By Lucia Mutikani and MacDonald Dzirutwe
JOHANNESBURG/HARARE – Zimbabwe’s central bank raised its key bank rate by 50 percentage points on Tuesday in a bid to curb spiralling inflation, but analysts dismissed the step as futile saying pressures were being fanned by exces
sive state spending.
In a circular to banks, Reserve Bank Governor Gideon Gono said the accommodation rate would rise to 800 percent from 750 percent effective Tuesday to put brakes on rampant inflation by reducing excess liquidity in the market.
It is the rate at which the central bank lends money to commercial banks.
“Breaking the back of this undesirable spiral demands … we remain relentlessly steadfast in mopping out excess liquidity from the market … when confronted with the threat of high inflation,” Gono said.
The country’s annual inflation rate vaulted to a record 913.6 percent in March from 782 percent in February. Zimbabwe has the highest inflation rate in the world and its once thriving economy is in its eighth year of recession.
Analysts said the latest rate hike, which followed a similar rise in March, was unlikely to achieve the desired effect — given that the main source of inflationary pressures was uncontrolled government spending and borrowing.
Commercial banks are not lending to individuals due to prohibitive debt servicing costs, while companies are looking at alternative means of raising working capital.
Prime lending rates are officially around 600 percent — below the bank rate — due to what dealers said were political pressures and a high risk of defaulting by borrowers.
“The bulk of credit extension is not coming from lending to individuals or the corporate sector. The root cause of inflation has always been fiscal policy and that needs to be addressed,” said an economist who declined to be named.
Central bank statistics show the government’s domestic debt at $15.1 trillion (US$152.2 million) early this month compared $14.1 trillion during the same period in March.
Treasury bills account for 87.9 percent of the total debt, which analysts said reduced the effectiveness of monetary policy to address the country’s hyper-inflation environment.
An International Monetary Fund mission in February told the Reserve Bank to halt its inflationary quasi-fiscal activities.
DIFFICULT TO CONTROL INFLATION
“In hiking interest rates, they are indirectly allowing for greater money supply growth simply because so much of the debt is denominated in very short-term instruments. That ultimately makes it difficult to control inflation,” said the economist.
“If this move had come a while back, it might have had a greater chance of success. The difficulty is that once the month-on-month rate of inflation rises to such an extent, it become difficult to control it through monetary policy alone.”
Zimbabwe’s monthly inflation rate is around 20 percent.
Soaring inflation has emerged as President Robert Mugabe’s government’s number one enemy, dashing hopes of revival for the economy mired in escalating poverty and shortages of foreign currency and fuel.
The central bank, tasked with turning around the economy’s fortunes, had previously forecast that inflation would peak at between 700 and 800 percent during March before falling to between 220 and 230 percent by the end of the year.
“I think the policy is self-defeating because on one hand you discourage borrowing by companies and on the other you want to curb speculative borrowing yet the government is the main player by borrowing to pay interest on its debt,” said University of Zimbabwe professor of business Anthony Hawkins.
Critics blame Mugabe’s government for the economic meltdown.
But the government attributes the country’s woes to sabotage by the West, led by former colonial power Britain in retaliation for its controversial seizures of land from white commercial farmers. — Reuter