CAPTAINS of industry and commerce have commended the Reserve Bank of Zimbabwe (RBZ)’s decision to cut interest rates and increase foreign currency retention thresholds, saying the latest intervention would boost viability.
Business has been lobbying the authorities to address high borrowing costs following the hike of the bank policy rate to 200 percent last year.
In his 2023 Monetary Policy Statement (MPS) on Thursday, RBZ governor Dr John Mangudya reduced interest rates from 200 percent to 150 percent with effect from February 1, 2023.
The export retention threshold was also reviewed upwards to 75 percent from 60 percent across all sectors.
Retention from domestic foreign currency sales were similarly raised from 80 percent to 85 percent.
Retentions are a portion of foreign currency earnings that firms are allowed to keep from their revenues.
Confederation of Zimbabwe Industries (CZI) president Mr Kurai Matsheza said the latest review was “a step in the right direction”.
“We welcome the decisions they have taken on both the local nostro and export surrender, together with the interest rates that have been reduced from 200 percent to 150 percent.
“It is a welcome development; those are steps in the right direction,” he said.
He, however, said there was still room to continue refining policy.
Increased foreign currency retentions, he added, would boost the capacity of businesses to build up reserves for capital investments.
“Also on the interest rates, for those who are going to borrow or (already) in borrowed positions, this will mean that the cost of doing business comes down; it is good for business (and) it is good for economic development.”
Zimbabwe National Chamber of Commerce (ZNCC) president Mr Mike Kamungeremu thanked Dr Mangudya for “listening”.
“It is a welcome development . . . The ratios that were there; with more money being surrendered and the rate which kept moving . . . it was actually affecting the profitability of transactions,” he said.
“Some exporters were actually saying they had stopped exporting because of viability issues, so, if they are retaining more, then it means more in the pocket of the exporter, which would mean the exports may become viable again.”
The decision by the monetary authorities to review interest rates was in line with the current and expected inflation outturn.
Borrowing costs at 200 percent per annum had become punitive and unviable.
Month-on-month inflation has declined from a peak of 30,7 percent in June 2022 to 1,1 percent in January 2023.
Annual inflation also declined to 229,8 percent in January 2023 from 243,8 percent in December 2022.
“The tight monetary policy stance implemented by the bank since the second half of 2022 has anchored inflation expectations in the economy.
“As such, despite the heightened risks of global inflation in the outlook period, the policy scenario envisages low domestic inflation pressures with average blended month-on-month inflation of below 1,5 percent in 2023.
“In line with stable monthly blended inflation, annual inflation is expected to progressively decline to close the year in the range of 10-30 percent,” Dr Mangudya said in last week’s MPS.
The monetary authorities believe that adjusting interest rates and mopping up excess liquidity, especially through the sale of gold coins, had been the major contributing factor towards the current disinflationary trend. The current tight monetary policy stance has allowed the bank to anchor inflation and exchange rate expectations through measures designed to sustain price and exchange rate stability.
Business confidence, industry activity and exports have significantly improved.
In 2022, the country’s foreign currency receipts rose to a record US$11,6 billion.
Dr Mangudya opines that blended inflation was now the most appropriate model to measure domestic market trends in view of the increased use of foreign currency in local transactions, as well as the high levels of foreign exchange deposits and loans in the banking sector, at around 65percent.
Going forward, the RBZ, through the Monetary Policy Committee, will periodically review the bank policy rates in line with the expected inflation profile.
Similarly, interest rates on local currency deposits and loans will be guided by the implied expected average annual inflation on the domestic currency.
Taking into consideration the implied month-on-month local currency inflation for 2023, interest rates on local currency borrowings are expected to fall between 40 and 60 percent by year-end.
“The envisaged inflation and interest rate profile will support a stable exchange rate path, which is expected to move in line with monthly inflation differentials between Zimbabwe and its trading partners,” Dr Mangudya added.
The lending rate on the Medium-Term Bank Accommodation Facility for the productive sectors of the economy (including individuals, as well as small and medium enterprises) was also cut from 100 percent to 75 per annum.
The minimum deposit interest rates on savings and time deposits were adjusted to 30 percent and 50 percent per annum, respectively, while minimum deposit interest rates on savings and time foreign currency accounts deposits were maintained at 1 percent and 2,5 percent per annum, respectively.
Overall, the motivation to further liberalise the foreign exchange market and reduce demand for foreign currency on the auction system and interbank market was behind the review of the foreign exchange retention on domestic sales in foreign currency to 85 percent from 80 percent.
But this shall apply to all foreign exchange deposits from domestic sales of goods and services, with the exception of deposits in respect of fuel sales, non-governmental organisations funds, free funds and Government-funded projects and programmes.
Further, export retention has been increased and standardised at 75 percent of earnings across all sectors of the economy, including firms listed on the Victoria Falls Stock Exchange, with effect from February 1, 2023.
“Given this positive development, the incremental export incentive scheme is suspended for ease of administration,” Dr Mangudya said. – Sunday Mail
