7 working days after the ban on bank lending to both government and the private sector became effective after being announced by President Emmerson Mnangagwa, it has been lifted by the Reserve Bank of Zimbabwe. Through a press statement from Reserve Bank of Zimbabwe Governor John Mangudya, dated 17th May 2022 lending services have been returned to the country. Unfortunately, a lot of damage has already been done.

Throwing the cat amongst the pigeons

The move to suspend bank lending is so rare the only example of it we have seen in Ethiopia in 2021. Their ban lasted 3 and half months and they cited reasons similar to Zimbabwe’s for taking such an extreme move. It was a very long week for Zimbabweans as left right and centre different sections of the economy were hit and hit hard by the lack of credit. Sugar producer Tongaat-Hullet struck twice, first by telling suppliers that they would be unable to make forward payments for sugar cane without credit and then announcing sugar price increases. Milk processing giant Dairibord postponed a planned dividend payment due to a lack of credit to finance it. Fivet and Wholesale beef wrote to customers informing them that they could no longer provide trade credit. Perhaps the most important indication of the effectiveness of the policy was its failure to dampen spirits on the parallel market.

While missing the target

The claim by the government that there were Zimbabweans, both individuals and businesses that were borrowing from banks in Zimbabwean dollars and going on to use the money to buy US dollars on the parallel market. Then with a little patience, they would be able to pay off the loans with a fraction of what they had initially borrowed. They also accused some of the borrowing parties of directing the money to the Zimbabwe Stock Exchange which as regular readers of our ZSE updates know has far outpaced any measure of inflation in Zimbabwe so far this year. Making huge profits and paying off the loans while buying US dollars on the parallel market with the profits. Both allegations are not far fetched, they are certainly both possibilities. While ZSE certainly contracted 22.46% in the week following the announcement the parallel rate has not moved downwards, reports are that it has continued to look upward towards 450 Zimbabwean dollars for a single US Dollar. The statement says banking is still suspended for those under investigation by the Financial Intelligence Unit so it would appear they have found some of their culprits.

The issue with some of these policy announcements is that they go against rational behaviour and you rarely win when you go against rational behaviour. The move was akin to burning the much-acclaimed haystack to find a needle in it. A week after suspending lending we are supposed to go back to business as usual but the damage has already been done.