THE Reserve Bank of Zimbabwe (RBZ) has kept its bank policy rate at 200 percent after its Monetary Policy Committee (MPC) expressed satisfaction with how the current tight monetary policy stance has helped maintain economic stability.
In a statement released yesterday after the MPC meeting on Friday, RBZ Governor Dr John Mangudya said the MPC was pleased with improved business confidence which was now obtaining as a result of economic stability in the economy.
The economy has enjoyed relative stability since the bank hiked its bank policy rate from 80 to a record 200 percent to discourage speculative borrowing, which was partly blamed for driving exchange rate volatility and inflation.
Industry and commerce have been lobbying authorities to review downwards the interest rates saying at the current levels, economic agents were finding it difficult to borrow and remain profitable, adding this could result in a resurgence of non-performing loans.
The bank policy rate signifies the level at which the central bank wants to see interest rates, as such the bank policy rate determines the minimum interest rates charged by commercial banks on loans to borrowers.
In fact, monthly inflation has trended down for five straight months from 30,7 percent in June to 1,8 percent in November while the annual rate has also been going down since the year-high of 285 percent in August 2022 to 254,96 percent in November.
Said Dr Mangudya: “The committee reviewed to maintain the bank policy rate and medium-term lending rate at current levels of 200 percent and 100 percent, respectively, and to review the interest rates in the first quarter of 2023 as dictated by inflation developments.”
The RBZ Governor said “the committee unanimously agreed to stay the course of a tight monetary policy until the first quarter of next year and resolved to review the foreign currency retention thresholds on exports and domestic foreign currency accounts during the first quarter of 2023”.
“This is being done in line with measures aimed at ensuring improved efficiency of the foreign exchange trading systems in order to sustain the current growth trajectory in foreign currency receipts.”
High-interest rates, combined with local currency mop up operations being executed through trade in gold coins, have been credited with cooling off exchange rate volatility and inflation surge, which hit the economy during the first half of the year.
The Medium-Term Lending Facility, for borrowing by productive sector players, was kept at $10 billion for the rest of the year but will be doubled to $20 billion in the first quarter of 2023, as the Bank continues to support key productive sectors of the economy.
The RBZ said the foreign currency retention ratios, a sharing mechanism between the central bank and exporters, will be reviewed in the first quarter of 2023.
Exporters keep 60 percent of their earnings, with 40 percent being liquidated to local currency at official rate.
Local earners of foreign currency keep 80 percent of their earnings as foreign currency with 20 percent being liquidated to local currency.
Economist Professor Tony Hawkins applauded the move saying the firms ought to have more foreign currency at their disposal.
“It is unfair really to say companies are not retooling when they have less foreign currency to deal with in their operations. Such a move will mean more planning for exporters and this will help the country attain the projected growth of 2023.”
Confederation of Zimbabwe Industries (CZI) president Mr Kurai Matsheza said, “The development is a welcome one as industry has been crying for such a review for over a year now. This is the only way we can grow industry as it frees more capital and cashflows for investment in the business.”
In light of foreign currency trading laws, the committee resolved that it will further liberalise the foreign exchange market in the next quarter in order to enhance efficiency in the operation of the foreign exchange auction system and the willing-buyer willing-seller foreign exchange mechanism.
Financial and economic analyst Evelyn Chifamba said, “It is the right decision although some might say the time is now to review the interest rates. It was becoming more likely that the country could slide in a recession as the high interest rates mean companies cannot borrow to finance their operations as the money is deemed expensive.”
Cashflows needed to finance working capital are now being channeled towards debt repayment as the cost of that debt no longer makes sense to them.
Economist Dr Prosper Chitambara said, “It is true that the tight monetary stance has strained aggregate demand in the economy and if it was to be sustained beyond the next quarter economic output growth, in the long run, was never going to reach the 4 percent targeted.”
Dr Mangudya said the MPC expressed satisfaction with the continued close coordination of fiscal and monetary policies in stabilising the economy and it said that this was a necessary precondition for sustaining the current disinflationary process and a bedrock for sustainable growth of the economy.
It is the MPC’s expectation that the economy will grow by 4 percent in 2023 and inflation will remain stable at below 3 percent per month throughout the year.