Banks charge punitive interest for loans to industry and commerce because they get funds at a premium due to the high country risk profile, a central bank official said.
RBZ senior divisional chief, economic research and policy enhancement Mr Simon Nyarota, said Zimbabwe has a high country risk profile due to its debt overhang.
Banks are charging punitive interest rates on mostly short-term loans in a development that has seriously constrained industry’s capacity to turnaround its fortunes.
“The major reason is the country risk profile. Banks are forced to seek offshore lines of credit, which is where part of the cost comes from,” he said.
“You will find that if a bank needs money offshore, it is going to be charged interest. The bank is going to put its own margins and charge interest rates of 15 to 20 percent per annum,” Mr Nyarota said.
Mr Nyarota said this during a question and answer session on his presentation after the Confederation of Zimbabwe Industries annual general meeting last Wednesday.
Dairibord chief executive Mr Anthony Mandiwanza wanted to know why bank loans remained punitively high yet the institutions offered no interest on deposits.
Mr Mandiwanza wanted to know if the high interest did not warrant the intervention of the central bank considering that the high cost of capital was hurting industry.
“As the Reserve Bank, we felt that if you try to control then you would have problems because the banks would also find ways of going around the controls,” Mr Nyarota said.
The country’s high debt overhang, Mr Nyarota said, increased the country’s risk profile and discouraged most lenders from extending more credit to the country.
Zimbabwe’s current public debt stands at over $6 billion with over 75 percent of the liabilities in arrears. According to the central bank total external debt is around $9 billion.
Banks have therefore taken advantage of the tight liquidity situation to charge punitive interest rates. The liquidity crisis was compounded by low exports, negligible foreign direct investment and little lines of credit.
This comes at a time when the country suspended its own currency due to hyperinflation, which peaked at 231 million percent at the last official country in 2008, which has made it difficult to intervene with monetary policies.
High cost of funding was one of main constraints cited by industry as militating against efforts to turnaround the fortunes of companies, which have seen a drop in capacity.
According to CZI, industrial capacity utilization dropped from an all time high of 54 percent after dollarisation in 2009 to 44,6 percent in 2012 and 39,6 percent in last year.
Other challenges besetting industry include high cost of electricity, labour, water, old equipment, machinery and inputs. With a $4,1 billion budget, Government has little fiscal latitude to extend financial help to cash-strapped industry.