The interest rate hike by the Reserve Bank of Zimbabwe (RBZ) this week as part of its immediate response to rising inflation, will not be smooth sailing and will negatively impact on economic growth, experts have warned.
The Central Bank reviewed upwards the Bank Policy Rate from 60 percent, which was relatively higher to 80 percent per annum.
Inflation accelerated to 72.7 percent year-on-year in March from 66.1 percent in February fueled by a combination of external pressures from the Ukraine-Russian conflict and legacy internal factors such as exchange rate volatility.
According to leading economic advisory firm, Morgan and Co, in its Economic and Market Intelligence Report, the rate hike will affect local companies that predominantly rely on debt to finance working capital.
“This will inadvertently impact the productive sector that currently bemoans the short-term nature of loans from banks,” said Morgan and Co.
“The increase in the policy rate will likely increase the burden of debt financing for borrowers through higher interest rates in the short to medium term. We note that companies that extensively rely on debt for working capital needs will be exposed for example, SeedCo Limited is one such company that could be affected by the increase in interest rates in the medium term.”
Zimbabwe expects GDP growth of 5.5% this year although analysts are skeptical of this projection given the recent external developments that have pushed price of fuel and grain up to record levels.
Recently, the Finance and Economic Development Minister, Prof Mthuli Ncube declined to review growth targets in light of fresh headwinds saying the economy was still on course to meet the targets.
With interest rates up, a lot of companies in the country could be forced to either shelve borrowing plans and halt projects or continue to borrow albeit at much higher costs with analyst expecting this to stifle economic growth.
