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Interest rate hike to cripple industry

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Industry captains and economists are warning that a higher interest rate and an inflationary environment will cripple the already ailing local industry as these will drive up production costs.

This week, the Reserve Bank of Zimbabwe (RBZ) hiked the bank policy rate to 200% from 80%, meaning higher interest expenses will hit companies’ bottom line and drive down cashflows.

It also means that most local companies will find it difficult to start new projects or expand as they will not easily afford to take out credit, due to higher charges.

The government said the sharp increase in the cost of borrowing, the second in a space of three months, was part of efforts to tame the unrelenting annual inflation rate, which soared to 191% this month from 131% in May, and discourage borrowing for speculative purposes. 

But  business leaders and economists said a higher inflationary and  interest rate environment  was likely to create additional pressures on an already ailing local industry as costs of raw materials, inventory and labour  will continue to rise, putting a strain on profitable businesses.

“This will hurt business as this will push up the cost of doing business and this will push up prices of goods in shops. These cost increases will be passed on to the consumers who already have waning spending power,” the Confederation of Zimbabwe Industries president Kurai Matsheza told Business Times.

He said the businesses have been exposed as firms depend on borrowing to survive.

“They should have reviewed the interest rates to reasonable levels to do the balancing act on industry survival and cut borrowing for speculation purposes as this will make our goods uncompetitive,” he said.

Economist Gift Mugano said the increase in interest rates is going to add costs to the business and make the ease of doing business more difficult in Zimbabwe.

“I don’t think there is any bonafide business which has capacity to absorb a 200% interest rate where you can get good margins to spin the money to help you to pay three times the amount you have borrowed over a year,” Mugano said, adding that he sees “many businesses failing to manage that”.

“With RBZ trying to beat inflation at 191% the businesses will struggle to borrow,” he said.

Mugano said the net effects of such policies mean that the consumers will suffer.

“There are things like food which cannot be substituted and consumers will pay the price as one cannot run away from eating. But if these are luxuries like cosmetics the businesses cannot pass 100% costs to the consumers as many will leave out some to survive,” he said.

The development also comes at a time when farmers are struggling to keep up with lending rates.

PHI Commodities operations director Graeme Murdoch told Business Times the new policies have made lending difficult to farmers.

“Despite the recent bank policy review by the RBZ to 200%, the banks and other lending institutions have further increased the interest rates by 10% to around 210%, making it difficult for an ordinary farmer to make profits,” Murdoch said.

Instead, banks should give farmers special rates to enable them to improve production levels, he said.

Farmers have called on financial institutions to reduce interest rates to allow farmers to borrow money as they move to improve productivity.

“We are calling upon the RBZ to engage the banks to reduce interest rates on agriculture lending to reasonable levels to ramp up production and reduce imports,” Zimbabwe Commercial Farmers Union president Shadreck Makombe said.

The Consumer Council of Zimbabwe said the consumer remains the recipient of all economic headwinds experienced in the economy.

“As consumers we have been hit hardest by the economic headwinds and policy measures as the businesses are just passing the effects to us and this leaves the consumer to live on margins,” CCZ said.

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