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Top economists dismisse Biti over Duplum Rule effect on Zimbabwe's 200% interest interests
25 Aug 2022 at 01:42hrs | Views
TOP economists have dismissed concerns by former finance minister, Tendai Biti, on the applicability of the in Duplum Rule in respect of hiked interest rates in Zimbabwe, saying that the principle is not even followed internationally.
The remarks come against a background where the former treasury boss, who is currently the Harare East legislator, took the incumbent, Finance Minister Mthuli Ncube to task in parliament recently, arguing that the move by the Reserve Bank of Zimbabwe (RBZ) to hike interest rates to 200% violates set economics principles.
"If you look from 2014 to 2021, the economy has been on a downward spiral. In fact, if you trace the history of our economy from 1960 to now, the economy has been in permanent recession mode. If you raise rates of interest, you are discouraging economic activity in the market.
"You are preventing companies from borrowing because companies depend on working capital from the banking sector.
"You are preventing financial intermediation and high rates of interest also do not make sense because we have got an in Duplum rule, which says that when interest capitalises and reaches 1%, it stops accumulating," he said.
He said a rate of 200% does not make sense both economically and legally and underscored that it starves the economy of oxygen and it causes the economy to go into recession or depression mode.
Economics literature also confirms that the literal translation of in Duplum is 'double the amount'. The in Duplum rule is a common law rule that specifies that interest on a debt will cease to run when the total amount of arrear interest has accrued to an amount equal to the outstanding principal debt.
However, analysing the likely impact of the rule in the Zimbabwean scenario, economist Doctor Prosper Chitambara said while the principle has been violated, the rule is rarely followed even beyond the borders.
"It may have an effect but look, the rule exists yes but it is not followed religiously even in international practices. You will recall that out of the total debt Zimbabwe owes to international financiers , currently estimated at around US$20 billion or so, only 30% of that debt is the principal amount owed, with 70% being made up of interests accruing ," he said.
Another economist, Persistence Gwanyanya, stressed that the policies are simply aimed at creating an enabling environment for the same companies which may not thrive outside stability.
"Empirical evidence tells us that there is no sustained growth without stability. As such, the sequencing of priorities is stability and then growth and development. This is why reforms had to start with the Transnational Stabilisation Program.
"It is important for you to understand that whilst instability can be traced to the structure of the economy, behavioural issues played a key role in achievement of stability
"At the centre of these behavioural issues is speculation and arbitrage largely occasioned by cheap credit at what could be sub-economic interest rates," he said.
The remarks come against a background where the former treasury boss, who is currently the Harare East legislator, took the incumbent, Finance Minister Mthuli Ncube to task in parliament recently, arguing that the move by the Reserve Bank of Zimbabwe (RBZ) to hike interest rates to 200% violates set economics principles.
"If you look from 2014 to 2021, the economy has been on a downward spiral. In fact, if you trace the history of our economy from 1960 to now, the economy has been in permanent recession mode. If you raise rates of interest, you are discouraging economic activity in the market.
"You are preventing companies from borrowing because companies depend on working capital from the banking sector.
"You are preventing financial intermediation and high rates of interest also do not make sense because we have got an in Duplum rule, which says that when interest capitalises and reaches 1%, it stops accumulating," he said.
He said a rate of 200% does not make sense both economically and legally and underscored that it starves the economy of oxygen and it causes the economy to go into recession or depression mode.
Economics literature also confirms that the literal translation of in Duplum is 'double the amount'. The in Duplum rule is a common law rule that specifies that interest on a debt will cease to run when the total amount of arrear interest has accrued to an amount equal to the outstanding principal debt.
"It may have an effect but look, the rule exists yes but it is not followed religiously even in international practices. You will recall that out of the total debt Zimbabwe owes to international financiers , currently estimated at around US$20 billion or so, only 30% of that debt is the principal amount owed, with 70% being made up of interests accruing ," he said.
Another economist, Persistence Gwanyanya, stressed that the policies are simply aimed at creating an enabling environment for the same companies which may not thrive outside stability.
"Empirical evidence tells us that there is no sustained growth without stability. As such, the sequencing of priorities is stability and then growth and development. This is why reforms had to start with the Transnational Stabilisation Program.
"It is important for you to understand that whilst instability can be traced to the structure of the economy, behavioural issues played a key role in achievement of stability
"At the centre of these behavioural issues is speculation and arbitrage largely occasioned by cheap credit at what could be sub-economic interest rates," he said.
Source - NewZimbabwe
