TAURAI MANGUDHLA/TINASHE MAKICHI
The Reserve Bank of Zimbabwe is under intense pressure to increase the country’s interest rates amid rising inflation, coupled with the recent devaluation of RTGS balances.
Interest rates are pegged at a maximum of 12% while the RBZ savings bond is at 7%. But now there are calls for the central bank to align interest rates to inflation, which stood at 56,90 percent in the month of January 2019, up from 42,09 percent in December 2018 with indications it is set to maintain an upward trajectory.
Under the current conditions, investors are getting negative returns on fixed term instruments forcing market players to put pressure on the central bank to hike lending rates to ensure that they track inflation.
Sources within the financial sector told this publication that there had been requests to recall cash investments as the rates that are currently obtaining are not favourable.
“Some of the clients who had invested in fixed term instruments are recalling their portfolios. The biggest challenge, however is that the local market is illiquid at the moment,” said a source within the banking sector.
In his Monetary Policy Statement , the RBZ said the banking system only held $1,8 billion in RTGS balances.
There are also calls for the central bank to issue inflation-linked bonds, similar to the savings bond, to cushion investors.
Some investors say they are less worried about devaluation and more concerned by inflation.
However, RBZ governor John Mangudya last week said the central bank was in the process of developing an overnight facility which will determine the interest rates.
RBZ plans to restore its lender of last resort function through the reintroduction of the overnight accommodation window to provide liquidity support to banks. The interest rate that will be applied in providing the overnight liquidity support, will become the base rate for setting interest rates across the financial sector.
“We are going to have a bank rate for interest rates. Right now some banks are cash rich, others are not as cash rich as others and they are going to be knocking on our doors. So we want to first establish an accommodation rate, which will then determine the interest rate,” Mangudya told analysts at the central bank last week.
Meanwhile in light of reduced spending from government, there are fears that the economy will slip into recession. Government spent only $100 million in December and $395 million in January compared to figures of at least $600 million since March 2018. This comes amid reports Government is not paying some of its suppliers including ZUPCO bus suppliers.
Godfrey Kanyenze, an economic analyst said the economy was heading for recession considering the current condition of the agricultural sector.
“With the current state of the agricultural sector, the economy is likely going to face some shocks,” Kanyenze said. “As you are aware, during the global financial crisis in 2008, governments had to intervene with stimulus packages, but it is different in Zimbabwe because we don’t have enough fiscal muscle to avert the situation. Therefore, the government has resorted to cutting back initiatives under the Transitional Stabilisation Programme (TSP), which is likely to worsen the recession, going forward,” said Kanyenze.
Mangudya however calmed analysts saying his bank was on top of the situation.
“Going forward we will use the money base as our control mechanism because the amount of money in the market will determine inflation and the exchange rate, we don’t want to push this economy into recession,” Mangudya said.
Economist Brains Muchemwa said the negative returns on the money market in the face of rising inflation is creating apprehension for the big investors on the money and capital markets, with those on the latter in panic mode.
“Unless the RBZ removes the cap on the lending rates, the banks are going to have to contend with restive investors wanting to switch their portfolios and that will leave a few banks with mismatched portfolios that will be very expensive to fund,” Muchemwa said.
Equally, Muchemwa said, the pressure is expected to mount on the government to be a responsible citizen and reprice its long dated TBs that have, with the statutory instrument 32 of 2019, become RTGs and therefore susceptible to massive capital erosion in the face of a bleak inflation outlook.
Economist John Roberson said the options remain limited for corporates.
“With rising inflation against lower and fixed interest rates, Government needs a quick and viable solution to attract deposits into the formal banking system.
“The inflation rate is certainly important because even TBs will become an issue and people will start demanding huge discounts on TBS,” Robertson said.
“The interest rate of government is very important and has got to change and all the banks have got to follow suit,” added Robertson.