The Bankers Association of Zimbabwe (BAZ) held a high-level meeting with the Reserve Bank of Zimbabwe (RBZ) governor Dr John Mushayavanhu on Monday to discuss critical policy measures arising from the bank's Monetary Policy Committee (MPC) meeting of September 27, 2024.
To stabilise the economy, in the wake of the recent build-up of inflationary pressures, the central bank has started implementing several policy interventions agreed by the MPC, including raising interest rates, increasing statutory reserve requirements and adjusting the official exchange rate.
The changes are expected to have various implications for the banking sector, businesses and the general economy. The central bank said the measures were necessary to stabilise the exchange rate and rein in inflation.
The most immediate monetary policy intervention, effective September 27, 2024, was the increase in the RBZ's bank policy rate from 25 percent to 35 percent.
Bank policy rate is a monetary policy instrument used by central banks globally to signal the minimum interest level at which central banks expect commercial banks to lend to borrowers to influence desired economic trajectory.
The steep adjustment, which makes borrowing for speculative reasons more expensive, is aimed at curbing market liquidity to combat threats of a rise in inflation.
However, banks said this may introduce some significant challenges to the banking sector and the broader economy.
BAZ expressed concerns over the potential negative impact on borrowing costs, particularly for small and medium enterprises (SMEs), which rely heavily on loans to manage cash flow.
"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.
The lobby group for banks added that the move could result in an uptick in non-performing loans (NPLs), as some borrowers may struggle to meet the new repayment obligations.
The possible increase in borrowing costs would, according to BAZ, also reduce consumer spending, leading to a slowdown in economic activity, BAZ said.
"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, which could weigh on jobs in the country.
In addition to the interest rate hike, the apex bank 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 the policy.
"The increase in statutory reserves will reduce banks' lending capacity, which will likely dampen economic growth," the association noted.
Banks, BAZ suggested, 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," BAZ's 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," Dr Mushayavanhu stated.
Another major policy change discussed was the RBZ's decision to allow greater flexibility in the exchange rate for the Zimbabwe Gold (ZiG).
By permitting the currency to be influenced more 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.
"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.
The association emphasised the importance of restoring confidence in the local currency, which remains fragile due to past episodes of hyperinflation and depreciation.
The RBZ, however, expressed optimism that the combination of increased interest rates and statutory reserves would stabilise the exchange rate.
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"We believe that these measures will lead to a stronger and more credible currency regime," the governor asserted, acknowledging the need for sufficient foreign exchange reserves to back this strategy.
Another area of concern to BAZ 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, according to the banks' lobby group.
"Many businesses, particularly in the informal import trade, rely on higher amounts of foreign currency for transactions," BAZ said, highlighting the potential disruptions this could cause.
It said the restriction may drive more trade underground, raising prices in the informal market and creating shortages of essential goods.
Furthermore, the reduction of foreign currency in circulation could increase demand for US 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," he said.
