Firms chase Zim dollar debt conversion to USD

Chocked by high interest rates following the central bank’s record bank policy rate hike in June this year to stymie speculative borrowing, Zimbabwean firms are reportedly begging banks to convert their Zimbabwe dollar liabilities to US dollar debt to avoid paying the onerous 200 percent plus lending rates.

Responding to stubborn inflation, amid domestic and global inflation upheavals, the Reserve Bank of Zimbabwe (RBZ), in June this year became the most aggressive central bank in the world after bulking its bank policy rate from 80 to 200 percent.

The bank policy had recently been increased from 60 percent to 80 percent in April 2022, figures that were not punitive enough to discourage borrowing for speculative purposes.

The central bank policy rate (CBPR) is the rate used by the central bank to implement or signal its monetary policy stance. It is most commonly set by the apex banks’ monetary policy-making committee.

Zimbabwe has experienced rapid inflation increase since reintroducing and floating its domestic currency in 2019 after a decade-long, again, hyperinflation-induced hiatus.

At its peak post dollarisation, Zimbabwe’s inflation reached 837,5 percent in 2019 before rapidly declining to a two-year low of 50,1 percent in June 2020.

Notably, the Southern African country’s inflation has rallied on account of the volatility of its currency, which has depreciated from 2,5/US$1 when reintroduced in February 2019 to $654/US$1, on the official interbank market.

On the parallel market, the Zimbabwe dollar changes hands at between $800 and $850 to the greenback.

Zimbabwe’s largest business member organisation, the Confederation of Zimbabwe Industries (CZI), said the prevailing high interest rates were choking business activity.

“A lot of those who were in borrowed positions are finding it difficult to service the loans. However, with more dollarisation of the economy, some are negotiating with banks for conversion of those loans into USD (loans),” said CZI president Kurai Matsheza.

However, Small Enterprises Association of Zimbabwe (SMEAZ) president, Farai Mutambanengwe, said the reason companies need to convert loans to US dollar debt was the need to shield themselves from punitively high Zimbabwe dollar interest rates but warned the process would present a number of complications.

“The problem is number one; the exchange rates that would then be used to make such a change because if the exchange rate is going to be the (lower) official exchange rate, it means the indebtedness will be much higher.

“Number two; obviously what it means is that there is now further dollarisation of the economy as people move out of the Zimbabwe dollar into US dollar-based lending.

“Problem number three is that a lot of the time there are assessments done before people get loans including whether or not they will be able to repay those loans; especially in US dollars.

“Much as we are a multicurrency economy, some people may not actually generate US dollars so there may also be a complication in terms of that,” Mutambanengwe said.

But Matsheza insisted; “Those who are not able to are just focused on liquidating those liabilities. As earlier alluded to, with the deepening (dollarisation), banks are now slowly availing USD loans.

“This is helping the working capital positions of some companies,” said Matsheza, adding they continued to engage the authorities to review those (Zimbabwe dollar) interest rates downwards, “now that there is some level of stability in the parallel market”.

Pain to continue

But the RBZ has no plans for an immediate downward review of its punitive interest rate regime until it sees inflation on a “durable” decline trajectory, according to governor Dr John Mangudya.

Like medication prescribed to cure an ailment, Mangudya said, the tight monetary stance was expected to have side effects such as the pain the policy thrust has had on industry, commerce and individuals.

Asked if the record interest hike was justified, Mangudya replied, “Yes, it is a necessary pain. Any policy measure is bound to have side effects just like medication. For policy measures designed to stabilise the economy, that was to be expected.

“How can you have a policy that has no side effects?”

“The tight monetary policy stance was designed to reduce aggregate demand. The strong monetary policy stance was adopted after we realised that demand was higher than the economy can carry,” he said.

Against this background, the central bank governor said the monetary authorities were looking to stay the course to ensure inflation continues to come down.

However, this comes as Zimbabwe’s monthly inflation fell to 1,8 percent this month, its lowest since April last year and the second lowest for more than three years, as the market-led and effective policy interventions by the Government and the Reserve Bank of Zimbabwe continue to succeed in holding prices down.

Measures bite speculators

Monthly inflation rose gradually but steadily in the last half of last year and the first quarter of this year after being beaten back following the surge seen just before the auction system and other measures smashed black market pricing since the middle of 2020.

Then it suddenly shot up to peak at 30,7 percent in June, before the Government and Reserve Bank launched a swathe of measures to smash the speculation that was driving up the black market exchange rate and which in turn was driving inflation.

The measures were anchored around pushing up interest rates to 200 percent, so speculators could not make money by borrowing to play the black market.

At the same time, a number of measures were taken to take ordinary businesses out of the black market, from selling gold coins to those that wanted a legal store of value, introducing the interbank market run by the banking system to set the official exchange rate and eliminating overpricing, which created excess liquidity offloaded into forex, in Government contracts.

The result has been rapidly growing stability.

But while companies have approached banks seeking to have their expensive Zimbabwe dollar debt converted to US dollars, concerns have risen about the fictitious impression this creates on banks that they now hold US dollar assets on their balance sheets.

According to ZimStat, on a year-to-year basis, inflation cooled down to 255 percent in November from 268,8 percent in October and 280,4 percent in September 2022.

The Zimbabwe dollar exchange rate, which has been the major determinant of the behaviour of inflation in Zimbabwe has been largely stable during the period, hands the trend down in inflation.-ebusinessweekly