Banks have urged Zimbabwe’s central bank to raise interest rates and lift a two-year old 12% cap, which remained in place despite a partial floating of the exchange rate in February.
Reserve Bank of Zimbabwe governor John Mangudya left rates unchanged in his monetary policy statement released in February, but said he planned to introduce a bank rate – the rate at which banks borrow from central bank – as a guide for rates to the market.
In a proposal to RBZ, the Bankers Association of Zimbabwe (BAZ) said it “recommends lifting of the interest-rate caps” in order to “allow for proper risk-based pricing of loans”.
Mangudya imposed a 12% cap on interest rates in March 2017, saying high interest rates in a then dollarized economy was limiting lending and hurting economic growth. Non-performing loans had also ballooned, resulting earlier in the formation of the ZAMCO bad debt clean-up.
By now keeping rates capped after allowing the exchange rate to move, critics say RBZ is creating arbitrage gaps that could see borrowers increasing demand for foreign currency. Other bankers however say, ultimately, higher rates will also drive up prices.
BAZ says current interest rate levels do not reflect inflation trends.
“In view of the prevailing inflation, the interest rate framework does not allow banks to adequately compensate their investing and depositing customers. In the end, this will perpetuate financial disintermediation and probable market bubbles on the stock market, as customers will look for alterative, non-bank based, investment options.”
Banks say an overnight rate, soon to be introduced, must be pegged at 15.5% for the following reasons: Monetary Authorities must signal a tightening of monetary policy to anchor inflation expectations; To support the exchange rate; To discourage consumption borrowing; Support the continuing improvement in current account balance.
Banks’ minimum lending rates can be a margin of 3% above the overnight accommodation rate, BAZ says.
BAZ accepts that higher rates may push up NPLs, but they insist “it is also imperative to strike a balance and determine an optimum interest rate policy that complements the policy measures that have been put in place”.
Government plans to rollover RTGS$2.2 worth of Treasury Bills which mature this year, as part of a plan to contain the deficit, but BAZ says these must be honoured.
“Not honouring the maturities obligations will have far-reaching adverse consequences on the entire banking sector, and the rest of the economy,” the BAZ said. “In fact, a default by the government on sovereign paper is unfathomable.”
BAZ said an overnight rate would allow banks short of cash to obtain funding from the central bank. An interbank market would further stabilise interest rates, the bankers said.
BAZ also want statutory reserve ratios lowered from 5% to 3%. “This is meant to offer some room for banks to still be able to advance credit to the productive private sectors. It is conceivable that a failure to leave a room for new credit expansion will result in the country facing a higher risk of a recession or stagflation in the worst case.”
RBZ data shows that personal loans continue to dominate bank loans, hogging 26.3% of credit, compared with just a 10% share for manufacturing. Many still cannot afford credit at current rates, while a number of borrowers are still in default.
IMF spokesman Gerry Rice said in March that while Zimbabwe’s currency reforms were a “step in the right direction”, they also needed to be backed up “by market-determined interest and exchange rates.”
In February, Mangudya said interest rates would be led by an accommodation rate for banks.
“Once we establish the accommodation window, we shall come up with something called the bank rate. The bank rate will then determine the rates in the market; that’s how things are going to operate,” he said.
Banks have separately proposed a sharp increase in bank charges, which will add to the cost of banking in an economy where the bulk of transactions is electronic.