US policy tightening to increase cost of external financing: IMF

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The decision by the United States’ Federal Reserve Bank to raise the benchmark interest rate for three consecutive quarters, with more likely to come, as well as recent moves to reduce its size of the balance sheet assets through offloading some of its bonds by the end of the year could have negative repercussions on dollarised Zimbabwe, the International Monetary Fund (IMF) has said.

“Zimbabwe will be impacted to the extent that the cost of external financing increases”, an IMF spokesperson said through emailed responses to FinX.

Monetary tightening by the US Fed will only increase an already existing borrowing premium on Zimbabwean creditors due to perceived country risk. According to Finance Minister Patrick Chinamasa, Zimbabwe has struggled to access bi-lateral credit as easily as regional peers who enjoyed benefits of zero interest rates from the western hemisphere since 2009.

Zimbabwe is already receiving declining foreign investment inflows and its frosty relations with the international community have seen government often resorting to the domestic financial markets to mobilise funds.

Fears are that, if the cost of external financing increases, government might intensify its reliance on the domestic market, much to the disadvantage of the private sector which will be crowded out. Already, government’s domestic debt has been rising unsustainably, from $2,281 billion in 2015 to close the year 2016 at $4,006 billion.

Government has also been dependent on credit financing from the RBZ, which has been expanding money supply in the banking sector through digital platforms. Questions arise as to whether or not this debt monetization between the RBZ and Government of Zimbabwe can be sustainable, particularly when this debt is in effect pegged to a currency not sovereign to the RBZ. — Finx.

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