RBZ, BAZ in talks over new policy measures

The Bankers Association of Zimbabwe (BAZ) held a high-level meeting with the Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mushayavanhu on Tuesday to discuss critical policy measures arising from the Monetary Policy Committee (MPC) meeting held on September 27.

In an effort to stabilise the economy, which continues to face mounting inflationary pressures and exchange rate volatility, the RBZ implemented several policy changes, notably raising interest rates, increasing statutory reserve requirements and allowing greater flexibility in exchange rate management among others.

These changes have wide-reaching implications for the banking sector, businesses and the general economy.

The most immediate change, effective from September 27, 2024, was the hike in the RBZ’s policy rate from 25 percent to 35 percent. This sharp rise is aimed at curbing market liquidity to combat inflation, but it also introduces significant challenges to the banking sector and the broader economy.

BAZ expressed concerns over the impact on borrowing costs, particularly for small and medium enterprises (SMEs), which are heavily reliant on loans to manage cash flows.

“While we understand the need for tighter monetary policy to stabilise the economy, the jump in interest rates will likely deter investment and business expansion, especially for SMEs who cannot afford higher borrowing costs,” BAZ noted.

They added that this move could result in an uptick in non-performing loans (NPLs), as some borrowers may struggle to meet the new repayment obligations.

The increase in borrowing costs could also reduce consumer spending, leading to a slowdown in economic activity.

“A contraction in consumer demand will have ripple effects on sectors such as retail and services,” BAZ cautioned, raising concerns about the potential for businesses to cut back on operations, resulting in job losses.

In addition to the interest rate hike, the RBZ increased statutory reserve requirements to 30 percent for both the Zimbabwean Gold (ZiG) and foreign currency deposits. This measure, which forces banks to hold a higher proportion of their deposits with the RBZ, is expected to further tighten liquidity in the financial system.

BAZ outlined several challenges posed by some of the policy measures.

“The increase in statutory reserves will reduce banks’ lending capacity, which will likely dampen economic growth,” the association argued.

Banks, already struggling with liquidity constraints, may face difficulties in meeting the new reserve requirements.

“Many banks have their funds tied up in treasury bills, loans and other investments, making it hard to comply with the new rules without significantly limiting lending activity,” the statement reads.

The association also warned that reduced liquidity could exacerbate exchange rate volatility, as banks would have less capacity to lend and manage currency transactions.

“There is a real risk of a liquidity crunch in the market,” BAZ said, calling for the RBZ to consider more flexible solutions, such as allowing repos on government securities to ease liquidity management.

In response to the feedback, the RBZ remained firm on the reserve increase but made some concessions.

“While we will not stagger the reserve requirement increase, we have agreed to accept gold coins and gold-backed digital tokens (GBDT) for statutory reserve payments,” the Governor stated.

Another major policy change discussed was the RBZ’s decision to allow greater flexibility in the exchange rate for the Zimbabwean dollar.

By permitting the currency to be more influenced by market forces, the central bank hopes to improve market transparency and reduce the gap between the official and parallel exchange rates.

However, BAZ raised concerns over the potential risks.

“Greater flexibility could lead to increased speculation, resulting in more frequent or wider fluctuations in the exchange rate,” BAZ said. This could, in turn, lead to higher prices for imports, pushing inflation higher in an economy already battling price instability.

“While we understand the need for exchange rate flexibility, history does not work in our favour,” BAZ remarked, noting the lingering skepticism surrounding the local currency.

The association emphasized the importance of restoring confidence in the Zimbabwean dollar, which remains fragile due to past episodes of hyperinflation and currency depreciation.

The RBZ, however, expressed optimism that the combination of increased interest rates and statutory reserves would stabilise the exchange rate.

“We believe that these measures will lead to a stronger and more credible currency regime,” the Governor asserted, but also acknowledged the need for sufficient foreign exchange reserves to back this strategy.

A more controversial measure discussed was the reduction of the amount of foreign currency individuals can take out of Zimbabwe, from US$10,000 to US$2,000. This policy, intended to curb externalisation of funds, has already begun to impact the informal sector.

“Many businesses, particularly in the informal import trade, rely on higher amounts of foreign currency for transactions,” BAZ pointed out, highlighting the disruptions this could cause.

The restriction is expected to drive more trade underground, raising prices in the informal market and creating shortages of essential goods, BAZ argued.

Furthermore, the reduction of foreign currency in circulation could increase demand for U.S. dollars, pushing up exchange rates and fuelling further inflation.

“This move risks compounding the already severe economic hardship faced by many Zimbabweans,” the association warned, stressing that the informal sector plays a crucial role in the country’s economy.-ebinessweekl