Liquidity crunch, high interest rates weigh down stability

Zimbabwe Stock Exchange listed companies have heaped praises on stability experienced in the second half of 2022 — praising monetary policy interventions employed by the Reserve Bank of Zimbabwe (RBZ) — but have bemoaned pursuant liquidity crunch and expensive borrowing rates that they say threaten to erode some gains achieved.

Towards the end of June 2022, the central bank increased the bank policy rate from 80 percent to 200 percent per annum as a means of restricting the bloating money supply in the economy, while Medium-term Bank Accommodation (MBA) rate increased from 50 percent to 100 percent per annum.

Annual inflation retreated from a high of 285 percent in August 2022 to 229, 8 percent in January 2023.

This was before the central bank earlier this month cut the bank policy rate by 50 percent percentage points to 150 percent inspired by a downward inflation path and outlook in the economy.

According to the firms, monthly inflation showed signs of retreating as the year headed to the end as instituted measures began to pay dividends.

This, however, did not come with a win-win scenario for companies as they suffered a liquidity crunch that apparently led to a decline in consumer spending as scarcity of the local currency characterised the period.

During this period, the local business environment moved to experience steep operating costs emanating from the rise in cost of credit.

As such, analysts have alluded that high-interest rates cripple businesses as companies become hesitant to borrow in order to improve their capacities, a position that has been deemed a direct attack on the industry albeit being convenient in addressing the scourge of inflation.

Consequently, the monetary policy measures have been weighing heavily on the local economy undoubtedly increasing the country’s risk as high-cost environment scares away private sector investment certainly negating productivity and development.

“The country’s exchange rates relatively stabilised during the third quarter following monetary policy interventions.

“The monthly inflation rates showed signs of slowing down towards the end of the quarter as measures instituted by fiscal and monetary authorities began to bear fruit,” said OK Zimbabwe Limited group company secretary Margaret Munyuru in the trading update for the third quarter to December 2022.

“Liquidity constraints were witnessed in the last three months of 2022 resulting in dampened consumer demand.”

In the period, the retail company’s sales volumes took a 11,3 percent deep for the quarter, a position which the firm attributed to declining consumer spending power.

Willdale, a listed brickmaker, reported a two percent decline in sales volumes in the quarter to December 2022, which the company attributed to low product uptake caused by liquidity shortages.

According to Willdale company secretary, Mavuto Munginga, the policy measures also affected production levels in the quarter under review that took a nosedive as the company encountered working capital constraints resulting from repulsive interest rates.

“The measures ushered in by the monetary authorities at the beginning of the quarter brought some stability to the exchange rate inflation.

“However, the resultant liquidity shortages led to depressed orders. Inflation needs to remain under control for a better operating environment,” said Munginga in the trading update for the quarter to December 2022.

However, Tanganda Tea Company is projecting sustained turbulence, particularly with regards to ballooning operational costs emanating from high cost of credit and the incessant power outages which continue to haunt the productive sectors of the economy, resultantly pushing them to rely on costly alternative energy sources, especially diesel powered generators.

“The operating environment is expected to remain difficult on the backdrop of the envisaged macro-economic instability due to inflationary pressures, currency instability, fast-rising operational costs and exogenous shocks as imported global inflation,” Tanganda Tea Company secretary Sharon Kodzanai said in the first quarter to December 2022.

In his recent monetary policy statement pronouncement, RBZ governor Dr John Mangudya said; “The Bank has been maintaining a tight policy stance since July 2022 with the Bank policy rate pegged at 200 percent to contain speculative borrowing. The review was also done to ensure positive real rates in line with expected inflation.”

The central bank policy rate (CBPR) provides an indicator of the minimum level of lending rates for banks.-ebusinessweekly