Omega Ukama 
BUSINESS says the best way to fight the country’s rising inflation lies in addressing structural economic challenges rather than raising interests rates.
Captains of industry and commerce who spoke to The Financial Gazette this week said this was so as speculative borrowing had a “negligible impact” on the country’s renascent inflation. This comes after the Reserve Bank of Zimbabwe (RBZ) hiked interest rates last week, in a bid to curtail speculative borrowing and inflation, while also fostering macro-economic stability.
Christopher Mugaga, the ZNCC chief executive officer.
It also comes as companies have become increasingly jittery about the rising cost of doing business in the country, as well as Zimbabwe’s capacity to achieve its economic growth targets this year amid mounting headwinds — including surging imported inflation and the tumbling local currency.
The chief executive of the Zimbabwe National Chamber of Commerce (ZNCC), Chris Mugaga, was concerned that raising the policy rate by 20 percent to 80 percent, as the RBZ did, would further raise the cost of doing business in the country.
“I am convinced that both inflation and the exchange rate in Zimbabwe are driven significantly by adverse expectations outside key fundamentals in the economy. “So, for us to continue fighting to control inflation by adjusting the interest rate is a big disservice to business.
“We thus, implore the government not to continue pushing up the interest rate because as long as some fundamentals, including adverse expectations and money supply, are not moving in line with economic growth, then we will continue to have inflation and exchange rate depreciation,” Mugaga said.
“In any case, the trend in global economics is that the interest rate adjustment is no longer such a popular tool with regards to inflation targeting.
“Monetary authorities should consider other instruments,” he added, saying further that the level of informalisation of the local economy heightened the limitations of interest rate adjustments as a tool for inflation targeting.
“So, you will find that we are not gaining much from raising the rate, but the pain to commerce and industry is real. In fact, one of the major threats to industrialisation is the cost of capital.
“So, if the interest rates continue to go up, this will threaten the regional value chains we are trying to build because domestic businesses will have to continue to contend with an uncompetitive financing model.
“All this effectively results in negating the objectives of the NDS1 (the country’s economic blueprint, the National Development Strategy),” Mugaga said further.
On his part, the chief executive of the Chamber of Mines of Zimbabwe, Isaac Kwesu, said the interest rate adjustment would push up costs in the short-term, although miners understood and supported authorities on the move.
“We are of the view that the recent measures will discourage speculative borrowing and curtail inflation pressures, a pre-condition for macro-economic stability and sustained economic growth.
“The outlook for the exchange rate largely depends on the foreign currency supply situation as well as conditions surrounding money supply growth and arbitrage opportunities on the foreign exchange market. “It is our hope that the government will address these challenges in the short-term,” he said.
Dairibord chief executive, Anthony Mandiwanza
Dairibord chief executive, Anthony Mandiwanza, speaking to The Financial Gazette on the sidelines of the milk producer’s results briefing in Harare last week, also raised concerns over the latest hike in interest rates. “The interest rate adjustment is going to impact us on costs. It’s certainly a cost-push issue because ultimately it’s overarching, with effects on both the processing side and the consumer side.
“So, the interest rate increase is a cause for concern for business,” he said, adding that speculative borrowing was not a major driver of inflation in the country. “We need to understand fundamentally what is driving inflation. As business, we think the major driver of inflation is around the availability of foreign currency and, recently, imported inflation on critical raw materials.
“The exchange rate, whether it is through the parallel market rate or not, is an issue of demand and supply, which needs to be balanced. The second issue is whether we have sufficient holdings of foreign currency in the country? We believe we do.
“If you look at last year, the country received US$9,7 billion — making it larger than Kenya. I think it is the utilisation of that foreign currency that becomes an issue,” Mandiwanza said further. While Zimbabwe’s month-on-month inflation declined from 6,99 percent in February to 6,31 percent in
March, annual inflation escalated from 66,11 percent to 72,70 percent over the same period. According to the RBZ, global inflation — which has been on the increase as a result of the ongoing Russia-Ukraine conflict — had had significant secondary pass-through effects on domestic prices.
“Rising prices of oil, fertilisers and other related products had the effect of increasing global inflation and, inevitably, had a negative impact on domestic costs of production and was destabilising the foreign exchange market.
Reserve Bank of Zimbabwe, governor John Mangudya and Finance Minister Mthuli Ncube
“In this regard, the bank will remain focused on inflation reduction and putting in place additional policy measures in response to the resurgent inflationary pressures and foreign exchange parallel market activities,” RBZ governor John Mangudya said last week when he hiked interest rates.
The central bank’s policy rate is what commercial banks pay when they borrow from the apex bank, and this generally serves as a reference rate for the entire financial system.
Before the latest interest rate adjustment, businesses had been complaining about high borrowing costs in the country.
In a recent report, Zimbabwe Stock Exchange-listed agro-industrial group TSL said it realised an average interest rate of 45 percent in 2021, which it characterised as “unsustainably high”.
At the same time, some bankers have welcomed the interest rate adjustment.
“It’s a positive move … because once the interest rate is below inflation, we tend to have negative real interest rates, which means that we now have a cheap source of funds which can be misused,” a Harare banker told The Financial Gazette.
“In the same vein, banks will not be willing to lend at sub-inflationary levels because by the time one repays back that money, it would be worthless.
“That is why whenever there is an increase in inflation, there should be a commensurate interest rate adjustment,” the banker added.
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