FBC Securities reported this week that United States dollar interest rates in the country are on the rise due to low liquidity, increasing foreign currency demand, and a decline in financial intermediation.
According to FBC Securities, this upward trend has significant implications for the economy and financial markets.
“USD (United States dollar) interest rates have been creeping upwards on thin liquidity, increasing foreign currency demand andfinancial disintermediation,” FBC Securities said in its review of the 2024 mid-term budget review announced last week.
“On the backdrop of limited USD liquidity, the market has started to witness elements of financial disintermediation wherein non-financial institutions are also picking fixed-term deposits at elevated yields compared to commercial banks.”
The tightening liquidity has several potential consequences. Consumers and businesses may find it harder to obtain loans and credit, leading to reduced spending and investment. A decline in demand for goods and services could trigger deflation, where falling prices further discourage spending, potentially resulting in economic contraction, increased unemployment, and a deflationary recession.
The securities firm noted that minimum lending rates are also rising dueto the limited supply of demand deposits.
“Major downside risks to the outlook period include sustainability of power supply, tight liquidity situation, climate risks (erratic rainfall patterns), geo-political risks, sluggish mineral commodity price trends, and increasing informalisation,” FBC Securities said.
The Treasury has introduced measures to promote the use of Zimbabwe’s local currency, Zimbabwe Gold (ZiG), which FBC Securities cautions could have downside risks.
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“However, over-reliance on local currency use has proved to be inflationary in the past due to challenges in money supply management,”it said.
“The Zimbabwean local currency has a history of instability and devaluation; promoting its use might be met with scepticism and confidence deficit from stakeholders.
“The public and businesses accustomed to using the stable US dollar might resist, leading to non-compliance and augmentation of the alternative market.”
Normal levels of money supply are crucial for economic stability, providing sufficient liquidity to support growth.
An adequate money supply allows consumers to spend and businesses to invest, maintaining stable prices and supporting job creation.
It also fosters investor and consumer confidence, promoting overall economic health.
Financial services firm IH Securities noted that the forex component of broad money corrected from a peak of 87% in February to 84% in May.
The firm emphasized the need to manage expenditure pressures, particularly the wage bill and debt servicing, to avoid monetising the budget deficit.
“In our view, the introduction of ZiG has brought some stability into the market enabling some smoothness for business operations,” IH Securities said.
“The proposed amendment to corporate income tax for net earners of USD will likely require them to liquidate some of their forex through official channels, thereby supporting dollar liquidity.
“The government will, however, still have to fund its forex obligations.”
Other measures to promote ZiG are allowing for the payment of presumptive tax in local currency and the payment of customs duty in local currency on selected finished goods.
Since the introduction of ZiG in April, the Reserve Bank of Zimbabwe and Treasury have made concerted efforts to limit the money supply in the market to avoid an inflationary environment.
However, these efforts have led to a massive cash crunch resulting in those holding forex outside formal channels hoarding the currency.
