The Bankers Association of Zimbabwe (BAZ) has called out new exchange rate strengthening measures by the country’s central bank, which devalued the local unit of exchange.
The Reserve Bank of Zimbabwe (RBZ) last week devalued the Zimbabwe Gold currency, seeking to tame a runaway parallel exchange rate.
After retailers complained of monetary and pricing distortions following the wider parallels between the official exchange rate and the street exchange, the RBZ hiked the policy rate from 25% to 35%.
However, banks in Zimbabwe have now said that the new measure has the “potential to see an increase in non-performing loans” in addition to driving up the cost of capital, with the the higher borrowing costs set to “defer investment and expansion” of businesses.
Banks in Zimbabwe include units of South African finance institutions, such as Standard Bank, Old Mutual and Nedbank, among others.
At a time the government of President Emerson Mnangagwa was battling to tame inflation and drum up usage of the local currency, the representative grouping of Zimbabwean banks said the new policy rate could also result in “increase in prices and subsequently inflation”.
After announcement of the new monetary stance, Finance Minister Mthuli Ncube said this week that the government would hike civil servants salaries in line with the new exchange rate.
However, economists and finance institutions feel that the impact will be more pronounced on the private sector, especially on smaller players.
“Companies reliant on loans to manage cash flow, especially small and medium enterprises (SMEs), will struggle to maintain operations due to higher interest payments,” said the BAZ.
Zimbabwean bankers have now called for convergence of official and parallel exchange rates and improvements in market transparency by the government.
They are also concerned that “if the exchange rate weakens significantly, it could lead to higher prices for imported goods, driving inflation higher in an economy already struggling” with price instability.
“Foreign investors may view a more flexible exchange rate regime as a positive sign, as it reduces the risk of sudden devaluations and allows them to assess currency risk more accurately. However, short-term volatility may still make investors cautious,” said BAZ in a statement.
However, the Zimbabwean central bank has defended its new monetary measures, saying the increase in the bank policy rate is a common policy measure to curtail market liquidity and control inflation.
It also said the hiking of statutory reserve requirements to 30% on both local and foreign currency was intended to further tighten monetary conditions and support the Zimbabwe Gold stabilization efforts.
It rejected the bankers’ proposal to stagger the statutory reserve payments, saying it believed the exchange rate would “firm up once the policies of increasing the policy rate and statutory reserves are implemented”.
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