Rising inflation threatens banks

LIVINGSTONE MARUFU

 

Local banks are feeling the heat of rising inflation, which is posing a severe threat to financial institutions, the Bankers Association of Zimbabwe (BAZ) has said.

Zimbabwe’s annual inflation in the month of July rose to 257% from 192% in June.

“In June, the interest rates were increased to 200% and the inflation was at 192%, this was the first time we had positive lending. But, a month later annual inflation rose to 257% and we are in the negative again,” BAZ chief executive officer Fanwell Mutogo told Business Times.

“Banks tend to suffer more as lenders are struggling to keep operations afloat.”

He said several companies across all sectors have thin working capital and might struggle to repay their loans at that rate.

Mutogo said the high interest expenses have hit companies’ bottom line and driven down cash flows.

“The companies may be forced to astronomically increase prices to be able to pay and this could cause inflation in the process,” he said.

Mutogo said some firms that have good reputation are getting reduced interest rates and have the ability to repay.

Farmers and Small to Medium Enterprises are also using concessionary rates of between 100% and 120% in order to continue producing.

In his monetary policy statement last Thursday, the Reserve Bank of Zimbabwe governor John Mangudya said in the next six months the interest rates will be reviewed according to the developments in the economy.

“The current bank policy rate of 200% will be reviewed in line with developments in monthly inflation and the Medium Term Accommodation rate will also continue to be reviewed in line with monthly inflation developments and long-term productive sector funding needs.

“The deposit interest rates on savings and time deposits will remain at 40% and 80% per annum, respectively, and will be reviewed in line with month-on-month inflation developments” Mangudya said.

An economist who preferred anonymity said: “That is where we lose it. Clients get interest rates per annum rather than per month hence the interest rates should also do that.

“We will be failing to apply economics if we lower the interest rates based on the declining month on month inflation at a time when the annual is quickening.”

Zimbabwe’s month-on-month inflation having declined from 30.7% in June 2022 to 25.6% in July 2022, the central bank anticipates the monthly inflation to continue to progressively decline by between 3 to 10% in the outlook period.

 

 

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