WILL THE INTER-BANK RATES SAVE THE ZIMBABWEAN INFLATIONARY ECONOMY.
The past few months have brought about hardships for the ordinary citizens of Zimbabwe. There are big changes taking place right now in the country and the concerns are, will the economy ever stabilize and when is all of this going to end. In an effort to control run away inflation, Zimbabwe's central bank introduced an inter-bank rate of 15% in February 2019 and later increased it to 50% by end of June 2019. This is all good, but to the ordinary Zimbabwean, what does it all mean, and can we count on this policy measure to solve the economic problems at hand.
What is the inter bank rate.
it is important for us to understand what the inter-bank rate is first before we get to understand how financial authorities and economists hope to use it to stabilize the economy which seem to be on a run away inflation. The inter-bank rate can also be called the inter-bank exchange rate or federal funds rate in other countries. But what is it really?
The inter-bank rate is a rate of interest that is charged between and among financial institutions for short term loans they give each other. for Instance bank A has surplus cash and bank B has a shortage. Bank A will lend to bank B at the prevailing Inter-bank exchange rate for a short period of time, some are overnight loans while some can go a a long as a week. The inter-bank exchange rate can be used by financial institutions when they are swapping one currency for another. For example, CBZ bank would swap its Zimbabwean dollars for United States dollars (USD) with First Capital bank.
How does the inter-bank rate works exactly
Every commercial bank is required by regulation to ensure that it has adequate cash to in its reserves to meet its everyday withdrawals by clients. To manage the liquidity situation banks with cash shortages end up borrowing from other banks and financial institutions that have surplus cash in order to meet this short term cash demand as explained earlier.
The cost of borrowing or rate of interest for inter-bank borrowing and lending is determined by the Central Bank of Zimbabwe. Essentially this is a tool that the central bank uses in order to increase or decrease the quantity of cash that is circulating in the market. If the inter-bank rate is low then banks can borrow from each other easier and more cheaply, resulting in more money in the market and hence banks are likely to issue out more loans. More loans means more spending, more spending increased inflation. On the other hand if the inter-bank rates are raised then it means it's now expensive for banks to borrow from each other, hence it instills discipline on financial institutions resulting in lesser money on the market. less money on the market implies less loans and less spending. Reduced spending will require imply inflation is curbed. The Picture below shows how the inter-bank borrowing and lending system integrates into and influences the overall money supply in the Zimbabwean economy.
Are inter-bank rates important for the Zimbabwean economy?
Having discussed the above information, it is essential to note that according to this article, the inter-bank rate serves four purposes:
a) it serves as a cost to the borrowing financial institution.
b) it serves as a return to the lending financial institution
c) It is used by the Central bank to control money supply in the market
d) It is used to determine the value of a country's currency against that of other countries.
From an economic perspective, the ordinary Zimbabwean resident will be more concerned with the last two points. The rise in inter-bank rate from 15% to 50% by end of June 2019 was argued by the Finance Minister Professor Mthuli Ncube to strengthen the recently introduced Zimbabwean dollar through the statutory instrument SI-142 against further value losses against other foreign currencies like the South African Rand and the United State dollar. However on the other hand, banks will tighten their purses and reduce the quantity of money the can lend to other financial institutions and eventually to businesses and individuals that require loans to fund business projects or even consumptive expenditure.
Will the Inter-bank rate stabilize the Zimbabwe Zimbabwean
Looking at countries like Nigeria have managed to implement the inter-bank rate and actually sustain their economy and even grow it. The question is will Zimbabwe be able to follow the same path that Nigeria is on and sustain its own economy? There are several aspect at play and the success of the economy will be depended on the performance of this inter-bank policy.
An element of discipline and religiously pursing the necessary steps is needed to stabilize the economy and re-introduce the already announced currency. The greatest challenge in Zimbabwe is that of coming up with policies which they might not have the will or capacity to enforce. the policies may be sound and concrete on paper yet fail to get full backing from responsible persons even from the highest government officials.
Its is imperative as well to keep in mind that banks do not have sufficient foreign currency and hence the inter bank exchange rate system might succumb to the pressure of foreign currency demands. The black market will almost always offer a more lucrative exchange rate than the inter-bank rate. To curb the lost in local currency value against other foreign currencies, the inter-bank exchange rate should compete fiercely with the black market. At the same time money supply should be tightly controlled, though it further squeezes the already suffering citizens.
It remains to be seen on whether the inter-bank rate will be able to save the highly inflationary Zimbabwean economy. There are many factors at play and hence it could be a bit difficult to understand the true intentions of the treasury department considering that they re-introduced the Zimbabwean currency without addressing the fundamentals such as production, sufficient reserves and addressing corruption. The inter-bank rate policy might require other fundamentals to be address and help stabilize the economy.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2019 Tapiwa Chidakwa