ZIMBABWE’S interest rates are expected to rise this year driven by a widening balance of payment deficit as the economy continues to underperform, University of Zimbabwe (UZ) Graduate School of Management Professor Tony Hawkins has said.
REPORT BY ACTING BUSINESS EDITOR
Plagued by liquidity constraints due to low foreign direct investments and a huge trade deficit, official figures show that credit remains very expensive in Zimbabwe with corporates being charged an annual interest of 10%, while 14,5% annualised interest is charged individuals.
The current interest rates regime came after the Reserve Bank of Zimbabwe and the Bankers Association of Zimbabwe signed a memorandum of understanding to lower bank charges and interest rates.
Official figures show that exports account for a third of Gross Domestic Product (GDP) compared to imports which account for 52% of GDP.
According to a paper presented at the IHS Africa Outlook Conference in Sandton, South Africa, Hawkins this week said the outcome of the forthcoming elections would drive short term economic performance. He cited three scenarios that could emerge from the polls. Hawkins said a worst case scenario resulting from a widely contested election would trigger political wrangling and deepening policy uncertainty.
A base scenario—a Zanu PF victory recognised both in the region and the international community would result in intra-party fighting and intensify the indigenisation and empowerment regulations compelling foreign owned companies operating in the country to dispose of 51% to locals.
The UZ lecturer said while an MDC victory, which he described as the “Best Case” scenario would ignite economic growth, driven by closer engagement with the international community and greater economic policy rationality.
“A key concern is the widening gap between a stable US dollar and a falling rand. Over the last year the dollar has gained 3%, while the rand is down 15% — an 18 percentage point gap. If South African exporters pass on their devaluation gains in the form of lower import prices to Zimbabwe, the country would benefit. But because Zimbabwe is a captive market there is really no reason why they should,” Hawkins said.
“Interest rates are more likely to go up than down, reflecting the tight liquidity situation — itself a function of a huge BOP deficit. There has been no deposit growth in 2013 and banks are fully loaned up (81% of their deposits).”
Hawkins warned that a Zanu PF government would likely disregard economic measures prescribed by the International Monetary Fund after the fund agreed on Zimbabwe’s Staff Monitored Programme (SMP) which seeks to assist the country in settling its $10,7 billion debt.
“The recently-signed SMP is a first step towards that goal, but it is one that could be derailed by either a Zanu PF election victory or another electoral stalemate. Zimbabwe cannot go on borrowing at such a rate, and must negotiate a debt-relief agreement with creditors sooner rather than later,” Hawkins said.
“Last year the IMF estimated that the US dollar was 15% overvalued (in Zimbabwe), thereby making the economy highly uncompetitive. Foreigners are not going to supply the requisite capital so long as economic and resource nationalism dominate the policy agenda and there is no debt-restructuring agreement. FDI is more closely correlated with growth, but Zimbabwe’s current hostile stance towards FDI limits such inflows.”