DESPITE the downside of a sustained tight monetary policy approach, which includes reduced borrowing and investment, hence lower economic growth, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya says the government is staying the course with its current macro-economic stabilisation measures rooted in high interest rates.
BERNARD MPOFU
Zimbabwe’s benchmark interest rate is 200%, the highest in the world. In the aftermath of the RBZ Monetary Policy Committee (MPC) meeting on 2 December and the post-National Budget period, Mandudya says the government will maintain the current measures until the end of next year’s first quarter when they will be reviewed.
“After our recent MPC meeting and in the post-2023 budget time, we are staying course with the current tight monetary policy framework and macro-economic stabilisation measures to sustain the disinflationary process and reduce prices in the economy,” Mangudya told The NewsHawks in an interview.
“We will continue with the monetary targeting approach to manage creation of money and extending of credit, control the supply side and reduce demand for cash, while containing speculative borrowing and parallel market activities, including arbitrage opportunities.”
Through monetary targeting, the central bank has moved its instruments, interest rates in this case, to control monetary aggregates considered the main determinants of inflation in the long run. By comparison, inflation targeting revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
“We will control money creation on the supply side and continue our open market operations, including selling gold coins; basically our securities or derivatives to the public to provide alternative investment opportunities and store of value havens, while at the same time mopping up liquidity in the economy to stabilise the exchange rate and inflation.
“These measures are being supported by government’s value-for-money process regarding public procurement and payments of suppliers.”
The government has imposed a tight payment system for suppliers under this new approach. However, Mangudya also acknowledged the downside of the current tight monetary policy approach.
Tight monetary policy implies the central bank reduces demand for money, thus limiting the pace of economic expansion. Usually, this involves increasing interest rates.
“The downside of this policy framework is that it stifles economic growth, reduces tax revenues and creates a budget deficit as government may not be able to meet its revenue targets from a funding perspective,” he said.
This leaves government walking a tight rope trying to balance the tight monetary policy objectives with spending to encourage consumption, investment and production to stimulate economic growth.
The government revised economic growth for 2023 down to 4%, from 4.6%. After the recent monetary policy committee meeting, Mangudya issued a statement saying the RBZ had decided “to maintain the bank policy rate and medium-term lending rate at current levels of 200% and 100%, respectively, and to review the interests rates in the first quarter of 2023 as dictated by inflation developments”.
He said also the committee had resolved to further liberalise the foreign exchange market in the first quarter of next year, enhance efficiency of the forex auction system, continue to support productive sectors of the economy and review hard currency retention thresholds on exports and foreign currency accounts by March 2023.
The aim of a tight monetary policy is usually to reduce inflation. With higher interest rates, there is usually a slowdown in economic growth.
Higher interest rates increase the cost of borrowing, and therefore reduce consumer spending and investment, leading to lower economic growth.
A tight monetary policy is tantamount to a deflationary process; reduction of the supply of money in an economy, hence decreasing economic activity as part of government strategy to combat inflation or reduce prices.
