The 6% growth puzzle: Can Zimbabwe’s economy expand under a tight money regime?

CLOUDINE MATOLA

Zimbabwe’s economy is projected to rebound sharply this year, with GDP growth expected to surge from 2% to 6%.

However, this optimistic forecast comes amid the Reserve Bank of Zimbabwe’s (RBZ) continued commitment to a tight monetary policy aimed at stabilising the exchange rate, inflation, and overall economic conditions.

This raises a critical question, can such ambitious growth be achieved while liquidity remains constrained?

The RBZ governor, Dr. John Mushayavanhu, remains confident that restrictive monetary measures will not stifle economic expansion.

He argues that stability fostered by the current policy will serve as a catalyst for growth, particularly with the anticipated boost from a strong agricultural season. “The anticipated economic rebound from a growth rate of 2% in 2024 to 6% in 2025, due to the favourable performance of the agriculture sector which has strong backward and forward linkages with other sectors of the economy, is expected to boost aggregate demand,” Mushayavanhu stated.

“There is, therefore, no threat to economic activity from the current monetary policy stance. On the contrary, the stability resulting from the current stance will be a key enabler of growth.”

Despite this confidence, some analysts and business leaders are skeptical.

Zimbabwe National Chamber of Commerce (ZNCC) CEO Christopher Mugaga warns that while tight monetary policy has contributed to exchange rate stability, it has also created liquidity challenges for businesses.

“A tight monetary policy doesn’t necessarily fuel or hinder economic growth—it depends on how well it aligns with fiscal policy,” Mugaga explained. “We have seen exchange rate stability, but the liquidity crunch makes it difficult for businesses to borrow. If they do find lines of credit, they are often expensive and short-term, which creates challenges for sustained growth.”

Economist Dr Prosper Chitambara echoes these concerns, emphasizing the trade-offs of the current policy.

“The idea, of course, is to stabilise things, but tight monetary policy can also restrict lending to productive sectors, which are crucial for growth,” he noted.

“For now, stability is the most important goal. Once that is entrenched, we can look at ways to foster expansion without undermining economic fundamentals.”

Mugaga further elaborates that fiscal discipline is a key factor that must complement monetary policy for economic growth to be realized. “If the government spends recklessly while maintaining a tight monetary stance, it could disrupt the entire economic cycle. The key is ensuring that government expenditure is disciplined and strategically directed towards productive sectors,” he said.

Another economist, Malone Gwandu, argues that while a tight monetary stance was necessary to curb inflation and stabilize the economy, it is not a long-term growth strategy. “Limited credit availability and high borrowing costs hinder business expansion. Borrowing is a critical tool for growth as it aids liquidity and accelerates investment,” Gwandu said. “There is now a need to gradually refine the monetary policy to support sustainable economic growth. A phased adjustment, particularly through targeted funding facilities, may be necessary to achieve the 6% growth target.”

He further explains that businesses are struggling to access capital due to high interest rates, which restrict expansion efforts. “Even if a business has a solid growth plan, without affordable credit, expansion is stifled. The current monetary policy must be refined to strike a balance between maintaining stability and providing necessary liquidity to productive sectors,” Gwandu added.

The agricultural sector, which the government and central bank believe will drive much of the anticipated growth, also faces challenges linked to the monetary stance. While Mushayavanhu points to improved rainfall and agricultural productivity as key factors in the projected rebound, analysts caution that limited access to credit could restrict farming investments.

“Agriculture needs funding at every stage, from inputs to mechanization. If farmers and agro-businesses struggle to access credit, the anticipated sectoral rebound may not be as strong as expected,” Chitambara noted. “For sustainable growth, policies must work holistically—monetary policy alone cannot drive the economy forward.”

In addition to monetary and fiscal policy concerns, global economic conditions present additional uncertainties. Mushayavanhu acknowledges that geopolitical tensions and trade protectionism could pose inflationary risks, necessitating continued monetary tightening. “Given that stability is still nascent and there are lingering uncertainties from the global economy—mainly the continued geopolitical tensions and trade protectionism, which are expected to trigger inflationary pressure—the Reserve Bank will, for now, maintain a tight monetary policy stance to durably anchor inflation expectations and sustainably reduce inflation to low and stable levels,” he explained.

Yet, some experts argue that without sufficient liquidity, economic momentum could stall. “Monetary policy needs to evolve with economic conditions. While tight liquidity was necessary to curb inflation, a rigid stance could hinder recovery efforts. There should be a measured, strategic easing that supports businesses while maintaining stability,” said Gwandu.

The debate over monetary policy’s impact on growth is not new, but with Zimbabwe targeting a significant GDP rebound, the stakes are higher than ever.

Can the economy truly expand under stringent monetary conditions, or will policymakers need to reconsider their approach?

The coming months will be critical in determining whether the balance between stability and expansion can be achieved.