The economy may be edging toward a recession occasioned by high interest rates that are slowing aggregate demand, said former Finance Minister Tendai Biti.
In September 2022, the central bank chose to maintain its key policy rate at a record high of 200% in order to preserve the long-term sustainability of the current deflationary trend, that is, until monthly inflation reaches the desired levels of less than 5%.
Last month, Treasury Chief Mthuli Ncube said the country will keep the interest rates into next year as it prioritizes economic stability ahead of high growth rates.
Biti told the CEO Africa Roundtable annual conference recently that the interest rate must decline, but only slightly below the inflation rate.
“The issue of a 200% interest rate does not work; it has never worked. All you are doing is forcing the economy into a recession,” he said.
“You are killing aggregate demand by which business people and farmers can operate on lending rates of 200%, which implicitly are illegal.”
Biti said that to create macro-economic stability, there is a need to deal with export surrender requirements.
“They constitute a double tax on industry and they make the central bank a centre of passive fiscal activities,” he said.
Interest rate spikes discourage bank borrowings.
Economics professor Gift Mugano said there is a need to encourage investments into the economy by lowering the interest rates.
“So, you are better off killing the economy because you want to target inflation. The central government must advise properly,” he said.
“You must be a thief to borrow money at a 200% interest rate and pay it back. You can only be a thief.”
Central banks raise interest rates to curb accelerating inflation and safeguard price stability.
The trading environment is difficult for the majority of enterprises, marked by rising prices, high interest rates, and supply chain disruptions.
Businesses favor a gradual easing of some of the measures as a result of the increased stability so that consumer spending can rebound, albeit in a more stable inflationary environment – Harare