Zimbabwe bankers warn of price increases

Bankers in Zimbabwe are raising alarms about potential price increases and shortages of basic commodities following the recent devaluation of the Zimbabwe Gold (ZiG) by over 40% by the Reserve Bank of Zimbabwe (RBZ). This devaluation is part of the RBZ's foreign exchange flexibility measures aimed at stabilizing the local currency amidst a challenging economic landscape.

The Bankers Association of Zimbabwe (BAZ) shared these concerns in a leaked internal document detailing discussions from a meeting with RBZ Governor John Mushayavanhu on Tuesday. This meeting addressed the implications of the RBZ's recent measures, which were implemented to support the beleaguered ZiG.

BAZ highlighted that if market conditions do not improve—characterized by high inflation, low investor confidence, and trade imbalances—the ZiG could continue to depreciate. This depreciation, they warned, would lead to increased costs for imports and further inflationary pressures on goods priced in foreign currencies. "There's a need to ensure sufficient forex to meet demand," the bankers stated, emphasizing that demand could be curtailed by limiting the creation of local currency.

The association pointed out that a weakened exchange rate would undermine investor confidence, result in higher import costs, and exacerbate inflationary pressures. Consumers could see a spike in prices for essential items like fuel, food, and other goods that are priced in foreign currency.

While some foreign investors might perceive a more flexible exchange rate regime as a positive development, as it reduces the risk of abrupt devaluations and allows for better currency risk assessments, the document cautioned that short-term volatility could still deter investment. "History does not work in our favour as the market holds inhibition around the local currency as long as confidence levels remain low," BAZ remarked.

BAZ also expressed concerns about recent restrictions on the amount of foreign currency individuals can take out of the country, which has been reduced from US$10,000 to US$2,000. This reduction may disrupt informal import trade and could result in job losses in the informal sector. "This will see disruption to informal import trade, with more transactions taking place underground," the bankers warned, indicating potential economic hardships, especially in a country already struggling with limited formal employment opportunities.

The recent hike in the policy rate from 25% to 35% poses another challenge, as it will lead to higher borrowing costs, which may deter investment and expansion efforts. BAZ cautioned that this increase could also lead to a rise in non-performing loans (NPLs), further pushing prices upward and fueling inflation. "Companies reliant on loans to manage cash flow, especially small and medium enterprises, will struggle to maintain operations due to higher interest payments," they added.

Moreover, the increase in statutory reserve requirements by 30% may further exacerbate liquidity constraints, potentially leading to a liquidity crunch in the market. BAZ warned that these measures could reduce liquidity, decrease exchange rate volatility, and discourage the use of local currency.

As Zimbabwe navigates these economic challenges, the concerns raised by the banking sector highlight the urgent need for effective policy measures to stabilize the economy and ensure that essential commodities remain accessible to consumers.