eBusiness Weekly
Taking Stock Kudzanai Sharara
The Monetary Policy Committee appeared more confident in its stance on interest rates at the last policy meeting, with one of the members Eddie Cross telling Business Weekly inflationary pressures are receding and month-on-month inflation could fall to single digit as early as March this year.
That optimism probably underscored the central bank’s decision to leave Medium-term Bank Accommodation (MBA) rate unchanged at 35 percent.
But is it even worthwhile to use interest rates as a tool of controlling inflation or money supply growth. For instance, the weakening exchange rate has been doing the most on both rising inflation and money supply growth.
On price instability, the exchange rate is being used to determine the Zimbabwe dollar prices and causing inflation. The exchange rate is also used to determine how much US dollars we have in Zimbabwe dollar terms, something that obviously pushes money supply growth.
There is an estimated US$1 billion in the banking sector and that translates to approximately $17 billion at the going exchange rate. As the exchange rate or the US dollar holdings increase, so too is money supply growth which might be inflationary.
Central banks across the world often use interest rates to encourage lending or discourage it. They also use interest rates to increase money supply as a rate cut encourages borrowers and boost money creation.
A rate hike on the other hand discourages borrowing by consumers and aggressive lending by financial institutions.
Also kept in check by rate cuts and rate hikes is inflation, with a rate cut enabling banks to put more money into the economy which might push up prices (demand push inflation) while a rate hike will discourage such practices as both lenders and borrowers will have to consider the risks involved.
To put it differently, interest rates enables central banks to expand or contract money supply as needed to achieve stable prices, and stable economic growth.
But given where inflation is, why would the MPC leave rates unchanged? In an economy that is struggling for positive traction, banks will not be too keen to lend on high interest rates with a default risk too high. Borrowers too will be cautious. Not many businesses can get good returns in a struggling economy.
The default risk which might give one a bad debtor tag is too high.
The Zimbabwe economy has been struggling for a while now on both the fiscal and monetary front.
Businesses have struggled for sales and those that are highly indebted have found themselves defaulting. Those that are prudent have stayed away from crippling bank loans and have had to do with their own little resources. Banks themselves have been extra cautious, going beyond their direct customer opting to knowing your customer’s customer.
This is the economic environment that the MPC has found itself in where interest rates cannot be used as a tool to manage money creation or inflation pressures. At some point, before the MPC came to be, interest rates were hiked to 75 percent but no bank was desperate enough to seek accommodation at the central bank.
In fact, given the level of lending in the country, at below 40 percent, banks are very liquid, even though the liabilities are mostly demand deposits.
Banks won’t be pressured to seek accommodation at the apex bank even at 35 percent. When interest rates were put at 75 percent, very few banks if any, adjusted their interest rates anywhere close to the bank rate.
Even when inflation is as elevated as it is, above 500 percent (estimated), not many businesses can borrow at 75 percent or anywhere close and make a reasonable returns on that investment.
The consumer is constrained and chances are high that such products (of high interest rate borrowings) will take longer on the shelves than the time frame of the short term debt. It’s too risky for the business and the bank to lend at those interest rate levels.
So understandably the MPC left the bank rate at 35 percent.
With inflation above 500 percent one would expect borrowers to go all out and borrow, but that has not been the case. There are perhaps two reasons to this.
One is that banks have not been too excited to indulge all Tom and Dick’s borrowing appetite. In a story we carried last week, the country’s biggest commercial bank, CBZ, had its loan to deposit ratio at just 26 percent as at end of September 2019. This is a bank with $3,6 billion in deposits. It is highly liquid too, with a liquidity ratio of 87,2 percent.
The bank is probably looking at its non-performing loan ratio of 13,4 percent and taking cue, it might not be prudent for aggressive lending.
The other reason might be that borrowers themselves have no appetite for debt. Earlier we highlighted the inflation levels; they are too high for business.
To borrow and then sale your product at an arm and leg (read inflation) might not be such a good idea. The consumer just does not have that muscle. We have seen it through tumbling sales volume at various businesses.
Borrow and you might be stuck with your product. Expansion strategies are not a top priority at the moment for most businesses, so no borrowing either. The idea is to weather the storm and survive. If an expansion is to be done, then it’s probably through internal resources.
Businesses that are doing well in this environment are also probably cash rich in local dollar terms. If any borrowing is to be done then it has to be in US$, something most banks do not have.
At 35 percent interest rates, the MPC has however, not left it as a blank cheque for speculative borrowers. Any bank that lends to the extent of seeking accommodation would have to have advanced to the productive sector and for medium to long term.
The MPC emphasised that access to the accommodation rate window at 35 percent crucially depends on the quantum of medium and long-term productive lending undertaken by banking institutions. There is also a limit to how much banks can access, just $1 billion. These conditions, hopefully, will keep speculative borrowers at bay.
