• The Reserve Bank of Zimbabwe announced on 27 June that it will increase its benchmark lending rate by 12,000 basis points to 200 percent.
• The interest hike is one of a series of measures taken by the government to combat the recent onset of hyperinflation, which is driving a rapid deterioration of the country’s socio-economic environment.
• The effectiveness of these measures will be limited, due to the structural nature of inflation in Zimbabwe; rather, the substantial monetary tightening is expected to further constrain activity in the private sector and weigh on growth prospects.

Governor of the Reserve Bank of Zimbabwe (RBZ), John Mangudya, announced on 27 June that the central bank’s Monetary Policy Committee (MPC) had increased its policy rate to 200 percent from 80 percent, effective as of 01 July. This is the second interest rate hike in recent months, and represents a cumulative increase of 14,000 basis points since the beginning of the year; in April, it raised the rate from 60 to 80 percent.

As per Mangudya, “the monetary policy committee expressed great concern [over] the recent rise in inflation”. The interest hike comes after the Zimbabwe National Statistics Agency confirmed on 25 June that the country’s annual inflation rate increased to 191 percent in June, from 131.7 percent in May and 96.4 percent in April. As per Mangudya, the “committee noted that the increase in inflation is undermining consumer demand and confidence”.

Other measures taken by the RBZ to curb inflation include increasing the minimum deposit rate for Zimbabwe dollar (ZWL) saving accounts to 40 percent per annum, up from 12.5 percent. The RBZ also reportedly “resolved to introduce gold coins into the market as an instrument that will allow investors to store value”. The RBZ did not provide further details on how the coins will be introduced, other than to say that they would be “sold to the public through the normal banking channels”.

In addition, Mangudya confirmed that the government will continue to authorise the use of the ZWL and the United States dollar (USD) over the course of the next five years. The government had approved the domestic use of USD in March 2020 in an effort to cushion some of the inflationary and economic shocks of the coronavirus pandemic. Since then, the government has repeatedly stated that it is committed to the de-dollarisation of the local economy. As noted by Mangudya, this has fostered a thriving parallel market for foreign currency. The central bank governor further expressed that embedding “the multi-currency system and the continued use of the US dollar into law for a period of 5 years” is intended to eliminate “speculation and arbitrage based on this issue”.

Finally, Mangudya noted that the government will take direct measures to halt consumer price inflation for certain basic commodities. In particular, the government will release a certain amount of maize and wheat from national reserves in an effort to combat a local grains shortage and accompanying price pressures. While the price of agricultural commodities has increased internationally, local supply during the most recent harvest has fallen far below expectations. The government estimates that maize production during the 2021/2022 harvest season fell to 1.8 million tonnes, compared to 2.2 million registered in the previous seasons (as a result of intermittent rainfall). According to Mangudya, this has led to a “looming shortage of maize meal and flour in the market which has resulted in the sharp increase of the price of bread and mielie-meal to levels which the ordinary citizens cannot afford”.

The Signal

The measures recently introduced by the central bank are not expected to significantly contain current inflationary pressures. This is due to several factors. The first relates to the government’s incomplete diagnosis of the roots of current inflation. Reserve Bank of Zimbabwe (RBZ) Governor, John Mangudya, stated on 27 June that limited market confidence and heightened inflation expectations were fuelling a “vicious cycle of increasing prices which is self-fulfilling, and is generating higher month to month levels of inflation as well as fuelling adverse inflation expectations”. To support this claim, Mangudya referred to studies reportedly conducted by the “University of Zimbabwe, which indicate that inflation is not being caused by the normal real economic variables but by behavioural variables such as confidence, adverse inflation expectations, etc”. While such a “vicious cycle” could in fact be occurring, it is unlikely to be the sole driver of Zimbabwe’s current hyper-inflation. Structural factors – such as weakening local currency, limited foreign currency liquidity, and domestic productivity constraints – are likely to be more important in this regard. Furthermore, these factors are exacerbated by the elevated cost of fuel and food imports, along with a tightening international financial environment. Consequently, the acute monetary tightening may help slow down price acceleration from the demand side; however, it will do little to resolve the supply-side and currency constraints that are at the heart of Zimbabwe’s price volatility.

Persistent economic mismanagement is likely to further undermine efforts to contain inflation. This was most recently demonstrated on 07 May, when the government implemented poorly conceived capital control measures in an effort to curb inflation, halt the depreciation of the Zimbabwe dollar (ZWL), and reduce the extent of dollarisation in the economy. The measures ­– which included the increase of tax charged on forex bank transfers, the raising of levies on forex cash withdrawals above USD 1,000, and the prohibition of banks from processing third-party country foreign payments – had the opposite effect. The ZWL depreciated by 40 percent between 01 and 06 May, while existing foreign currency shortages worsened. This in turn put additional pressure on the inflationary environment (and the wider economy). While some of the more egregious measures – such as a ban on bank lending – were subsequently reversed, several of the above-mentioned capital controls remain in place. As such, any disinflationary effects that monetary tightening may have had are likely to be undermined by ongoing policy uncertainty, continued downward pressure on the ZWL, and expensive imports.

Excessive monetary tightening is likely to add to existing economic headwinds. The 12,000-basis point interest hike announced by the RBZ on 27 June is likely to have immediate consequences, including reduced credit growth, reduced domestic consumption, and reduced productivity more broadly. These effects will be compounded by structural challenges such as an uncertain policy environment; extensive public sector corruption; political involvement in key sectors (such as mining); and distortions in foreign exchange markets. These factors – in addition to external headwinds like a growing imports bill – could weigh on GDP growth (via the consumption and investment channel), which the World Bank forecasts at 3.7 percent in 2022, compared to 5.8 percent in 2021. Lower growth (and currency interventions) could erode the country’s already limited internal and external buffers. As per statistics released by the International Monetary Fund (IMF) in March, foreign reserves are expected to decline to 0.9 months of import cover in 2022, down from 1.3 months recorded in 2021. In addition, increasing import costs and declining remittance inflows are expected to lead to a narrowing of the current account surplus to 1.5 percent of GDP in 2023 (from a 3.3 percent surplus in 2022). Although public debt is expected to stabilise at 69.5 percent of GDP in 2022 (and 68.1 percent in 2023), a significant proportion of this – 48.9 percent of GDP – remains in arrears. This will continue to prevent Zimbabwe from accessing commercial or concessional finance for the foreseeable future to ease short-term financing burdens. Finally, elevated spending pressures, primarily related to the public sector wage bill, could compromise the government’s target of achieving a fiscal deficit of 1.2 percent of GDP in 2022.

Increasing socio-economic concerns could fuel elevated grievances with the administration of President Emmerson Mnangagwa. This was most recently indicated by a strike in the healthcare sector held between 20 and 24 June. According to the Zimbabwe Health Apex Council (ZHAC) workers union, the strike was held over grievances related to working conditions and remuneration. Relatedly, the government reportedly offered all public sector workers a 100 percent pay increase on 17 June. The Zimbabwe Confederation of Public Sector Trade Unions announced that they had “flatly rejected” the offer as it still fell below current inflation levels. While the government has made a number of concessions to civil servants, authorities are unlikely to be able to meet workers’ core demands (such as full remuneration in United States dollars). Accordingly, such industrial activity is likely to continue to affect the provision of public services for the foreseeable future. In addition, related protest activity – such as the recent #ShutDownZim demonstrations – is equally likely to occur in main urban centres. The political opposition could seek to capitalise on the current economic malaise by mobilising anti-government demonstrations in the coming weeks. Such protest activity is likely to increase in frequency in the run-up to general elections in 2023.