Zimbabwe to Try Dual Interest Rates

UNCLAS HARARE 002679 SIPDIS STATE FOR AF/S NSC FOR SENIOR AFRICA DIRECTOR JFRAZER USDOC FOR 2037 DIEMOND PASS USTR ROSA WHITAKER TREASURY FOR ED BARBER AND C WILKINSON USAID FOR MARJORIE COPSON ¶E. O. 12958: N/A TAGS: ECON EFIN ETRD ZI SUBJECT: Zimbabwe to Try Dual Interest Rates Ref: Harare 2546 ¶1. Summary: The Reserve Bank announced it will allow the market to determine lending rates for most businesses and consumers while subsidizing an ultra-low rate for certain exporters. The welcome step toward interest rate liberalization is unlikely to offset other interventionist measures that punish exporters. If the market-determined rate applies to savings as well as borrowing, it will provoke an investor exodus from Zimbabwe's stock market. End Summary. Businesses must cope with rate hikes -------------- ¶2. The GoZ said it would finance the ultra-low borrowing rate of 15 percent (inflation is conservatively pegged at 144 percent) with a Z$ 25 billion (US$ 16 million) fund. This is great news to anyone who can access the funds, but the GoZ did not explain how it would prioritize exporters. The lucky few should be able to boost productivity and earn the GoZ desperately-needed foreign exchange. Other businesses and consumers will watch their variable interest rates float to more natural levels, from approximately 60 to 160 percent. Comment -------------- ¶3. This would be a logical market solution to shore up exports if the GoZ were not also tightening its grip on most aspects of the economy. Through the subsidy, the GoZ will return to exporters as a whole only a small portion of the 50-100 percent of foreign exchange earnings it now retains (ref). At the same time, many borrowers will have to endure skyrocketing rates, causing homeowners to default and businesses to raise prices (tricky, given the GoZ's renewed vigor to control prices). ¶4. Finally, the GoZ did not address savings rates. We assume they will also rise to levels that take inflation into account, from perhaps 20-40 to 90-130 percent. If this happens, investors will transfer funds from stocks to money-markets, causing a steep plunge in equities. Many firms would thus be hit concurrently with undercapitalization and higher borrowing rates. Sullivan