“There’s absolutely no need to rush to spend the Zimdollar,” says Zim govt. 40% interest on deposits good enough

I remember a friend telling me that their company always seemed to be in fire fighting mode. It appeared nothing was ever pre-planned and all the company did was react to the outside world. Doesn’t that sound just like how Zimbabwe is run.

The bond note loses value? Outlaw use of the USD. People ignore the directive? Readopt a multicurrency regime. ZW$ collapses again? Prescribe an exchange rate. That creates arbitrage opportunities? Ban banks from lending.

Today we discuss the latest measures meant to right the ship. Faced with one of the world’s highest inflation rates, the govt and the RBZ have decided to take drastic measures. Not drastic in a Zimbabwean context though, we are the people that banned banks from lending after all. 

Rising interest rates around the world

Raising interest rates to curb inflation is the textbook response. The world over, countries are looking to increase their interest rates to deal with inflation as the Russia-Ukraine war has contributed to rising inflations.

Of course, the war has been somewhat of a scapegoat. Even the US, which implemented policies that increased energy dependence on foreign countries blames the war for record high fuel prices. It’s Politics 101, scapegoats can always be found. 

Earlier this year, developing countries were warned that the US would be increasing interest rates in the course of the year. The IMF said “Emerging economies should prepare for potential bouts of economic turbulence.”

The US did indeed increase interest rates by 0.75%, the biggest increase since 1994. We discussed how that will affect Zimbabwe here: Zimbabwe should brace for economic turbulence as USD set to strengthen – IMF. 

For one, we recently talked about Zimbabwe’s national debt. We are over US$17 billion in debt and some of that debt has only increased with the higher interest rates being introduced. That’s the disadvantage of having USD denominated debt. 

Most of the $17bn debt will be affected by the US interest rate hikes, adding millions to the debt in interest obligations each year. 

World’s highest interest rate – 200%

While the Americans fret over a 0.75% increase in interest rates, in Zimbabwe we have to contend with an increase from 80% to 200%. You will recall that it was just in April that we increased the rate from 60% to 80%.

Our inflation rate increased to 191% year on year recently and we had to respond to that. That doesn’t make it easy to accept that if you borrow ZW$100, you will pay back ZW$300. Those are loan shark kinds of interests but still reasonable in this high inflation economy.

That right there is meant to discourage people from borrowing. We discussed how borrowing affects inflation when we reacted to the banning of bank lending. 

The RBZ recently revealed how some companies were babusing loan facilities. Said the RBZ,

The majority of the entities…make significant profit margins by borrowing at concessionary terms, stocking and then selling their products in US$ or in ZW$ at inflated parallel market exchange rates, thus enabling them to easily pay off the loans from a portion of the proceeds, and start the borrowing cycle again.

RBZ

The RBZ introduced measures meant to discourage borrowing as a result and the interest rate hike should help with that too. However, we should note that companies with access to cheap forex on the auction can easily handle a 200% interest. 

Won’t defaults hurt banks?

However, not all will be able to keep up with loan repayments under this new interest rate. This would lead to some defaulting on their loan repayments, leaving banks in a terrible position. Non-performing loans are banks’ sworn enemy and they have been burnt before, hence why they are reluctant to lend.

They shouldn’t fret too much though, if they get in trouble, in the end we the people will carry that burden in some way. You might remember how ZAMCO was such a vehicle, hoisting banks’ bad loans on taxpayers.

The ridiculously low deposit rate

In addition to discouraging borrowing, we are looking to encourage savings. That’s what high interest rates mean, people will want to bank their money and get the sweet interest.

That won’t be the case in Zimbabwe. While inflation rages at 191%, the minimum deposit rate for ZW$ savings has been increased from 12.5% to 40% per annum. Time deposits will attract  80% interest, up from 25%. What? 

Perm Sec Guvamatanga believes that this 40% deposit rate is commensurate with the 200% lending rate. He said that for too long focus has been placed on the lending rate and not the deposit rate. I don’t see how these figures change that.

So I was surprised to hear him say that the 40% deposit rate should ensure that the ZW$ works as a store of value. He actually said,

There is absolutely no need now to get the Zimdollar and want to rush to spend it when you will actually be losing value.

Secretary for Finance and Economic Development

How he can say that with a straight face is beyond me. Inflation = 191%, deposit rate = 40%, and yet he says if I spend my ZW$ as opposed to saving them, I will be losing value. That doesn’t make any sense, at all. In the Perm Sec’s defence, I’ll assume he only knew that the RBZ would be reviewing the deposit rate upwards, not that it would only be to 40%. 

Should they have matched lending and deposit rates?

Why didn’t the RBZ match the lending rate with deposit rates? Okay, that’s unreasonable because banks would not be able to meet those interest obligations. 

In the last quarter of 2021 the loan to deposit ratio was just under 50%. If banks paid out 200% interest on deposits whilst getting 200% interest on loans, they would go out of business. That said, that is not my concern when deciding whether or not to keep my money in a savings account.

Who in their right mind would leave their savings in a bank account, knowing that the interest they earn from that will be comically lower than the inflation eroding them. Oh, he who can’t withdraw, or otherwise use his ZW$ savings. That’s the plight of many companies.

No one would willingly keep ZW$ in a bank account even at 200% interest because we all expect the inflation rate to accelerate further. Minister Mthuli Ncube knows this, he mentioned how adverse inflation expectations are killing the ZW$. But still. A 200% deposit rate, though not tenable, would have been nice.

Will you be saving your ZW$?

Is the Perm Sec right in saying it would be foolish to rush to spend the ZW$ when it can earn 40% interest in a 191% inflation rate economy? I made my case on why I don’t agree. I’m curious to know what you think about all this. Let me know in the comments section below.

You should also read:

Zim govt introduces gold coins which could be a game changer, commitment to multicurrency regime commendable too

Govt says willing-buyer-willing-seller for forex but it’s more like fortunate-buyer-unwilling-seller

You are $1,200 in debt right now because Zim owes former farmers US$3.5bn, Paris Club US$3.8bn

RBZ measures addressing abuse of loan facilities reasonable, however findings show lending suspension was not worth it