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Hiking of interest rates a double-edged sword



THE hiking of interest rates by the Reserve Bank of Zimbabwe (RBZ) could serve as a double-edged sword for the economy which will arrest speculative foreign exchange trading on the parallel market on one hand while stifling the growth of productive sectors on the other, analysts have said.

RBZ governor John Mangudya last week announced a lukewarm Monetary Policy Statement (MPS) at a time Zimbabwe is under Covid-19 restrictions which have brought many businesses to a grinding halt. As the economy opens up, market players expected the central bank to announce policies which would drive domestic consumption.

The MPS comes at a time when the global economy is grappling with the debilitating effects of the Covid-19 pandemic which are causing incredible human and economic hardships across the country and around the world.

These challenges have seen most central banks adopting monetary easing, by taking accommodative measures to keep their economies afloat.

Zimbabwe becomes the third country after Zambia and Mozambique to tighten its monetary policy.
These challenges have seen most central banks adopting monetary easing, by taking accommodative measures to keep their economies afloat.

Mangudya announced its appetite to maintain an iron grip on the country’s foreign exchange auction system despite several calls by some market players to liberalise the system.

To buttress price and financial system stability, the apex bank announced a cocktail of measures which include increasing the RBZ policy rate for overnight accommodation from the current 35% to 40% per annum and the medium-term lending rate for the productive sector lending from 25% to 30% per annum.

He said the decision on interest rates takes into account the current liquidity conditions in the market and the need to continue controlling speculative borrowing.

“Notwithstanding these Covid-19-related challenges, the Bank remains optimistic that the expected economic growth of 7.4% in 2021 is achievable. The Bank also projects annual inflation to close the year at below 10%,” Mangudya said.

Economists and business leaders however doubt that Zimbabwe will achieve significant growth as high interest rates may result in the crowding out of productive sectors.

Prosper Chitambara, a researcher at the Labour and Economic Development Research Institute of Zimbabwe told The NewsHawks that with no budgetary support, the country must resist the tempation to print more money into the system to maintain economic stability.

“The monetary policy seeks to build on some of the successes that were achieved last year such as price stability. But going forward, the challenge is to put a leash on money supply growth given that there are few financing options for government on account of Covid-19-induced pressures,”  Chitambara said.

Zimbabwe National Chamber of Commerce chief executive Chris Mugaga said the monetary policy would do little to stimulate growth due to high interest rates.

The MPS comes against the backdrop of subdued consumer spending, investment inflows are sagging and the country is fighting hard to bring macro-economic convergence through both price stability and exchange rate stability.

“On my part, I think the MPS is a bit out of touch with reality. I think you would appreciate that most economies, be it in Africa or elsewhere, have loosened their monetary policy somehow to try and inject some liquidity into the market in the midst of the challenges which the private sector is facing,” Mugaga said.

“But our monetary policy, if you look closer, you will see it’s a policy statement which is fighting hard to try to complement the Budget Statement of 2021 in somehow tapering or restricting the growth of the economy because if you are targeting a growth rate of over 4% in 2021 and you are hiking the interest rates, definitely you are militating against the ethos of your policy statement.

“If you look at the 2021 Budget, it had a high propensity for tax hikes and the MPS is complementing that by also pushing for an interest rate hike while there has been no significant shift in withdrawals, be it individual and corporate. It’s a very contractionary monetary policy which might make it more difficult to achieve significant growth in 2021 because it’s not open for allowing liquidity injection.”

A contractionary monetary policy is typically intended to reduce the rate of monetary expansion to fight inflation. The policy reduces the money supply in the economy to prevent excessive speculation and unsustainable capital investment.