Zimbabwe has recently gained attention for maintaining the highest borrowing rates in the world. This decision was made by the country’s central bank at its initial rate-setting meeting following the re-election of President Emmerson Mnangagwa. The benchmark interest rate was kept at a staggering 150% for the second consecutive meeting.
The decision to maintain such a high interest rate is in line with the central bank’s commitment to combat inflation and stabilize the exchange rate. In recent years, Zimbabwe has faced significant challenges in terms of inflation, which has been a persistent issue in many African economies. Therefore, the central bank has implemented a strategy of high-interest rates to control inflation and anchor inflation and exchange rate expectations.
Zimbabwe is not the only country in Africa that has adopted this approach. Several other emerging markets, including Egypt, the Philippines, Indonesia, Taiwan, South Africa, and Ghana, have also opted to maintain their interest rates unchanged. Central banks in these countries are carefully deliberating their monetary policy options, considering the delicate balance between controlling inflation and promoting economic growth.
In contrast, the United States has maintained its interest rates at a range of 5.25%-5.50%. Additionally, there are indications that the US may further increase its interest rates in the future. This has led to a strengthening of the US Dollar, which has had repercussions in global financial markets, particularly in African markets.
The high-interest rates in Zimbabwe and other African countries serve multiple purposes. Firstly, they act as a tool to combat inflation. By increasing borrowing costs, central banks make it less attractive for consumers and businesses to take on debt, thereby reducing the demand for goods and services and curbing inflationary pressures.
Secondly, high-interest rates help to stabilize the exchange rate. When a country has a relatively high interest rate compared to other countries, it attracts foreign investors seeking higher returns. This influx of foreign capital can help strengthen the country’s currency and stabilize the exchange rate.
However, the decision to maintain such high-interest rates also comes with risks. While it may help combat inflation and stabilize the exchange rate, it can also hinder economic growth. High borrowing costs can discourage investment and negatively impact consumer spending, which are essential drivers of economic activity.
Zimbabwe’s decision to maintain the interest rate at its current level was widely expected, according to a report by Bloomberg. This move aligns with the government’s previous indications of upholding a strict monetary and fiscal policy framework, aimed at fostering economic stability and supporting the Zimbabwean dollar.
The local currency experienced a sharp depreciation of approximately 85% against the US dollar between May and June, leading to an alarming rise in inflation. To counteract this trend, the government implemented measures to liberalize the exchange rate and incentivize the use of the national currency, such as mandating corporate tax payments in Zimbabwean dollars.
In September, there was a notable decline in the annual inflation rate from 77% to 18.4%, following revisions made by the statistics office to accurately reflect the considerable impact of the US dollar on Zimbabwe’s economy. The central bank has set an end-of-year target for inflation within a range of 60% to 70%.
Moreover, the reliance on high-interest rates as a monetary policy tool may create challenges in attracting foreign direct investment and capital flows. Investors may be deterred by the high cost of borrowing and choose to allocate their funds to countries with lower interest rates and potentially higher returns.