daniel chigunwe
Economy Uncensored with Tapiwanashe Mangwiro
Zimbabwe’s businesses are walking a tightrope. Faced with interest rates that hover around 35 percent, the nation is caught up in the crosshairs of an aggressive monetary policy designed to tame runaway inflation.
While the Reserve Bank of Zimbabwe (RBZ) has declared victory over hyperinflation in recent months, the cost of this stabilisation effort has been borne disproportionately by businesses, particularly small and medium enterprises (SMEs).
The underlying question remains: are these policies achieving the right balance between macroeconomic stability and economic growth, or are they stifling entrepreneurship and innovation in the process?
Inflation targeting and its side effects
The RBZ’s strategy to combat inflation through exorbitant interest rates is rooted in monetarist theory. Milton Friedman famously argued that inflation is “always and everywhere a monetary phenomenon.”
In this view, tightening the money supply, through tools such as raising interest rates should theoretically curb inflation by making borrowing expensive and slowing consumption.
Zimbabwe’s policymakers have adhered strictly to this textbook approach, aiming to restore confidence in the Zimbabwe Gold (ZiG) and stabilise the broader economy.
But the realities of Zimbabwe’s economy complicate this equation. The country’s inflation is not driven solely by excess money supply. Structural issues, such as supply chain disruptions, high import dependence and speculative behaviour in foreign exchange markets, also play significant roles.
These factors mean that high interest rates alone cannot fully address the root causes of inflation, and their collateral damage on economic growth is becoming increasingly apparent.
The cost to businesses
For Zimbabwean businesses, borrowing to finance operations or expansion has become prohibitively expensive. The nominal interest rate of 35 percent translates to a staggering real interest rate even when adjusted for inflation. The result? SMEs, the backbone of Zimbabwe’s economy are struggling to stay afloat.
According to Keynesian economic theory, aggregate demand is a key driver of economic growth.
However, high interest rates reduce consumer spending and business investment, leading to a decline in demand. Zimbabwe’s SMEs are feeling this pinch acutely. Many are cutting back on production, laying off workers, or turning to informal and less reliable sources of financing.
Take the manufacturing sector, for example, once a promising area of economic growth, it is now under severe pressure as businesses face rising costs for imported raw materials (due to currency volatility) and limited access to affordable credit.
Similarly, in agriculture, a critical sector employing nearly 70 percent of Zimbabweans farmers are struggling to secure loans for inputs such as seeds and fertilisers, jeopardising the country’s food security.
A liquidity trap in disguise
Zimbabwe’s predicament also echoes elements of a liquidity trap, a concept popularised by economist John Maynard Keynes. In a liquidity trap, high interest rates discourage borrowing and investment, even when inflation expectations are low or moderate.
In Zimbabwe, businesses and consumers are so wary of the economic environment that they prefer to hold onto cash or seek alternative currencies, such as the US dollar, rather than take on debt. This behaviour exacerbates the slowdown in economic activity, creating a vicious cycle.
Alternative financing and informal economies
With traditional bank loans out of reach, many businesses are turning to alternative financing options. Microfinance institutions, private equity and even fintech platforms are emerging as lifelines for cash-strapped entrepreneurs. However, these solutions are not without their own challenges.
Microfinance loans often come with high effective interest rates, and fintech platforms remain inaccessible to businesses in rural areas with limited digital infrastructure.
Moreover, the informal economy is expanding as businesses look for ways to avoid high taxes and regulatory hurdles. While this sector provides some degree of resilience, it also poses long-term risks, including reduced government revenues and limited access to formal financial services for workers.
The need for policy recalibration
Zimbabwe’s policymakers face a critical dilemma. On one hand, maintaining high interest rates to control inflation is essential for restoring confidence in the local currency and preventing further economic instability.
On the other hand, these rates are strangling the productive sectors of the economy and suppressing the entrepreneurial spirit that Zimbabwe so desperately needs.
A more balanced approach may lie in blending monetarist principles with supply-side economics. By addressing structural bottlenecks such as improving infrastructure, reducing bureaucratic red tape and supporting local production policymakers can create conditions for sustainable growth.
Additionally, targeted credit facilities for SMEs, supported by lower interest rates or Government guarantees, could help unlock much-needed capital for productive investment.
Lessons from other economies
Zimbabwe’s situation is not unique. Emerging markets like Turkey and Argentina have faced similar trade-offs between inflation control and growth.
In Turkey, unorthodox monetary policies have led to mixed results, while Argentina’s reliance on capital controls has sparked public discontent.
Zimbabwe can learn from these examples by adopting policies that are both pragmatic and context-specific.
For instance, the introduction of gold-backed digital tokens in Zimbabwe has been an innovative attempt to stabilise the currency and provide an alternative store of value.
Expanding such initiatives while ensuring transparency and trust could bolster the country’s financial system without relying solely on interest rate hikes.
Conclusion
High interest rates may have temporarily tamed Zimbabwe’s inflation monster, but they have also put the country’s entrepreneurial ecosystem under severe strain.
The RBZ and policymakers must now pivot toward a more nuanced approach, one that balances the short-term need for stability with the long-term imperative of economic growth.
Without such recalibration, Zimbabwe risks becoming a cautionary tale of how the cure for inflation can sometimes be worse than the disease.
This balancing act will require not only sound economic management but also the political will to address structural inefficiencies and create an environment where businesses can thrive. Only then can Zimbabwe chart a sustainable path to recovery.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn
Bongani Ndlovu