What the temporary ban on bank lending means for Zimbabwe's economy

Zimbabwe's economy is currently undergoing a tumultuous period as banks in the country have been banned from lending for the past six days. This directive was announced by President Emmerson Mnangagwa as part of capital control measures aimed at reducing the amount of local currency in circulation, stemming the flourishing black market, and ultimately curbing inflation. To shed light on the potential implications of this temporary lending ban on the economy and investments, CNBC Africa spoke with Batanai Matsika, Partner Research & Advisory at Morgan & Co. Matsika explained that the measures were put in place on May 7th in response to behaviors among economic agents that were contributing to the rise in parallel market rates and inflation. The suspension of lending activities by financial institutions was viewed as a means to address irregularities within the financial system, particularly concerning broad money supply. However, the move has faced criticism from business leaders who argue that it could hinder growth prospects for companies reliant on credit. Regarding the duration of these measures, Matsika suggested that they were likely temporary firefighting measures to stabilize the depreciating Zimbabwean dollar. He noted that additional directives exempting certain sectors from the lending ban might be introduced to promote productivity in key industries such as cotton, wheat, and tobacco. However, the overall impact on GDP growth and employment levels is expected to be negative, with companies scaling back operations and dividend payouts to investors. In light of the uncertain economic environment, Matsika advised clients to exercise caution and consider investing in well-established blue-chip companies to hedge against volatility. He emphasized the need to preserve capital and protect against risks associated with the upcoming election period in 2022 and 2023. As the situation unfolds, concerns have been raised about the implications on depositors and the overall investability of Zimbabwe. With the uncertainty surrounding the duration of the lending ban and potential further measures, investors are left grappling with decisions on whether to keep their funds in the country or seek alternative avenues for investment. The temporary ban on bank lending in Zimbabwe has cast a shadow of uncertainty over the economy, with businesses and investors wary of the implications on growth and financial stability. As the government navigates through these measures to address currency challenges and inflationary pressures, the path ahead remains fraught with challenges and potential disruptions to the economic landscape.