The Sunday Mail
Dr Munyaradzi Kereke
RECENTLY, the Reserve Bank of Zimbabwe (RBZ) reduced its policy lending rate from 150 percent per annum to 130 percent per annum.
The expected transmission mechanism is that the reduced policy rate would encourage lending to both individuals and corporates by banks, which would spur both consumptive and productive expenditures in the economy.
In this week’s instalment, the Justice Foundation makes some policy recommendations on interest rates to the RBZ for consideration in the interest of the achievement of set macroeconomic targets under Vision 2030.
Importance of observing the in duplum rule on cost of borrowing
Within Zimbabwe’s legal jurisdiction, and generally within the Southern African Development Community (SADC), there has been, from time immemorial, the common law rule which specifies that interest on a debt must cease to run when the total amount of arrears interest has accrued to an amount equal to the outstanding principal debt.
This rule seeks to strike a balance between the financial interests of banks as lenders and those of borrowers, both individuals and corporates. The lenders must enjoy reasonable returns on their money loaned out and borrowers must be protected from extractive and crippling costs of money.
If, say, a borrower gets a loan of $500 000 from a microfinance institution and struggles to repay it, the in duplum rule protects the borrower by stipulating that interest on the debt cannot accrue to beyond the principal amount borrowed, that is $500 000.
The repayments on this would be the $500 000 principal borrowed, plus maximum allowable interest of $500 000, giving a total of $1 000 000, which is double the original loan amount.
When interest rates go beyond 100 percent per annum
When interest rates are allowed to go beyond the 100 percent mark by the designs of the monetary policy, there are several implications.
First, instead of serving as a signalling tool to curb inflation, interest rates of over 100 percent themselves become a major contributor to inflationary impulses in the economy.
Producers and retailers of goods and services incorporate the cost of money in their pricing formulae for what they put on the market.
Excessive cost of money, therefore, becomes a significant driver of overall costs of running a business to those who borrow for both working capital and capital expenditure — Capex.
Even those that do not borrow would typically take the cue from the signal projected by announced highly excessive interest rates and factor such rates into their speculative pricing models.
The result is high inflation.
High levels of interest rates beyond 100 percent also become a source of high inflationary expectations for future periods, which triggers speculative overpricing of goods and services now. These negative inflation expectations result in higher measured inflation in the future.
The curse of stagflation
Secondly, excessive interest rates tend to trigger conditions of stagflation — coexistence of high inflation levels, high unemployment and depressed aggregate demand for goods and services, as is the case in Zimbabwe.
This condition sets out like this: The excessive interest rates of over 100 percent per annum tend to completely discourage borrowing to zero in some subsectors, with the ultimate effect of compressing employment levels and overall supply of goods and services in the economy.
Decline in supplies on the market will have an inflationary knock-on effect on prices.
Under conditions of stagflation, the appropriate monetary policy response function should, in fact, be to induce the productive sectors of the economy into supplying more goods and services on the market, as well as keeping and expanding job opportunities.
This is achieved through targeted release of money into those productive sectors at concessionary interest rates by the banking system, mirrored in reduced interest rates.
Interest rates of over 100 percent, thus, achieve the opposite.
They act against the achievement of Vision 2030 on the economic growth perspective through their counter-inflationary effects.
Also intuitively, when interest rates are over 100 percent, as is the case now where the RBZ policy rate is at 130 percent, banks that borrow from the central bank would, in turn, add on a margin on top of the RBZ rate, resulting in banks’ lending rates of between 140 and 200 percent, varying from one bank to another.
Borrowers drowning in debt
Where a borrower signs up for a loan whose cost of money is over 100 percent per annum, he or she is preset to pay interest charges that are more than the principal amount borrowed, which violates the letter and spirit of the in duplum rule, whose scope is to protect borrowers.
For example, if a tuckshop owner borrows $500 million and is charged an interest rate of, say, 140 percent per annum by a bank, his total repayments in a year would be $500 million principal, plus total interest $700 million — 140 percent of $500 million — which gives total repayments of $1,2 billion.
This is extractive and excessive to the borrower, who would be forced to drown or pass on the extractive cost of money onto his customers through higher prices.
The $700 million interest bill on the $500 million principal amount borrowed flies in the face of the letter and spirit of the in duplum rule, which seeks to strike a balance between the financial interests of lenders and borrowers.
Final consumers of goods and services would bear the brunt of the resultant high prices of goods and services in the market. When prices of goods and services rise beyond certain levels, end users may simply stop buying them, which results in episodes of recession.
A recession is a significant, pervasive and persistent decline in economic activity, and this can last from a few months to some years before the economy can recover fully.
In the case of Zimbabwe, impulses of recession currently bearing on the manufacturing, retail and services sectors are fortunately being counterbalanced and negated by the robust growth rates that are being registered mainly in the mining and agriculture sectors of the economy.
Excessively high interest rates and the stock exchange
When interest rates are excessively high — that is, above the 100 percent mark — the stock exchange also becomes a casualty over the medium to long-term.
Interest rates of over 100 percent do not merely reduce floods in financial liquidity rivers, but lead to virtual drying up of most streams and rivers of monetary flows in the economy to a point where activity on the Zimbabwe Stock Exchange would be reduced to a trickle for most counters.
When stock trades are sparse, share prices typically fall, and with this, the overall net worth of investors on the bourse shrinks.
Depression on the stock exchange would work to dilute and dampen the investment climate in the market, particularly in terms of portfolio investment inflows on the balance of payments current account.
Maintenance of excessively high interest rates in Zimbabwe, thus, also stands as a threat to the future of our equities market over the medium to long-term.
A call for further cuts
in interest rates
The direct implication of the above synthesis is this, as a general policy, the RBZ should ensure no interest rates in our economy are allowed to rise beyond the 100 percent mark.
Zimbabwe’s monetary policy rate should be reduced further to levels lower than the 100 percent mark due to the negative backlash that typically sets in when the cost of borrowing is excessive, as is currently prevailing in our money market.
Tightening of monetary policy through interest rates hikes in pursuit of low and stable inflation has upper limits beyond which the policy becomes counterproductive through backlash cost-push effects on producers of goods and services, as well as on the retail subsector of the economy.
Excessive antibiotics infused into the human body beyond the right dosages can themselves become the poison that kills the patient. Interest rates of over 100 percent in any economy are destructive, as they fuel inflation whilst chocking the productive sectors of the economy.
Healthy consumptive borrowing is also virtually switched off when interest rates are allowed to rise beyond 100 percent.
This kills the retail sectors of the economy.
The 100 percent mark is, therefore, the tipping point threshold beyond which interest rates must not be allowed to rise.
Any increases of monetary policy interest rates beyond 100 percent, as is the case in Zimbabwe at 130 percent per annum, penalise the economy mainly through cost-push impulses on producers and retailers’ pricing matrixes, as well as directly chocking the supply side of the economy through virtual absolute discouragement from any borrowing, leading to actual suspensions of productive and retail activities.
The result is the curse of stagflation currently characterising Zimbabwe’s macroeconomic landscape. High rates of inflation are co-existing with high interest rates and depressed aggregate demand for goods and services. Zimbabwe’s full potential real Gross Domestic Product (GDP)’s annual growth rates are around 15-20 percent when one considers the country’s natural resources capacity.
This means, when Zimbabwe further aligns its monetary policies, together with the fiscal management side and when all enablers are in place in terms of such things as rail, road, air and communications infrastructure, and expanded irrigation systems, our economy’s steady-state growth rates will range between 15 percent and 20 percent annually for decades to come.
Zimbabwe has the natural resources for achievement of these high annual economic growth levels. Curing stagflation through reduction of interest rates may seem contrary to traditional monetarists’ prescription of hiking interest rates for inflation control.
Zimbabwe’s current high inflation levels are not dominantly a result of too much money in the system for the reason that 85 percent of transactions are being undertaken in US dollars, and such foreign currency is in short supply in the domestic economy.
Therefore, one cannot postulate that there is too much money chasing too few goods and services as to cause demand-pull inflation.
The country’s inflation is mainly a result of supply side bottlenecks and high costs of doing business, a large part of which is arising from the cost of money.
Exchange rate volatility, characterised by upward pressure for the weakening of the Zimbabwe dollar is also a major source of Zimbabwe’s cost-push inflationary pressures.
Under these circumstances, the most potent interventions are those that directly reduce the costs of doing business so as to expand the productivity base of the economy.
Rising capacity utilisation and productive efficiencies would induce more supply of goods and services in the economy, which would cut the head of the inflation dragon.
Keeping interest rates excessively high will not resolve Zimbabwe’s high inflation imbalance as the tentacles of this monetary policy tool would only have a direct impact on the 15 percent or so that is being transacted in the local currency. The rest of the impact of the excessive high interest rates would be to push the market towards rising inflationary expectations on the observed signal of high cost of money.
Zimbabwe can surpass all expectations
Through careful calibration of monetary and fiscal policies, supported by continued strengthening of institutions and deepening of its infrastructure, Zimbabwe can surpass all expectations in terms of overall economic performance and social development.
Anchoring in the increasing agro-technological advancements, and in the broadening of dam construction and in expansions of irrigation systems, as well as in the deepening of human capital in crop and animal husbandry, Zimbabwe has targeted to achieve a US$13,75 billion agriculture sector by 2025.
This target is very achievable, notwithstanding the El Niño weather phenomenon that is forecast to retard agricultural performance in the 2023-2024 season.
Sustenance of this growth in agriculture would see the sector scaling up to a contribution of at least US$24 billion towards Zimbabwe’s annual GDP by the year 2030, assuming an average annual growth rate of 12,5 percent from 2026 onwards.
With respect to mining, the country’s US$12 billion target by end of 2023 has virtually been achieved, and more growth is expected over and above this milestone from 2024 to 2030.
Gold, lithium, platinum group of metals, chrome, nickel, copper and diamonds are expected to further anchor Zimbabwe’s mineral exports.
Just by growing at an average annual rate of 14 percent for seven years from 2024, the mining sector would be a US$30 billion industry by 2030.
This is very achievable.
The notable rebound in the tourism sector, and expected stability and growth in the manufacturing sector — through improvements in power availability; and better general road, rail and information and communications technology infrastructure — would also contribute to the achievement of high annual growth rates by Zimbabwe over the outlook period.
The above bright prospects in the economy, anchored by Zimbabwe’s vast natural resources, show that the country can exceed all expectations to register annual economic growth rates in the 15-20 percent range over the period 2026-2030.
This is very achievable under the Second Republic.
Zimbabwe is, thus, destined to become the next economic miracle, not just in Africa, but also in the whole world.
Fiscal and monetary policies ought to be fine-tuned now to infuse the enabling environment where producers continue to increase capacity utilisation, thereby protect and create new jobs.
The current peace and tranquillity in Zimbabwe must be maintained as this provides the right ambience for investor confidence, both locally and internationally.
Dr Munyaradzi Kereke is the founding chairman of the Justice Foundation. Feedback: +263 715 618 123; [email protected]
