PROVISIONAL TITLE
An analysis of the effects of interest rate on investment in Zimbabwe (2009-2015).
BACKGROUND AND PROBLEM STATEMENT
Since the adoption of a multicurrency system in Zimbabwe in 2009, the Central Bank’s power to control or influence interest rates structure disappeared. It is the monetary policy instruments that give the direction of interest rates in an economy. The broad money supply is neither an option because of the simple reason that the Central Bank cannot influence that anymore due to the multicurrency regime that the country embarked on in 2009.
High demand for working capital across all sectors of the economy is evident. Business needs to retool, innovate, reposition and possibly win back the market share that
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The basic definition of an interest rate is simply the cost of borrowing money. It is the cost associated with acquiring credit, whether buying a car, getting a mortgage, or taking a vacation. Interest rate is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender. It can also be seen as the return being paid to the provider of financial resources. It is an important economic price. This is because whether seen from the point of view of cost of capital or from the perspective of opportunity cost of funds, interest rate has fundamental implications for the economy either impacting on the cost of capital or influencing the availability of credit, by increasing savings (Acha&Acha …show more content…
Investment depends upon the rate of interest involved in getting funds from the market by investors, while economic growth to a large extent depends on the level of investment. If interest rate is high, investment is at low level and when interest rate falls, investment will rise.
Jorgenson (1963), in his paper “Capital Theory and Investment Behavior”, provided the effect of real interest rates on investment spending in an investment equation. He derived the desired stock of capital as a function of real output and the opportunity cost of capital. In this approach, a representative firm maximizes the present value of its future cash flows. The desired capital stock is directly related to output and inversely related to the cost of capital. A decrease in the real interest rate lowers the opportunity cost of capital and, therefore, raises the desired capital stock and investment
In recent years, monetary policy has become the prime tool of government macro-economic policies with a particular emphasis on interest rates as the main control variable within monetary policy. The prominence of interest rates means that monetary policy can affect the aggregate demand. For example, at higher interest rate levels, firms invest less and households spend less due to the increase in the cost of borrowing. Therefore, households and firms are less willing to borrow money for investing or consuming purposes. The rising interest rates also can have an affect on the international world. For instance, if the United Kingdom has relatively high interest rates in comparison to the rest of the world, it will cause the exchange rates to escalate. If the exchange rates rise due to the increase in interest rates, it will dramatically affect the United Kingdom’s competitiveness in the world market. The changes of interest rates and their effects can be explained by the transmission mechanism of monetary policy.
Zimbabwe is suffering from high inflation and unemployment. There economy has a daily inflation rate that climbed as high as ninety eight percent doubling almost every twenty four hours.
Its main focus is on monetary and other financial markets, determination of interest rates, extent to which monetary policy influences the behavior of the economic units and the implication such influence have in the context of macroeconomics. Hence, monetary policy could be defined as an economics of money supply, prices and interest rate, and their consequences in the economy. It therefore focuses on monetary and other financial markets, determination of interest rate, extent to which these policies, influences the behavior of economic units and the implications the influence has in the macroeconomic context. (Jagdish,
The decision regarding the level of overall investment in working capital is a cost/benefit trade-off - liquidity versus profitability. Unprofitable companies can survive if they have liquidity. Profitable companies can fail if they run out of cash to pay their liabilities. Liquidity in the context of working capital management means having enough cash or ready access to cash to meet all payment obligations when these fall due. The main sources of liquidity are
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
10. Interest Rates: Interest rates are also a major macroeconomic factor that has an overall influence on the stock markets. Higher interest rates mean that money becomes more expensive to borrow. As a result the economic activity tends to slow down and the earning tends to see depreciation. This leads to drop in stock prices. Similarly, when the interest rates are low there stocks see
As we know working capital is the life blood and centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management if working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.
Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.
Capital markets are markets "where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income)" (Woepking, ¶3). The two major capital markets are stock and bond markets. Capital markets promote economic efficiency by moving funds from those who do not have an immediate need for it to those who do. Individuals or companies will put money at risk if the return on the intended investment is greater than the return of holding risk-free assets. An example of this would be those that invest in real estate or purchase stocks and bonds. Those that invest want the stock, bond, or real estate to grow in value or appreciate. An example of this concept would be if an individual or company invested an amount saved over the course of a year. While investing may be riskier, these individuals hope that the investment will yield a greater return than leaving the money in a savings account drawing nominal interest. In this example the companies that issue the stocks or bonds have spending needs that exceed their income so the company will finance their spending needs by issuing securities in the capital markets. This is a method of direct finance because the "companies borrowed directly by issuing securities to investors in the capital markets" (Woepking, ¶5).
Modigliania, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review.
Have you ever seen a 100 trillion dollar bill? It may seem impossible, but in the early 2009, Zimbabwe’s government made it possible. The hyperinflation that struck Zimbabwe in 2004 till 2009 produced “starving billionaires.” It was at its peak in 2008 at a rate of 231 million percent. Although the world faced a number of uncontrollable inflation, Zimbabwe is the only country that experienced hyperinflationary episodes in the 21st century. According to the New York Times, the hyperinflation increased in such a frightening manner that “If you need something and have cash, you buy it. If you have cash you spend it today, because tomorrow it’s going to be worth 5 percent less” (Wines). Mostly, inflation is preceded by an increase in the money supply to fulfill the cost of wars, ending empires, or creating new ones. Likewise, Zimbabwe entered the hyperinflation stage when the government policies forced the RBZ (Reserve Bank of Zimbabwe) to print money that helped them to pay of certain debts but in return made the currency worthless. Debates went on and steps were taken to pull Zimbabwe out of this critical situation. Thus, in the late 2008, Zimbabwe’s hyperinflation was controlled after the adoption of U.S. monetary policy.
Economic growth focuses on encouraging firms to invest or encouraging people to save, which in turn creates funds for firms to invest. It runs hand-in-hand with the goal of high employment because in order for firms to be comfortable investing in assets such as plants and equipment, unemployment must be low. Hereby, the people and resources will be available to spur economic growth.
Investment is the condition that we bought an asset or item today in hoping that it will appreciate or provide incomes in the future. In the view of Economics, investment is the purchase of goods that are not consumed today but it will be used in the future in order to provide wealth. In the view of Finance, investment is defined as possessing a monetary asset with the idea that it will provide extra income in the future or appreciate and then it will be sold at a higher price. Besides, investment usually involves in diversification of assets in order to avoid unnecessary and unproductive risk.
Zimbabwe is one of those nations. Over the years many nations have withdrawn their aid from Zimbabwe. Much conflict has arisen between those who send foreign aid and those who believe that the assistance does nothing but further social divide and corruption. The longer conflict lasts in the African nations, the more inclined those who send aid financially are to cease assisting as conditions worsen. The decrease in funding, along with various other factors, has played into Zimbabwe’s recent economic crisis. Hyperinflation has plagued the African state for the last few years, a result of “unaccounted-for expenditures of the Second Congo War and… inflationary policies of the reserve bank” (Noko 346). Dollarization functioned as a highly effective solution to the issues posed in Zimbabwe. Although Zimbabwe is geographically closer to South Africa, the decision was made to use US currency as the new official legal tender rather than the rand. Thus, the “monetary policy… of the US” (Noko 349) became that of Zimbabwe. However, unlike Panama and El Salvador, officials in Zimbabwe did not encourage the phasing out of other nations currency. The circulation of money from other nations allowed a safe guard against any negative effects that might occur in results of the adoption of the US greenback. Though dollarization has brought about a few
Efficient management of working capital is one of the pre-conditions for the success of an enterprise. Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a firm and for fulfillment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm’s liquidity. Holding of excess working capital results in the reduction of the profitability. But the proper estimation of working capital actually required, is a difficult task for the management because the amount of working