BUSINESS Monitor International (BMI) has raised concern over the high-level of political interference in the operations of the Reserve Bank of Zimbabwe, saying this h
as made it one of the most disorganised central banks in the world.
In its fourth quarter forecast report, titled The Zimbabwe Business Forecast Report, the London-based BMI said although the RBZ was doing its best to regulate the financial sector, its task was being made difficult by government polices which undermine its operations.
“Largely because of political interference, the monetary policy structure remains one of the most disorganised and complex in the world,” the BMI said.
“The Reserve Bank of Zimbabwe does its best to manage domestic liquidity, regulate the banking system, and control inflation, but it faces a near impossible task because of government policies and the regime’s habit of using the central bank as its first resort for deficit financing, which it funds from the banking system.”
The BMI said many private financial institutions worry about being over-exposed to the state, but have very limited bankable propositions.
“Moreover, lending to the government is zero-risk-weighted in terms of capital required to back the advances, which greatly enhances their profitability. During late-2004, aided by a brief and rare period of fiscal restraint, the RBZ was able to bring inflation down to around 100%,” the BMI said.
“But prices resumed their upward path shortly thereafter, fuelled by shortages, hikes in government-administered prices and renewed steep currency depreciation. By July, inflation had reached 254,8% year-on-year and will probably continue upwards.”
On Tuesday, year-on-year shot to 359,8% from 265,1%.
Zimbabwe’s political situation has over the past five years been classified as unstable, something which has greatly undermined investor confidence.
The country has been battling to service its ballooning debt which has raised questions about the prospects of the country’s economic recovery.
The BMI also said predicting interest rates in Zimbabwe was difficult because of the arbitrary nature in which they are set.
“Earlier this year, the RBZ signalled that it wished to see interest rates lower to provide a measure of stimulus to the real economy. But given the developments on the inflation front, it has had to abandon that goal,” the BMI said.
“In July, the RBZ raised its benchmark overnight rate to 180% from a low of 95% in February and scrapped a scheme where exporters could borrow from it at a ludicrous 5% (and which was largely funded by raising the non-interest bearing statutory reserve requirements on banks to record levels).”
BMI core scenario:
* The country has abundant natural resources;
* Once stabilised, there could be substantial inflows of FDI, particularly from South Africa.
* The economy has effectively been de-industrialised and the crucial agriculture sector is in chaos;
* Many skilled workers and professionals have emigrated and an HIV/Aids infection rate estimated at 34% is further reducing skills endowment;
* Most state companies are bankrupt and will require large capital injections to become viable.