PHILLIMON MHLANGA
A spike in the Reserve bank of Zimbabwe (RBZ)’s benchmark interest rate for its overnight lending window by five percentage points to 40% is likely to have dramatic consequences for local firms, analysts warned this week.
The central bank said the spike in interest rates from 35% was part of efforts to fight persistent inflation and curb speculative borrowing, blamed for fuelling parallel market exchange rate instability.
But analysts say it will cost more for companies to borrow money for working capital from commercial banks as well as the capacity to pay back loans. Low interest rates tend to reduce the cost of borrowing and encourage credit starved companies to borrow.
The spike in interest rates will cause fewer investment projects to be profitable, they say.
When interest rates go up, the price of financial assets such as stocks on the Zimbabwe Stock Exchange falls. The move also has negative effects on consumption.
“The decision on interest rates takes into account the current liquidity conditions in the market and the need to continue controlling speculative borrowing,” RBZ governor John Mangudya said.
The spike might mean that many companies might struggle to borrow working capital or repay existing loans after the central bank hiked interest rates, a move which could have serious repercussions on the wider economy.
“It could have potentially dramatic consequences on the economy and struggling companies,” an economist with a local bank who requested anonymity told Business Times this week.
Other analysts say the decision to move up interest rates after it was reduced last year showed that the operating environment has remained unattractive for loan growth.
“The increase has worsened matters pushing up costs of borrowing,” another economist said.
Mangudya also increased statutory reserves to 5% for demand and/or call deposits and maintained 2.5% for time deposits.
The differentiation of statutory reserves by maturity is expected to incentivise banks to hold long-term liabilities or time deposits which will facilitate long-term lending in the medium-term, he said.
Mangudya said RBZ would maintain the conservative monetary targeting framework in 2021 by reducing the quarterly reserve money growth to 22.5% per quarter this year from the 25% quarterly target in 2020.
The current stability in inflation and exchange rate needs to be safeguarded, maintained and sustained, he said.
“The reserve money target of 22.5% is consistent with the targeted end of year inflation of below 10% and the projected 7.4% economic growth rate of the economy,” Mangudya said.
Bankers Association of Zimbabwe president Ralph Watungwa said bank charges continue to be unaffordable.
“Bank charges, fees and interest rates are considered high. We feel bad when our local community complains about our bank charges and fees,” Watungwa said.
“As banks, however, we are not seeing the money from it. We have been discussing it saying all banks combined are making less money than one private corporate. So, we are not seeing the money from these.”
