BY MTHANDAZO NYONI
A CONTRACTIONARY mid-term monetary policy statement (MPS) announced by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya last week will frustrate industrial recovery as firms will struggle to access lending facilities, economists warned this week.
A contractionary policy refers to a blueprint that prioritises reducing government spending or a reduction in the rate of monetary expansion by a central bank.
The RBZ chief maintained the policy and overnight accommodation rates at current levels, saying this was important to contain inflationary pressures and tie down money supply growth.
His move followed Finance minister Mthuli Ncube’s decision to maintain current policies when he presented the midterm fiscal policy review a week earlier, with both saying the status quo had worked well.
Mangudya has placed fending off inflation and bringing it down to about 30% by year end, from about 336% in December 2020 among his top priorities.
His strategy was bolstered when inflation fell to 56% in July from 106% in June.
“The bank’s overnight accommodation of 40% and the medium-term lending rate for the productive sector of 30% will be maintained in the short term, in order to control money supply and curb speculative activities,” Mangudya said.
“The bank shall continue to review the policy rates in response to the downward inflation trajectory,” he added.
Mangudya also kept an interest rate cap on the medium-term lending facility at 10% above the rate at which banks access funds from the central bank.
He said this was crucial to maintain a pipeline of cheaper funding for companies.
But Stevenson Dhlamini, applied economics lecturer at the National University of Science and Technology (Nust), said while it was apparent that the RBZ would pursue the same strategy as the Ministry of Finance, leaving interest rates at these levels would deter companies and small-to-medium-scale enterprises (SMEs) from borrowing.
“Mangudya maintained the same course being driven largely by the National Development Strategy Programme,” Dhlamini told businessdigest.
“We expected him to retain interest rates high, consistent with what the fiscal policy had dictated. But I will say this is not favourable because interest rates right now are too high. Most SMEs, for example, can’t access credits,” Dhlamini added.
He noted that while banks were sitting on about US$1,7 billion in their reserves, companies were suffering, most of them unable to borrow at high rates, while failure to access credit had driven some companies into the informal space.
These had joined a sector said by the International Monetary Fund to be controlling about 60% of Zimbabwe’ gross domestic product (GDP).
GDP growth is projected at 7,8% this year, after a 4% contraction in 2020.
But Dhlamini warned that with no hope of accessing cheaper funding from banks, Zimbabwe should brace for more informalisation of the economy.
“Companies now prefer private equity (instead of debt),” said the Nust academic.
“We are seeing them even delisting from the stock exchange, some of them doing this so that they can access private equity. So the question is, is it necessarily favourable?” queried Dhlamini.
He said in whatever decisions that they take, authorities must be guided by a familiar warning from the United Nations Development Programme, which says governments that pursue inflation and money supply targeting treat individuals as statistics, rather than as human beings who are affected by the economic activity directly.
“Statistically, they are consistent but for the common man — the average person on the street who is looking for a job — it’s not helpful. You look at unemployment figures, they are still high. Yet we are pursuing a contractionary monetary policy which is self-defeating. What people need are jobs and access to credit,” he said.
Independent economist John Robertson said when banks cannot provide cheap lending to productive sectors, economies suffer.
“Government’s determination to control and regulate new investors has caused the newest investments to take additional years to turn into functional companies,” Robertson said.
“Hopeful investors quickly learn that local banks will not be able to help them raise the working capital needed or to raise equity finance as the government has not restored the country’s credibility in the international capital markets,” added Robertson.
He said he was worried that instead of working on policies that help firms access funding, the government was actually crowding out the private sector.
“The loans of a few years ago could not be repaid (because of high interest rates) until the local currency was sharply devalued. Since then, deeply negative interest rates have done more damage to savings,” he said.
“Badly depleted savings have made investments by Zimbabweans difficult to finance and most of those needing imported machines or materials have to buy their foreign exchange on the black market. Regulations imposed on foreign investors cause such long delays and high compliance costs that most of them go elsewhere,” Robertson said.
Banks had started off well this year, channelling almost 90% of their interventions into the economy to productive sectors to stimulate recovery.
The value of banking sector loans increased by ZWL$105 billion during the first half of 2021, as financial institutions shifted from consumptive interventions to fund productive sector requirements, the central bank’s statistics showed.
The sector’s combined loans ended at ZWL$142,79 billion on June 30, 2021, rising from ZWL$37,7 billion a year earlier.
The big shift from an ages old tradition of targeting consumer loans boosted companies’ capacity to respond to volatilities that have rocked industries since Covid-19 broke out last year.
The Confederation of Zimbabwe Industries said recently that manufacturing sector capacity utilisation rose to 56% during the second quarter of this year, compared to 47% at the end of last year, with companies injecting about US$25 million in fresh capital to sustain operations.
“Total banking sector loans and advances increased by 73,27% from ZWL$82,41 billion as at 31 December 2020 to ZWL$142,79 billion as at 30 June 2021,” Mangudya said.
“During the period under review, financial intermediation remained stable as reflected by a loans-to-deposits ratio of 45,84%. This position reflects that there is scope for banking institutions to enhance their financial intermediation role. The banking sector continued to support the productive sectors of the economy, as reflected by the ratio of loans to productive sectors to total loans 80,89% as at 30 June 2021. The performance of loan portfolios of banking institutions was satisfactory as reflected by the average non-performing loans to total loans ratio which remained low at 0,55% as at 30 June 2021, against the international benchmark of 5%, reflecting sound credit risk management systems and internal controls. In the outlook period, credit risk is expected to remain low,” Mangudya added.