Zimbabwe poised for growth but high interest rates could derail that

These signs offer some cause for cautious optimism, though risks remain that can upend the downward trend in world food prices. Disruption of the Black Sea grain-export deal amid war in Ukraine and adverse supply shocks to global commodity markets are among the key potential risks.
Elevated interest rates from monetary policy tightening trigger a jump in the cost of borrowing for businesses. This happened in Zimbabwe in the aftermath of the world’s most aggressive central bank policy tightening in June 2022.

According to the two largest industry and commerce business groups in the country – Confederation of Zimbabwe Industries and Zimbabwe National Chamber of Commerce – the dramatic surge in the cost of borrowing tightened corporate credit conditions, raised production costs, and strained business investment. They are calling for the central bank to downshift to rate hikes between 80% and 100% so that borrowing costs do not rise so high that businesses must halt production.

The World Bank also joined the chorus of concern that higher interest rates had crimped investment in the country.

Higher borrowing costs also pushed down spending by households, adding to the disquiet over inflation and collapsing living standards. A new law barring health workers from going on strike for an extended period of time underscores how the government is choosing to react to the cost-of-living squeeze on household budgets.

Less household spending means less revenue for firms, and less revenue for firms means more job losses in a country where it is estimated that up to 90% of Zimbabweans are working in the informal economy.

Lastly, the negative impact of high interest rates on the labour market is a concern. Aggressive rate hikes would only serve to further crush the labour market.

The dual drags on business investment and consumer spending combined with the labour market pain imply that it would have been very challenging for the economy to grow – in spite of the well-intentioned new public investment initiatives.

The proposed public investment expenditures that were unveiled in the national budget have the potential to accelerate economic growth and usher in a new era of structural transformation. With falling interest rates and inflation, the potential growth benefits of higher public investment will be amplified by the positive impact on business investment, consumer spending and the labour market.

By Jonathan Munemo for The Conversation

(155 VIEWS)