Zimbabwe’s 200% interest rate policy choking economic growth

Analysts said yesterday that the current high interest rates were chocking economic growth. File photo: EPA

Analysts said yesterday that the current high interest rates were chocking economic growth. File photo: EPA

Published Oct 18, 2022

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Maintaining interest rates at 200% - the highest in the world - will stifle economic growth for Zimbabwe, as it battles monetary instability despite retailers and manufacturers starting to record a surge in US Dollar sales amid a local currency crunch.

Finance Minister Mthuli Ncube said over the weekend that Zimbabwe would maintain interest rates at 200 percent for the next three months as a way of stabilising inflation. The government was inclined to maintain the current tight monetary, interest rate and fiscal policy regime.

“That's what it takes to bring stability and bring things under control," he said.

The Zimbabwe dollar local unit of exchange, which has been highly volatile, has notched up some stability on the parallel exchange rate market. It has been trading at around $1:ZWL700 in the past few weeks.

However, analysts said yesterday that the current high interest rates were chocking economic growth. Such high interest rates, in a rapidly dollarizing economy, were negating productivity and economic growth, said economists.

“A 200% interest benchmark is a sure way to guarantee a recession. It stifles business and output,” argued former Finance Minister and opposition parliamentarian, Tendai Biti.

He said such a high interest rate regime “will not control inflation” which in Zimbabwe’s case “is primarily a product of government’s overzealous fiscal policy” that had resulted in broad money growth.

The yearly rate of inflation is still elevated at 280 percent.

Industrialists and retail operators are still expecting volatility in the next few months, even as they have started raising sales in US Dollars which are providing some cover for their import requirements.

Truworths Zimbabwe said on Friday that its sales and profitability for the full year to July 2020 had been affected by a pricing regime that “rendered products expensive in US Dollar terms”.

This comes as retailers such as Edgars Zimbabwe have started to record an uptick in US Dollars on the back of near convergence in exchange rates for the Zimdollar on official and unofficial markets.

“Whilst a sizable portion of our cash sales are in foreign currency, we believe that further relaxation of foreign currency trading will go a long way in increasing our USD generation to fund imports,” Edgars Zimbabwe, said.

High interest rates have been a deterrent to their borrowing capabilities, thereby impacting on productivity and ultimately economic growth. Ncube acknowledged that Zimbabwe’s economy will now grow at a slower rate this year.

Zimbabwe’s plight has been worsened by high indebtedness, which is deterring it from securing fresh funding for economic and developmental programs.

The Southern African country owes international creditors some $10 billion (R173bn) although Ncube says Harare is engaging the IMF and World Bank to clear the arrears.

Zimbabwe, which has suffered bouts of hyperinflation in the past 15 years, has over $10bn in external debt, mostly in arrears.

It has not received funding from lenders like the IMF and World Bank for more than two decades as a result.

In December, the IMF will send a team to discuss a staff monitored program for Zimbabwe, Ncube added. The IMF wants Zimbabwe to remove exchange rate distortions.

"We've begun to make token payments to the World Bank, the AfDB (African Development Bank), European Investment Bank and the Paris Club creditors, 17 of them, we will be making token payments to show that we want to be a good debtor," Ncube said.

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