Tight fiscal, monetary regime to stay

Exchange Rate Movement: Fiscal and monetary measures instituted by the Government were meant to move towards a unified market determined exchange rate through convergence of the parallel and formal exchange rates.

Finance and Investment Promotion Minister, Professor Mthuli Ncube, has reiterated that his ministry will continue to strive for price and exchange rate stability in the economy following his re-appointment to head Treasury once again.

Mthuli, who now has the additional mandate of promoting investment into the country, said he will continue to pursue tight fiscal and monetary policies currently in place to achieve durable stability.

Liquidity management will remain key with Mthuli saying they will make sure the ministry manages and regulates “payment of contractors so that we do not push so much liquidity into the economy”.

In the past, contractors paid by the Government, were accused of fuelling the foreign exchange parallel market and in the process hurting the local currency which has lost more than 90 percent of its value this year alone.

Punitive interest rates that have been higher for longer in the local currency, forcing economic agencies to turn to US dollar loans, are likely to remain in place.

In its Mid-Term Monetary Policy Statement, the Reserve Bank of Zimbabwe (RBZ) kept its Bank policy rate at 150 percent while the medium-term accommodation lending rate for productive sectors including individuals and MSMEs was kept at 75 percent.

The Bank Policy Rate remains the minimum lending rate for all banks.

In Zimbabwe higher interest rates have resulted in unintended consequences of entrenching dollarisation and putting limits and constraints on economic growth.

Economic analyst, Walter Mandeya of Trigrams Investments, said substantially higher lending rates “make it harder for businesses to finance expansions”.

“In business, investors facing higher costs of capital are likely to transact less while fundraising becomes more challenging,” said Mandeya.

But Mthuli said the Government will continue with “tight monetary policy endeavours so that again we do not have too much liquidity in the economy which will cause trouble in terms of people rushing to the parallel market”.

The tight monetary policy regime has been buttressed by other measures such as gold coins and digitalised coins, which Mthuli believes are helping in “mopping up liquidity from the economy” although they are also seen as a store of value away from the US dollar.

“So that is continuing, we are staying the course and we are very pleased that the Zimbabwean dollar is stable at the moment and we will continue with the multi-currency regime as we have pronounced,” said Mthuli speaking soon after his re-appointment.

The measures in place seem to be working with him pointing to a drop in inflation in the past two months.

The blended inflation has been negative month-on-month at –15,3 percent in July 2023 and –6,2 percent in August.

Year-on-year inflation has slowed to 101,3 percent July and to 77,2 percent in August respectively.

“We should have again lower inflation this month of September and everything is going according to plan,” said Mthuli.

Annual inflation is also expected to continue to decline and end the year between 60 percent and 70 percent, according to the central bank.

Mandeya said the risk confronting the local economy is “two-sided” as fear of inflation still percolates at a time costs for consumers and businesses will be damaging if the monetary screws remain tight for longer.

A local business executive said the high interest rates that have been in place for more than a year now impaired and harmed manufacturing sector and retail who need credit.

That policy placed a lot of companies into distress unnecessarily in the name of stabilisation because the entities were viable at an EBITDA level, but couldn’t sustain high interest levels, said the executive in a private conversation.

Economist, Joseph Mverecha, said while macroeconomic and price stability is the anchor of every other initiative, raising interest rates was a wrong decision, and keeping them high is a wrong policy.

“Our inflation is 95 percent exchange rate which is money supply driven,” so that’s what should be addressed.

Despite market fears of a slowdown in economic growth, Mthuli remained bullish and is expecting strong growth this year.

“We expect a growth of closer to 6 percent after a very strong performance in the last three years with growth at 8,5 percent in 2021, 6,5 percent in 2022 and then this year closer to 6 percent.

“The strong performing sectors will be agriculture, mining, infrastructural development and also manufacturing has also done very well,” he said.

Mthuli revealed that the best performing sector at the moment is tourism which “has recovered so well after the Covid-19 era and we are running out of hotel space”.

Tourist arrivals in the country increased 50 percent to 529 078 in the first six months of the year signalling strong recovery of the sector that was hardest hit following the outbreak of the Covid-19 pandemic.

Tourism receipts, during the period under review, spiked 16 percent to US$343,1 million and there is high hope the sector will continue to recover.

“So every sector seems to be really pumping very well and we want to make sure we support the economy and also given my expanded mandate as the Minister of Finance in terms of investment promotion, we want investment into all the sectors where we can drive investment whether its agriculture, manufacturing, infrastructure and mining.

“So we are working with ZIDA (Zimbabwe Investment and Development Agency), the agency charged with driving investment, working with me as a policy Minister to drive investment into the country,” Mthuli said.

Priority will also be given to domestic investors as well.

“We also have to create the right environment for them to invest. Domestic investment is as important as foreign investment.”

Mandeya said the current measures have indeed brought price and exchange rate stability, “but at the cost of the viability of some companies such as Metro Peech which struggled to sustain operations under the sudden shift to a high interest rate regime”.

“We thus advise that the current measures be supported by additional policies that will promote long term productivity within the economy.

“The continuity of leadership in the ministry is welcomed and we hope that the increased engagement that characterised the last year of the previous term will continue as the new term starts. We however encourage that the Minister should continue giving greater prominence to agencies such as ZIDA, Zimra, etc, that can focus on attending to technical queries and interpreting policy for potential investors.”

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