BAZ, central bank meet over policy interventions

The Bankers Association of Zimbabwe (BAZ) held a crucial meeting with the Reserve Bank of Zimbabwe (RBZ) governor, Dr. John Mushayavanhu, on Monday to address key policy changes from the Monetary Policy Committee (MPC) meeting held on September 27, 2024. These changes aim to stabilize the economy amidst rising inflationary pressures.

The RBZ has begun implementing several interventions, including an increase in interest rates, higher statutory reserve requirements, and adjustments to the official exchange rate. These measures are part of the central bank's efforts to curb inflation and stabilize the exchange rate.

One of the immediate changes, effective from September 27, 2024, is the increase in the RBZ's bank policy rate from 25% to 35%. This hike is intended to make borrowing more expensive, especially for speculative purposes, thereby reducing market liquidity and easing inflationary threats.

However, BAZ raised concerns about the potential impact of this policy on the banking sector, particularly on small and medium enterprises (SMEs), which depend heavily on loans for cash flow management. "The jump in interest rates will likely deter investment and business expansion, especially for SMEs that cannot afford higher borrowing costs," the association noted.

BAZ also warned that the increased borrowing costs could lead to a rise in non-performing loans (NPLs) as borrowers struggle to meet new repayment obligations. The resulting contraction in consumer spending could dampen economic activity, especially in the retail and service sectors.

In addition to the rate hike, the RBZ raised statutory reserve requirements to 30% for both Zimbabwean Gold (ZiG) and foreign currency deposits. This move requires banks to hold a larger share of deposits with the central bank, further tightening liquidity in the financial system.

"The increase in statutory reserves will reduce banks' lending capacity, likely slowing down economic growth," BAZ pointed out. It added that many banks already face liquidity constraints, with funds tied up in treasury bills and loans, making it difficult to comply without cutting lending activity.

BAZ also raised concerns about the potential for exchange rate volatility, as reduced liquidity could impact banks' ability to manage currency transactions. "There is a real risk of a liquidity crunch in the market," the association cautioned, urging the RBZ to explore more flexible solutions, such as allowing repos on government securities to ease liquidity management.

In response, RBZ governor Dr. Mushayavanhu acknowledged the concerns but stood firm on the reserve increase. However, he offered a concession, allowing gold coins and gold-backed digital tokens (GBDT) to be used for statutory reserve payments.

Another major policy discussed was the decision to introduce more flexibility in the exchange rate for the Zimbabwe Gold (ZiG) currency. By allowing market forces to have a greater influence, the RBZ aims to enhance transparency and reduce the gap between the official and parallel exchange rates.

Despite this, BAZ expressed reservations, warning that increased flexibility could invite more speculation and lead to wider fluctuations in the exchange rate, potentially driving up prices for imports and fueling inflation. "History does not work in our favour," BAZ remarked, referring to past episodes of hyperinflation and currency depreciation.

The meeting also addressed the RBZ's decision to reduce the amount of foreign currency individuals can take out of Zimbabwe from US$10,000 to US$2,000, a measure aimed at curbing externalization of funds. BAZ highlighted concerns that this restriction could hurt the informal import trade sector, which relies on higher amounts of foreign currency for transactions.

"Many businesses in the informal sector may struggle, potentially driving more trade underground and raising prices in the informal market," the association warned. BAZ also expressed concern that reduced foreign currency in circulation could increase demand for US dollars, exacerbating exchange rate pressures and inflation.

In response to the feedback, Dr. Mushayavanhu expressed optimism that the combination of higher interest rates and increased reserves would help stabilize the economy and strengthen the local currency. "We believe these measures will lead to a stronger and more credible currency regime," he said, noting the importance of foreign exchange reserves in supporting these strategies.

The meeting concluded with a recognition of the challenges ahead but a shared commitment to ensuring economic stability through effective monetary policy implementation.