Reserve Bank of Zimbabwe (RBZ) governor John Mangudya this week lowered interest rates on borrowings in a bid to entice businesses to take advantage of cheaper funding to recapitalise and stimulate production at a time employers are firing workers in their thousands.
Mangudya also came up with the revision of the debt-to-equity threshold for greenfield investments, creation of a bond market and introduction of export incentives.
Mangudya’s export incentives are widely seen as an attempt to stimulate production for the struggling manufacturing sector as well as improve the country’s perilous liquidity situation.
In his 2015 Mid-term Monetary Policy Statement on Wednesday, the governor said with immediate effect, foreign investors intending to undertake capital intensive greenfield projects are allowed to finance 100% of their projects using debt. Previously, foreign investors were required to inject debt which is equal to equity in the event that the investor intends to fund the project through a shareholder’s loan. The policy is aimed at instilling commitment by the foreign investor.
Mangudya wants lending rates to corporates and individuals reduced to as low at 6% per year effective October this year.
Some of Mangudya’s measures also seek to reduce the cost of doing business in the country.
He said high interest rates currently obtaining in the country were not supportive of economic recovery.
As such, new fee structures agreed between the central bank and the Bankers Association of Zimbabwe will come into effect.
The move comes after Finance minister Patrick Chinamasa last week announced in his mid-term fiscal policy Review statement that government was coming up with a National Financial Consumer Protection Policy whose objective will be to provide an overall framework for the protection of consumers of financial services products.
According to the new interest rate guidelines, lending to productive sectors that are classified as prime borrowers because of their low credit risk, will be between 6 and 8% interest per annum.
Borrowers with a moderate credit risk rating will pay an interest ratio of between 10 and 12% per annum.
Productive sector borrowers with a high credit risk rating will pay between 12 and 18% interest per annum while housing finance will attract an interest of between 8 and 16%.
Consumptive lending, according to the RBZ, will attract interest rates of between 10 and 18%.
An interest of between 3 and 8% will be charged to defaulters above the interest rate charged to the borrower.
“Banking institutions are required to effect the above lending rates for both existing and new borrowers, with effect from October 1 2015,” said Mangudya in his statement.
“The downward review in bank charges and interest rates are envisaged to achieve the key objectives of stimulating aggregate demand, promote the resuscitation of industry, improve the cost of doing business and support sustained economic growth and development and thereby going beyond stabilisation.”
He said the agreed interest rate guidelines would act as an incentive for borrowers to timely service their loans, improve their risk rating and access cheaper financing from banks.
Export incentives, aimed at improving liquidity in the market include proposed introduction of an export finance scheme where affordable pre and post-shipment export financing schemes will be provided through formal banking channels with support of the central bank.
Under this scheme, banks would extend credit to exporters and receive refinancing under the interbank market facility, with the Reserve Bank playing a regulatory and oversight role under the scheme.
Mangudya said post-shipment finance shall be granted to exporters after shipment of goods and such a credit facility helps exporters avoid the waiting period between shipping of goods and the receipt of payment.
Banks will recover loan repayments from export proceeds.
The central bank chief also called for diversification of exports, currently concentrated on tobacco and minerals.
Since the adoption of multiple currencies in 2009, export earnings accounted for over 61% of the country’s liquidity, followed by Diaspora and International remittances (27%), external loans and foreign direct investment, accounting for 13% according to the RBZ.
In addition to the establishment of the pre-and-post shipment finance window, the central bank is also mobilising development financial resources to finance capital projects that are necessary to enhance production within the country.
“It is against this background that the Reserve Bank has managed to negotiate with development financial institutions like PTA Bank, the African Export-Import Bank (Afreximabnk) and the Development Bank of Belarus for various project finance facilities in an amount of US$210 million,” he said.
Projects to be financed under this initiative would be made available to entities with both the ability and willingness to repay through normal banking channels.”
The RBZ has also proposed the removal of prior exchange control restrictions on non-sales exports. Previously, even machinery exported for repair required prior approval.
Mangudya said there was need to synchronise and harmonise export authority where with a view to streamline and expedite issuance of export permits as a means of reducing export barriers.
The central bank also committed itself to reviewing the money transfer regulations with a view to increase diaspora remittances.