The Reserve Bank of Zimbabwe yesterday published a statement indicating further measures the apex bank would be taking to help stave the economy off from further contraction in the face of the lockdown instituted at the beginning of April. The lockdown was out in place to prevent the spread of the coronavirus even though Zimbabwe had recorded very low numbers. The downside of the lockdown has of course been the shutdown of many businesses which has put both businesses and their employees at risk.
The bank announced a cocktail of measures aimed at providing stimulus to the economy. Firstly the bank policy rate, the rate at which the Reserve Bank lends to banks, was cut 25% to just 15%. In addition to this the interest rate on the Medium Term Bank Accommodation facility, which is a facility through which banks access interim funds, had its interest rate cut from 15% to 10%. These measures will take effect from Friday the 1st of May 2020. The central increased the size of the Medium Term Bank Accommodation by ZWL%500 million to bring the total fund size to ZWL$3 billion. A further ZWL$2 billion will be added to the fund. This money will be raised from the market through money supply neutral methods, more on this later. Finally, the RBZ instructed banks to on-lend to industry at no more than 20%.
What does this mean?
As less business is being done in the economy in general businesses and individuals livelihoods are threatened. Even where businesses have been able to work remotely, their customer’s incomes may be impacted by the lockdown. As is the response from governments across the world, our government is trying to keep the economy afloat. This particular set of measures has the goal of lending money to businesses at very attractive rates in the hope that businesses will use the money to cushion employees incomes in cases where there has been no production. Another possible use case is for businesses which have had to step into manufacturing items which are in high demand at present such as sanitisers and personal protective equipment and need a working capital boost to fund production. They too could benefit from low-interest loans, at least low in the Zimbabwean context. So the RBZ is helping keep the economy afloat by providing cheap loans.
Other governments are talking about bailouts through quantitative easing or in simple language printing money so why hasn’t our government gone down that path? Unlike those other countries, the COVID-19 pandemic is really a crisis amid another crisis for Zimbabwe. It is on record that our money supply has continually increased far beyond targets and this increased supply can be seen in the exchange rate with the US dollar which was once held at 1:1 with the then bond note but could not hold this fallacy.
In the recent past, however, this access to cheap money has not done the economy of Zimbabwe any favours as among those who have access to these loans are elements who see a simple way to profiteer of them. By purchasing foreign currency, hence increasing demand and pushing rates up then waiting until loan maturity to use a fraction of the initial foreign currency purchased to pay pullback the entire loan. The ever increasing exchange heaps more pressure on the economy and this practice was the reason the Reserve Bank had recently raised the bank policy rate to 70%.
While there can be little doubt that some enterprises will rightfully benefit from the policy, one wonders if any of the effects will trickle down to the huge informal sector of Zimbabwe. Industry certainly needs support but with access to finance a preserve of the few, who employ very few, the policy may not have economy-wide benefits but rather benefits for the few. Speculators who have access to the loans will certainly get their share of the spoils.