THE Reserve Bank of Zimbabwe (RBZ) has opted to maintain the policy interest rate at 35%, signalling a commitment to its tight monetary stance.
This means the bank has chosen to walk a tightrope in a balancing act that could have major ramifications.
On the one hand, the bank’s decision seemingly fosters macroeconomic stability, but on the other, liquidity will be constrained.
While the RBZ move appears to have achieved short-term wins in exchange rate stability and inflation control, its implications on liquidity in the broader economy warrant a deeper dive.
Yes, month-on-month inflation has decelerated sharply from 37,2% in October to 11,7% in November and this reflects the bank’s effort to rein in speculative activities in the foreign exchange market, aided by a narrowing exchange rate premium.
And these gains are bolstered by a robust 19,1% rise in foreign currency inflows, as the economy remains heavily reliant on external remittances.
However, these achievements come with a caveat.
By keeping the policy rate high and statutory reserve requirements elevated, the RBZ has effectively limited the amount of money circulating in the economy.
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This strategy curtails demand-side pressures on inflation, but can have unintended consequences on productivity and growth.
It also goes against what banks have been calling for, which is a reduction in the interest rate and statutory reserve requirements.
Let us not forget, the bank itself has stated that there is already US$2,5 billion that is circulating in the economy, in unbanked funds, hence, why give the informal market more money?
Liquidity, often likened to the bloodstream of the economy, is vital for businesses and consumers alike.
The current tight conditions restrict access to affordable credit, making it challenging for companies to expand, invest, or even meet day-to-day operational needs.
For households, borrowing becomes prohibitively expensive, suppressing consumer spending — the engine of most economies and we have it on good authority they are feeling the pinch.
RBZ’s introduction of a Targeted Finance Facility (TFF) is a step in the right direction to mitigate these effects, but its success depends on its timely rollout and efficiency.
Delays or mismanagement, which has become the norm with the central bank, could exacerbate liquidity woes, negating the facility’s intended benefits.
The decision to maintain high reserve requirements — 30% for demand and call deposits and 15% for savings and time deposits — impacts banks’ ability to lend.
By locking up significant portions of deposits, the RBZ ensures that financial institutions cannot flood the market with money, thus keeping inflation in check.
However, this policy reduces the profitability of banks as it diminishes their willingness to extend credit, creating a vicious cycle of constrained liquidity.
Moreover, businesses operating in Zimbabwe must now navigate a dual challenge: accessing scarce funds while contending with high borrowing costs.
For exporters and firms dependent on foreign exchange, the stabilisation of the interbank market provides some relief.
In this scenario, sectors reliant on domestic demand face a tougher road, as tight liquidity dampens spending power and limits market growth.
While the RBZ’s measures have brought short-term stability, their sustainability remains in question.
High interest rates and tight liquidity may eventually undermine the productive capacity of the economy, leading to stagnation or contraction.
Policymakers must also contend with the risk of overcorrection — fostering inflation and exchange rate stability while strangling growth.
A more nuanced approach could involve gradually relaxing reserve requirements and exploring innovative liquidity injection mechanisms, such as targeted quantitative easing for strategic sectors.
Additionally, enhancing transparency and efficiency in the TFF rollout would bolster confidence among businesses and investors.
