The Sunday Mail
Golden Sibanda
BANKS have significantly reduced lending in the local currency ever since monetary authorities hiked interest rates last year to prevent rent-seeking behaviour by individuals and corporates, Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya has said.
Most borrowers are now reportedly being deterred by the high cost of money.
In a market where the gap between the formal and parallel market rates was widening, speculators were largely using cheap bank loans to trade in foreign currency before using the proceeds to repay their obligations.
Central bank statistics indicate that while lending surged by a modest 27,7 percent to $1,3 trillion in the quarter to December 2022, the increase was largely driven by growth in foreign currency loans.
Borrowers, especially corporates, either switched to lower-priced foreign currency-denominated loans to avoid punitive interest rates or converted their local currency loans into US dollar debt.
The RBZ hiked its bank policy rate to a record 200 percent in June last year to tame resurgent inflation and exchange rate volatility.
The bank policy rate — which sets the minimum level at which the central bank expects lenders to peg their rates — was later revised from 200 percent to 140 percent in March this year, when the situation improved. The policy rate is also the price at which the banks themselves borrow from the RBZ in the event of short positions.
Some market watchers expect monetary authorities to raise interest once again to stem the local currency’s decline.
Treasury recently warned that interest rates could be increased if speculators continued to put pressure on the Zimbabwe dollar. Dr Mangudya has since indicated that the Monetary Policy Committee (MPC) will meet later this month to review the situation.
He, however, noted that he did not see a compelling reason to increase interest rates, as bank lending was already slowing due to the obtaining elevated rates.
“The MPC will, however, meet and decide on the next decision on rates; that is its job,” Dr Mangudya said when asked about whether interest rates would be raised in the near-term.
“The medication differs depending on the ailment . . . We need to know what is causing the effect, but generally speaking, if you look right now (at) interest rates, it’s an assumption that people are borrowing (too much), which is causing money supply growth.
“The question now is: Is there (too much) borrowing in this country? No! Banks are not lending. You can go and ask any bank today; they will tell you that they are not lending (much) because at 140 percent, people cannot pay back and they are afraid people will default. If people are not borrowing . . . there is a credit squeeze.
“If you increase interest rates, you will (also) affect those that are already borrowed and that is likely to create problems.”
To rein in resurgent pressures on the economy, last month, Treasury came up with interventions that include transferring payment of all external obligations from the RBZ to the Ministry of Finance and Economic Development to address the problem of money creation.
Treasury will also collect the export surrender portion from exporters and use it to pay the external loans.
Further, the auction will be improved to a true Dutch system, while the amount that will be allotted would be capped at US$5 million weekly. Among other measures, retailers will now be allowed to retain 100 percent forex from domestic sales, while the intermediated money transfer tax for forex transfers was cut from 2 percent to 1 percent.
