer, who cannot be named, said his firm is struggling with servicing its Zimbabwe dollar debts.
With revenue now largely in US dollars, what is being generated in local currency is not enough to service Zimbabwe dollar debts, he said.
Economic analyst and Livestock and Meat Advisory Council (LMAC) chief executive, Dr Reneth Mano, said the “Hawkish” MPC, in its last meeting, “missed a golden opportunity to recalibrate interest rate and arrest falling output.”
He said the visible damage to the productive sector inflicted by excessively high lending rates must have been a cause of great concern to the MPC team ahead of the September 23 meeting.
Mano said while conventional monetary policy wisdom does prescribe higher interest rates as the solution to rising inflation, managing the tradeoff between monetary tightening and productive sector growth is the prime challenge confronting central banks of developing countries whose economies are also reeling from high unemployment and low industrial capacity utilisation.
He said the hawkish stance of the MPC might have done more damage by sending the (wrong) signal that the high-interest rate regime is here to stay for longer.
“There is no doubt that productive sector output – especially in agriculture, manufacturing, distribution sector – has suffered from high-interest rates.
“A modest reduction of interest rate from 200 percent to 150 percent or even to 175 percent would have gone a long way in reducing the cost of money for the productive sector and improving viability,” said Mano.
But while acknowledging the positive impact of the policy stance, the MPC seemed unconvinced it is time to soften its position on interest rates.
As a result, interest rates will be maintained at current levels, “until durable stability, measured by a sustained decline in month-on-month inflation to desired levels of less than 5 percent, is attained,” reads part of the MPC statement released this week by its chairman and RBZ governor Dr John Mangudya.
A sustained decline might mean several months more of month-on-month inflation of below 5 percent. September at 3,5 percent was just the first of the anticipated slowdown.
The economy has experienced a sustained period of inflation below 5 percent before and that was between February and September 2021.
The MPC expects that a combination of the current tight monetary policy, continued use of gold coins, foreign exchange auction system, the insistence of value for money by Government in its procurement processes and practices, close monitoring of possible occurrence of wage-push inflation and effective monitoring and enforcement by the Financial Intelligence Unit will sustainably anchor exchange rate expectations, thus limiting the exchange rate pass-through to inflation.
While there are still some fears that exchange rate depreciation will unravel again, the market is not as jittery as before.
Forward pricing rates have significantly come down with the central bank saying the premium between the official exchange rate and the parallel market one is just between 5 percent and 15 percent.
“This positive development on the exchange rate front is envisaged to go a long way in eliminating arbitrage opportunities which were fueling forward pricing models and hence fomenting adverse inflation and exchange rate expectations,” said the RBZ.
Economist and businessman, Brains Muchemwa, weighed in and said while the current interest rates level is deemed high there are still on the soft side given where inflation is.
He said borrowing should not be on the basis that installments can be eroded by inflation as has been the case in Zimbabwe.
“We don’t want an economy where borrowing is profitable like what was happening before.”
“The interest rates in this market at 200 percent, for example, are still very low when compared to both current and forecast inflation. They are not good for this economy.
“Loan to deposit ratios in other countries are very low, not because banks don’t want to lend but because it’s expensive to borrow. Paying off a mortgage should not be as easy as has been the case in Zimbabwe. Here people borrow because inflation pays off the mortgage,” he said.
Muchemwa, however, said those who are borrowed have to exit their positions as soon as possible.
“If you are in business and you are borrowed, you have to pay off your loan now otherwise you will burn,” said Muchemwa.
He said most businesses have very low Zimbabwe dollar revenues and cash flows hence struggling to service their debts. – Business Weekly
