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MANGUDYA ON 08 FEBRUARY 2018

ANALYSIS OF THE 2018 RESERVE BANK OF ZIMBABWE MONETARY

POLICY STATEMENT PRESENTED BY THE GOVERNOR DR. J MANGUDYA
ON 08 FEBRUARY 2018

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PARLIAMENT BUDGET OFFICE

______________________________________________________________________

ANALYSIS OF THE 2018 RESERVE BANK OF ZIMBABWE MONETARY

POLICY STATEMENT PRESENTED BY THE GOVERNOR DR. J
MANGUDYA ON 08 FEBRUARY 2018

“Enhancing Financial Stability to Promote Business Confidence”

Contacts:
chivorep@parlzim.gov.zw
+2634700181-8 ext. 2011/2012

TABLE OF CONTENTS

1. BACKGROUND

2. COMPLIANCE WITH REGULATIONS

3. MAJOR HIGHLIGHTS OF THE 2018 MONETARY POLICY STATEMENT

4. EVALUATION OF 2017 MONETARY POLICY INTEVENTIONS

5. ECONOMIC DEVELOPMENTS

5.1 Real Time Gross Settlement (RTGS) System.

5.2 Balance of Payments Developments

5.3 International Money Transfers

5.4 Foreign Currency Receipts on a Cash Basis

5.5 Foreign Currency Utilisation on a Cash Basis

5.6 Financial Account Developments

5.7 Monetary developments

5.8 Commodity price Developments

5.9 Inflation Developments

5.10 Performance of the Banking Sector

5.11 Non-Performing Loans

6. ANALYSIS OF POLICY MEASURES TO ENHANCE FINANCIAL STABILITY AND TO PROMOTE BUSINESS

CONFIDENCE IN THE ECONOMY

7. CONCLUSION

8. ANNEXES

ANNEX 1: Performance and Impact of the export incentive Scheme

ANNEX 2: Payment System Transactional Activities for 2016 and 2017

ANNEX 3: Financial Inclusion Indicators - Dec 2016-17

BACKGROUND

The Reserve Bank of Zimbabwe Governor Dr. John Mangudya presented an optimistic 2018 Monetary Policy Statement on 8 February 2018
which complements the largely austerity driven New Economic Order Budget Statement presented by Finance and Economic Development
Minister Patrick Chinamasa on the 7th of December 2017. The policy came on the back of nationwide euphoria, renewed hope and a cloud of
expectations driven by new Economic Dispensation ushered in in November 2017. In the Governor’s words, “this renewed hope and
confidence would need to be supported by going back to basics to restore business confidence and to foster discipline within the national
economy”. The theme of the 2018 Monetary policy Statement “Enhancing Financial Stability to Promote Business Confidence” aptly
summarises the intention of the Policy, couched on the “open for business” narrative, which places the obligation on everyone to conduct
business in a manner that promotes investment in the country. This narrative suggests that lack of investment, which is itself occasioned by
capital constraints, is the major missing link in Zimbabwe’s recovery efforts.

COMPLIANCE WITH REGULATIONS

The legal requirements underpinning the preparation and presentation of this Monetary Policy Statement are provided for in Section 46 of the
Reserve Bank Act [Chapter 22:15] which requires the Bank to formulate and implement monetary policy for the country containing a
description of the monetary policy to be followed by the Bank during the next succeeding six months, and a statement of the reasons for those
policies; a statement of the principles that the Bank proposes to follow in the implementation of the monetary policy; and an evaluation of the
monetary policy and its implementation for the last preceding six months.

The specific objectives of the presentation of this Statement were:

§ To highlight the global and domestic financial developments;
§ To provide an assessment of the monetary policy measures taken by the Bank in May 2017, including the introduction of an export
incentive scheme financed through bond notes among other policy interventions geared at promoting domestic output and productivity;
§ To present additional policy measures and in some cases reforming current policies with a view to enhance financial stability, bolster
business sentiment and increase output and exports in 2018 and beyond; and
§ To offer policy advice to support a sustained economic recovery anchored on the good agricultural season in order to change Zimbabwe’s
economic narrative to production and productivity which is very vital to restore trust and confidence within the national economy.

MAJOR HIGHLIGHTS OF THE 2018 MONETARY POLICY STATEMENT

ü Exports grew 36 percent in 2017. $2,8 billion in 2016 to $3,8 billion in 2017, driven by the export incentive scheme introduced by
the RBZ.
ü Bank deposits up 26.47 percent to $8,48bn.
ü 99-year leases now accepted as collateral.
ü Plastic money now valued at $93,6bn.
ü Inflation to be contained at 3, 7 percent in 2018.
ü Nostro facilities draw-down reach $1,1bn.
ü 75 percent of population now financially literate.
ü Enhanced nostro stabilisation to facilitate foreign payments,
ü Measures to provide investment guarantees to protect investor funds,
ü

Specific measures presented in the Statement are meant to address the following:
ü Further promoting the use of mobile and electronic payment systems (plastic money);
ü Enhancing the use of the local generated RTGS funds to generate exports;
ü Improving the foreign currency market;
ü Enhancing rewards to exporters and reducing cost of doing export business;
ü Providing generators of forex assurances of ease of access to foreign currency;
ü Enhancing foreign currency retention threshold;
ü Enhancing nostro stabilisation facilities to provide assurances to foreign exchange earners of forex availability and to meet
the import requirements of essential commodities;
ü Improving ease of access to productive facilities;
ü Addressing the needs of the diasporans;
ü Reinforcing the arrears clearance and re-engagement programme;
ü Providing guidance on the continuation of the multi-currency system;
ü Providing guidance on the Presidential Amnesty on externalised assets and funds; and
ü Providing update on the acceptability of the 99-year land leases as collateral at banks.

Enhanced incentive support for gold, tobacco, cotton and macadamia

EVALUATION OF 2017 MONETARY POLICY INTEVENTIONS

ntervention Effect Comment

ostro Stabilisation The facility is said to have While the central bank must be commended
acilities- Introduced in assisted in sustaining financing for arranging for this facility, it should be
017 to the tune of of some critical imports such as noted that this is a short term stopgap
S$1.1 billion as a way fuel, electricity, medicines, measure. There is need to gradually tilt the
stabilize the forex fertilizers, agro-chemicals, soya economy towards production and for
arket. crude oil for cooking oil, cash industry to be competitive in the global
imports and raw materials for market. This will ensure the country
industry generates the much-needed foreign currency
which will boost the banking sector’s nostro
balances. To achieve this, both the fiscal and
the monetary policies must play a key role
in reducing the cost of doing business and
exports must be treated with the urgency and
importance they deserve.
xport Incentive Resulted in a 36% growth in There is need for a comprehensive
cheme-Facilities of exports from US$2.8 billion in evaluation of the impact of the export
S$200 million and 2016 to US$3.8 billion in 2017. incentive scheme to gauge its effectiveness
S$300 million in promoting exports. Without such a study,
onetized in bond notes one would not be wrong if they attribute the
a way to make growth to increased output, (driven the
mbabwean exports favorable weather pattern in the case of
ompetitive agriculture)
freximbank Backed Alleviated liquidity shortages AFTRADES is a financial instrument with
nterbank Market during 2017. The facility will lender of last resort characteristics, used to
acility (AFTRADES) run for another two years until mobilise domestic resources from the
tablished in 2015 at a February 2019. Total trades surplus banks to deficit banks. The
mit of US$200 million amounted to US$399.5 million extension is necessary given that the
in 2017 Reserve Bank, is not yet fully capacitated to
perform lender of last resort functions for
financial institutions with over 1.369 billion
combined core capital and given the $100
minimum capital requirement for banks in
2020. Aftrades will thus complement RBZ
lender of last resort function and this,
combined with the amended Banking Act,
ZAMCO and a functional credit reference
system, make the banking sector stronger
and safer. The extension comes at a time the
country is shifting focus to export led
growth and thus will increases the capacity
of trade finance banks to deepen their trade
finance activities.
he 7% tax-free Savings Raised a total of US$165
onds introduced by the million at the end of 2017 as the
BZ in September 2017 Bank enhanced their features in
mop up excess December 2017 to include
quidity within the Prescribed Asset Status to
arket enhance marketability.

ncouragement to use Plastic money usage registered
lectronic and Mobile phenomenal growth as more
anking Systems than 96% of the $97.5 billion -
lastic Money) from the 1 billion transactions
2017 processed in the entire country
in 2017 were through electronic
and mobile banking systems
with RTGS constituting more
than 63%. Aggregate electronic
means of payments in terms of
values and volumes grew by
41% and 164%, respectively,
Growth in plastic money usage attests to a
massive behavioral transformation amongst
the populace from the previously cash-
dominated economy to a cashlite society
which also helped in financial inclusion. As
such, overall growth in the number of bank
accounts increased by 106%, the number of
low-cost accounts increased by 152% from
1,2 million accounts in 2016 to 3,02 million
accounts in 2017.
The request by BAZ for Government to
either remove or reduce its share of the
intermediary transfer tax (IMT) on Point of
Sale Transactions was however not
addressed in the Statement. the huge
variance in Intermediary Transfer Tax (IMT)
of 355% ($743 083 collected against a
budget of $163 300) in 2016 justifies this
call which is motivated by the need ensure
further reduction in user fees to enhance
financial inclusion

inancial Inclusion & Total disbursements under all There is need for technical support through
ustainable Economic financial inclusion facilities extension services and laboratory facilities
evelopment Facilities amounted to US$122 million. from the Geological Survey, Department of
ntroduced in the mid- Gold support facility of US$74 Metallurgy and the Government Mining
rm of 2017 aimed at million saw gold deliveries to Engineer and access to equipment through a
omoting production, Fidelity Printers and Refiners hire purchase scheme, managed by the
usiness linkages and (FPR) increasing from 21.439 Government Mining Engineers. The facility
mpowerment targeting tonnes in 2016 to 24.843 tonnes can be more effective if Government
oups such as women, in 2017, with small scale gold supports miners’ organisations to take a lead
MEs and youth. The producers accounting for 53% . in the mobilisation and formalisation of
cilities have enhanced The number of ‘no frills’ small-scale and artisanal miners.
cess to formal financial accounts with minimum
rvices by the affordable requirements in the
arginalised groups in banking sector recorded a
upport of the National 151.67% increase from 1.20
nancial Inclusion million as at 31 December 2016
rategy to 3.02 million as at
31December 2017.
nancial Literacy- Around 75% of the population Financial literacy is key in raising awareness
BZ in collaboration was financially literate as at end of financial services among economic agents
ith development of Dec 2017. particularly the marginalised groups;
artners, conducted a ensuring responsible access to and usage of
umber of financial financial services; and in promoting
eracy stakeholders adequate protection of consumers of
orkshops during 2017. financial services.
stablishment of the Utilisation of the Credit The credit registry system will enhance
redit Registry system Registry continued to increase responsible borrowing and lending by
with cumulative inculcating a good credit culture and
access of 116,489 reports as at improving credit infrastructure thus adding
31 December 2017 and the an impetus to the efficient operations of
Registry system had a total of financial markets
350,000 banking sector
credit records, which are
updated on a continuous basis.

The Monetary policy statement is however silent with regards to providing updates on the following Monetary Policy interventions announced
in 2017:

§ Directive for banks to ensure that lending interest rates do not exceed 12% per annum and that bank charges that include application
fees, facility fees and administration fee, do not exceed 3% effective 1 April 2017;

§ Downward review of cash withdrawal charges and adoption of a proportional pricing model to replace the fixed charges in order to align
cash withdrawal charges to amount withdrawn with effect from 12 December 2016. The applicable charges for cash withdrawal were
set at a maximum of 1% and 1.25% of amount withdrawn for ATM and over-the-counter, respectively;
§ Directive for banks to review interest paid on deposits and to submit a report to the Central Bank detailing their deposit profiles and
proposed interest rates on deposits by 31 March 2017;
§ Resuscitation of the Educational Support Facility for students pursing studies at Higher and Tertiary institutions noting the reported
increases in moral decadence at higher learning institutions as students try to supplement their stipends.

ECONOMIC DEVELOPMENTS

.1 Real Time Gross Settlement (RTGS) System.

The statement noted that a total of 5.9 million transactions valued at US$61.7 billion were processed through the RTGS system during the year
2017 with the volumes and values increasing by 103% and 28% respectively compared to the same period in 2016.
The main driver of the expansion in RTGS payments is expanded government financing through the
overdraft at the central bank and the issuance of Treasury Bills which expanded to $5,2 billion in
2017 from $3,2 billion recorded in 2016. This growth against the miniscule growth in hard cash has Fig 1: Payment Systems Values
resulted in a three-tier pricing system in the economy. The RTGS balances which are created locally for 2017
have no “value creation”. They are inflationary both in the short run and in the long run. It is
therefore critical that a certain threshold that these RTGS balances must not exceed be ascertained.

Source: RBZ

.2 Balance of Payments Developments

While the import bill has slightly increased, the changes in the bill’s composition are encouraging. Over the period January to November
Although some finished goods and cereals (including maize) are still there, capital goods now 2017, total merchandise trade (exports
make up a large chunk of it as industry re-equips and retool buoyed by SI 64. The increase in the and imports) stood at US$8,408.5
year on year merchandise exports was mainly on account of increases in exports of nickel (mattes, million, representing a 15.8% increase
ores & concentrates), gold, ferrochrome and black tea. Gold, flue-cured tobacco, nickel (mattes, from US$7,262.5 million recorded
ores & concentrates) ferrochrome and diamonds which contributed about 80% of total export over the corresponding period in 2016.
earnings. The increase was on account of
increases in merchandise exports and
imports of 36.8% and 4.5% (from US$2,540.4 and US$4,722.0 million in 2016 to US$3,475.9 million and US$4,932.6 in 2017) respectively.
Consequently, for the period under review, the country’s trade deficit narrowed from US$2,181.6 million in 2016 to US$1,456.7 million in
2017 while the current account deficit is estimated to have slightly increased from US$591.3 million in 2016 to US$618.1 million in 2017.

.3 International Money Transfers

Inward international remittances amounted to US$1.4 billion in 2017 compared to US$1.6 billion received in 2016 representing an 11%
decrease. Of the US$1.4 billion, Diaspora remittances amounted to US$698.9 million. What is particularly encouraging is the growth in
investments in enabling technologies that broaden financial inclusion, reduce remittances cost and increase remittance access points for the
convenience of senders and recipients.

.4 Foreign Currency Receipts on a Cash Basis

Global foreign currency receipts, on a cash basis, for the year 2017 amounted to US$5.6 billion, compared to US$5.5 billion received during
the same period in 2016, representing a 1.4% increase.

Table 1: breakdown of foreign currency receipts by source

Type of Receipt 2017 US$ Millions 2016 US$ millions % change

Export proceeds 3 519.70 2 994.00 17.6%
International remittances 1 412.01 1 589.96 -11.2%
Loan proceeds 545.49 519.49 5.0%
Income receipts 58.87 332.70 -82.3%
Foreign investments 26.98 48.97 -44.9%
Total 5 563.05 5 485.12 1.4%

Source:RBZ

.5 Foreign Currency Utilisation on a Cash Basis

The Monetary Policy notes that while total foreign currency receipts increased and remain comparable relative to receipts in other countries in
the region, the benefits of such receipts continue to be outweighed by the country’s huge import bill. In 2017, global foreign payments
amounted to US$4.81 billion, representing a 6% decline from US$5.14 billion recorded in 2016. Notwithstanding this decline, payments for
capital and intermediate goods increased, against a notable decline in payments for consumption/manufactured goods. This commendable
development is testimony of better utilisation of foreign currency towards the productive sectors of the economy, in line with various
Government strategies anchored on promoting domestic production.

.6 Financial Account Developments

Net debt creating inflows declined from US$1,014.1 million in 2015 to US$544.7 million in 2016 and US$315.6 million in 2017. Similarly,
net foreign direct investment into the country is estimated to have declined from US$343 million in 2016 to US$235.4 million in 2017, while
net portfolio investment inflows declined from US$80 million to US$41 million. This points to the need for Government to vigorously
promote both foreign direct investment and portfolio investment.

.7 Monetary developments

Broad money supply recorded a 47,97% growth from US$5,42 billion in 2016 to US$8,02 billion in 2017. This growth is largely attributed to
growth in the government’s portion of domestic debt which grew 70,45% to US$6,27 billion in 2017 ostensibly to fund recurrent expenses.
This, together with the increase in government bills and bonds holdings of 62,5% from US$3,2 billion to US$5,2 billion between 2016 and
2017, shows that the government borrowing is crowding out private borrowing. As a result, private sector credit grew by a miniscule 6,97% in
2017, a development which is detrimental to production.

Whilst the support by the RBZ is commendable, Banks have not been as supportive as expected as evidenced by their de-risking and reduced lending to
the private sector in favour of less risky Treasury Bills. This de-risking largely explains the increase in net credit to government of 70.45% to $6 271.02
million in 2017, while credit to the private sector rose by 6.97% to $3 705.5 million. Overall Bank lending to local economic agents grew by 44.31%, from
$7 554.07 million in November 2016 to $10 637.23 million in November 2017. The continued decrease in the loan-to-deposit ratio to 44,81% by
December 2017 from 56,64% the previous year also points to the need for adherence to the austerity measures enunciated in the 2018 Budget Statement
including adherence to 20% overdraft threshold as provided for in the RBZ Act and minimising deficit financing through Treasury Bills (TBs) so as to
keep national debt below the statutory limit of 75% of GDP. TBs and bonds peaked to US$5,2 billion in 2017 from US$3,2 billion the previous year while
overdraft on RBZ was in excess of US$600 million.
The financial sector remains relatively underdeveloped with Zimbabwe ranked 126 out of 138 countries for financial sector development in the 2016 -17
Global Competitiveness Report with a score of 3.1 out a possible 7

.8 Commodity price Developments

Year 2017 witnessed a recovery in international commodity prices although they remained depressed compared to the levels that were attained
in 2012. Strong demand especially from China, the world’s largest consumer of base metals’ property, infrastructure, and manufacturing
sectors led to a recovery of energy, base metals, precious metals and agricultural commodity prices. Crude oil prices also firmed, buoyed by
declining global inventories as a result of efforts by OPEC to curb production.

.9 Inflation Developments

Inflation rose from low levels of 0.14% in August high levels of 3.5% by December 2017. The average inflation for 2017 was 1% while the
annual inflation for December 2017 was 3.5% which is within the SADC convergence benchmark of between 3 to 7 %. Food inflation, driven
by prices of meat; vegetables; and fish jumped to 6.6% in December 2017, up from -0.3% recorded in January. Annual non-food inflation also
accelerated from -0.82% in January 2017 to 2.0% in December 2017.

Source: Zimstat and RBZ

Speculative and profiteering tendencies; pass-through effects of parallel market premiums on foreign exchange; shortages of some imported
basic commodities as well as some external factors such as firming South African rand and strengthening oil prices were responsible for the
upsurge in inflation. However, the positive domestic and international goodwill, following the new economic and political dispensation in the
country are expected to dampen the speculative tendencies, in the outlook.

Figure 3: Regional and International Annual Inflation Trends

Source: RBZ

The massive increases in prices attributable to the three-tier pricing model adopted even by
sectors that are regularly allocated foreign currency by the RBZ are a cause for concern. This
level of gluttony and self-indulgency should never be tolerated in the new dispensation. Most
Economists are content that inflation has passed the 5% mark based on the realities on5.10 the Performance of the
Banking Sector
ground. One such analyst is the renowned Johns Hopkins University Professor and Cato Institute
Senior Fellow who is also an Applied Economics Professor, Steve Hanke, who famously measured
Zimbabwe’s inflation using what he called the Old Mutual implied rate (OMIR) during the
country’s hyperinflation phase. Although his opinion can be interpreted by many as alarmist and The improvement in key risk and
unrealistic, he deserves attention and consideration should be paid to his methodology. This spike performance indicators points to a
in inflation has however seen a remarkable increase in government revenues. satisfactory performance of the
The continued existence of a parallel market for foreign currency which importers require to banking sector. Total assets increased
finance the purchase of most commodities should be attended to as a matter of urgency. This is to $11.25 billion while capitalization
fueling an environment for speculative tendencies that the market continues to face due to and profitability indicators also reflect
uncertainty which casts doubt on the ability of the RBZ to contain inflation to the SADC target of improved performance. The banking
between 3.7% by yearend. sector deposits (including inter-bank
deposits) increased by 26.47%, from
$6.99 billion as at 30 June 2017 to $8.48 billion as at 31 December 2017. This was partly attributed to increased export receipts, expansionary
impact of government expenditure and multiplier effect of new deposits. Banking sector loans and advances increased from $3.69 billion as at
30 June 2017 to $3.80 billion as at 31 December 2017 with productive sector lending constituting 73.64% of total sector loans as at 31
December 2017. It is also refreshing to note that as at 31 December 2017, a total of 11,744 out of 54,909 depositors by number had been
compensated out of the Deposit Protection Fund in respect of the failed contributory institutions under liquidation. In monetary terms $3.2
million was paid, which represents 50% of the total exposure of $6.4 million. The satisfactory resolution of troubled banks which ushered in a
financial sector freed of troubled and distressed banks which is necessary to boost public and investor confidence in the banking sector is
commendable.

The banking sector’s performance was very strong, with all indicators pointing to a strong performance and healthy state of our financial
system and this is crucial since banking is at the anchor of any economic recovery. All the licenced commercial banks are compliant in terms
of the RBZ’s minimum capital requirements. Total banking sector capital increased 10,48% from US$1,24 billion as at 30 June 2017 to close at
US$1,37 billion. A strong capital base in the market is necessary in order to attract deposits and counter shocks that may arise in the market.
Overall profitability of the banking sector jumped 33.91% to close at US$241,9 million from US$181,06 million in 2016 as 18 of the 19
operating banks registered profits. The profitability is complemented by a health market liquidity ratio of 62,62%. The ratio is 32,62% above
the prescribed prudential liquidity ratio as required by the central bank. The banking sector, however, continues to suffer from the absence of a
lender of last resort as the RBZ has limited capacity to perform this function. However, the US$200 million Afritrades facility which has been
extended to February 2019 will enhance the stability of the banking sector in the event banks require agent accommodation in times of
liquidity stress.

.11 Non-Performing Loans

The hiving off of Non-performing loans (NPLs) to ZAMCO and the subsequent balance sheet clean-up has seen a marked improvement in the
quality of the banking sector loan portfolios. As such, the ratio of NPLs was 7.08% as at 31 December 2017, down from 7.87% as at 31
December 2016. As at 31 December 2017, ZAMCO had acquired NPLs amounting to $987 million.

ANALYSIS OF POLICY MEASURES TO ENHANCE FINANCIAL STABILITY AND TO PROMOTE BUSINESS CONFIDENCE
IN THE ECONOMY

Measure
Enhancement of the
Nosto Stabilization
acility by US$400
million
Analysis
Consistent with the “open for business narrative”, the RBZ has made efforts to
minimise the foreign currency remittance risk in Zimbabwe, which now seems to
be a major deterrent to investment in the country. The enhancement of the nostro
stabilisation facility by US$400 million will provide assurances that international
remittances and individual foreign currency inflows received through the formal
system will be available when required by owners, to meet foreign exchange
requirements for importation of essential requirements as well as to provide
assurance that investors will be able to access the proceeds from the capital in their
preferred destination through the refinement and enhancement of the Portfolio
Investment Fund, which is currently at US$5 million. It is advisable that RBZ
courts more financial players to support the country with its nostro requirements
rather than rely on a single institution which is also working as a lender of last
resort through its Afreximbank-backed Interbank Market Facility (Aftrades). In
addition to clearing arrears from IFIs, in line with the Lima Plan of 2015, the
country should start engaging non-traditional funders rather than continuing to pin
all hopes on financial assistance from these international financial institutions
(IFIs). The bank can tap from developmental funds, sovereign wealth funds, fund
managers, private equity firms and hedge funds that are seeking to diversify their
investment portfolios to minimise the risk from the imminent demise of the oil
industry.

Provision of The Bank announced an Afreximbank US$1.5 billion facility earmarked for the
nvestment provision of guarantees (US$1 billion) to investments coming into the country and
Guarantees to for liquidity support (US$500 million). The amount of investment enquiries and
Protect Investors’ approvals is testimony to the interest of foreigners to invest in the country. What is
Funds worrying is the very low rate of success ostensibly because of the perceived
country risk. Out of investment approvals of more than US$1,52 billion and
US$2,3 billion in 2016 and 2017, only US$343 million and US$235,4 million were
realised as net Foreign Direct Investment respectively. These statistics show that
the country continues to perform poorly as a proportion of total investment in
Africa of US$59 billion in 2016. Proposals to ring fence foreign investment funds
to offer guarantees against exchange rate therefore are a shot in the arm. There is
also need extend such guarantees to local investors who are also exposed to
exchange rate risks
Provision of 7% The motivation is to provide return on remittable funds currently held in Non-
ax-free savings Resident Transferrable Accounts in respect of in-country funds such as dividends
onds on non- and profits due to non-residents that cannot be immediately remitted as a result of
esident the current foreign currency shortages, such funds can now be invested in tax-free
ransferable funds savings bonds at a coupon rate of 7%.

Foreign currency shortages remain a central problem in the economy. Introducing a

7% tax-free savings bond sounds welcoming on paper but the problem rises when
the investors choose to have physical currency than invest. The inability to access
their funds when needed will erode their confidence.

Enhanced Export
ncentive Scheme
or Horticulture,
Cotton, Macadamia
nd Gold
The scheme which was adjusted to 12.5% for tobacco growers starting this year
shall be tweaked to 10% for horticulture, cotton, macadamia and gold producers
This recognition by the RBZ that the generators of foreign currency need to be
incentivized to continue producing more is welcome. Notwithstanding the need to
promote exports, this measure implies increasing exports through offering an
incentive scheme monetized through bond notes in circulation which can be
inflationary.

ncreasing tobacco The policy announces increment of the tobacco input finance facility from the $28
nd gold support million disbursed in 2017 to $70 million, while the gold support facility has been
acilities increased from $74 million (disbursed to 255entities) in 2017 to $150 million. The
facility is a shot in the arm considering the fact that gold deliveries are on an
upward trajectory from 21.4 tonnes produced in 2016 to 24.8 tonnes produced in
2017. Extending the facility to tobacco also has a positive impact of increasing
exports receipts as gold and tobacco are the top foreign currency earners for the
country.

The pace of getting Zimbabwe re-admitted into the London Bullion Market
Association (LBMA) from which the country can derive comparative advantage to
turnaround its mining sector and the economy as a whole is however discouraging,
especially considering that the country has already met the requirement to produce
at least 10 tonnes of bullion for three consecutive years. In 2017, Gold production
was 24,8 tonnes and in 2016 of 21,1 tonnes were delivered. It therefore defeats
logic that gold is still auctioned through Rand Refineries thus denying the country
an opportunity to benefit from lucrative structures such as forwards and futures,
which normally dominate the trade of the bullion in the international market. The
country can also consider other three major international gold exchange markets
namely America Gold Market, Zurich Gold Market and Hong Kong Gold Market
though LBME market prices have a greater influence on the world gold market
price.

Establishment of The Bank is currently working on a legal framework to operationalize the

Offshore Financial establishment of an offshore financial service centre within the context of the
Service Centre Special Economic Zones (SEZ) programme. These offer favorable economic
climate and taxation levels as well as allowing for the creation of offshore entities
to increase privacy in addition to having complex and detailed legislation
protecting their investors’ assets. However, the drawback is that the apex Bank is
still working on operationalizing the measure which gives no guarantee that the
measure will be successful in 2018.
The Bank intends to prioritize export oriented jewellery production, where the
Purchase of gold jewellery manufacturers shall retain 100% of the foreign currency generated from
or value addition the value added component for use in their business operations so as to enhance the
gold industry’s contribution to the value addition objective. Approved jewellery
manufacturers who meet local demand shall be availed not more than 3 kgs per
quarter through Fidelity Printers and Refiners under a properly monitored
arrangement to guard against abuse of this facility. This measure is in line with the
government policy on mineral beneficiation if well implemented. The challenge
however can be on selecting beneficiary jewellery manufacturers. There is need to
use a demand driven model than restrict the amount of gold to be given to these
manufactures by Fidelity Printers
Enhancing the Ease This measure was necessitated by the need to address concerns raised by both
f Access to business and individuals on the difficulties confronted in accessing these facilities.
Productive Sector It is however not clear on how the Bank intends to ensure that final beneficiaries
Facilities have ease access to funding for them to expeditiously promote production and
exports. Concern has also been raised on inadequate awareness of the facilities
which however is a responsibility of the business groupings or associations.
The Central Bank reviewed upwards the threshold for value of goods that can be
Upwards Review of exported by an individual without completing export forms. Form CD1, has been
Threshold for increased from the current US$1,000 to US$2,000. This measure translates to
Exports by convenience contextualised as “ease of doing export business” and will enable
ndividuals small exporters to expedite their export orders and ultimately improve the inflow
of foreign currency into the country.

Upwards Review of Foreign currency retention threshold for all services and products except gold,
Foreign Currency diamonds, platinum, chrome and tobacco remained at 100% of export receipts for
Retention exporters’ use in their business operations within an extended period of up to 14
Thresholds days from the receipt of funds. The retention threshold for private owned diamond
firms, platinum and chrome producers has been increased from 20% to 35% whilst
that for gold, public owned diamond firms and tobacco remain as per current
policy. The revision comes at a time when the Reserve Bank forex backlog is
worsening, as ot is reported to be now stretching as far as 12 months. The backlog
was estimated at US$600 million in May 2017 and the RBZ cannot assure
importers of timely disbursements of hard currency upon request to facilitate
external payments. Retention thresholds of less than 35% help to facilitate effective
allocation of foreign exchange, as well as spread liquidity to guarantee equity in
foreign exchange distribution. Zimbabwe generates about 60 percent of foreign
currency earnings from mineral exports.
Downward Review Reducing export charge from $50 to $20 per export transaction has a positive
f Cost of Export impact in promoting exports. The currently high charge reduces the marginal utility
Documents to export by individuals. In addition to reducing cost, there is need to reduce the
number of documents to export reported at 7, according to the World Bank
collection of development indicators as well as simplifying export procedures as
part of doing business reforms the procedure.

Establishment of an The Bank has established a desk to assist those in the diaspora to get involved in
nvestment Desk to the investment opportunities within the national economy. Zimbabwe last year
Cater for the received a staggering $1 billion from remittances. At a macro level, flows of remittances
Diasporans could improve the balance of payments and bolster a country’s foreign exchange reserves. By
stimulating savings, remittances can also have an impact on financial development
and foster long-term economic growth.

ssuance of
Diaspora Tobacco
& Gold Production
Financing Bonds
A diaspora bond is a debt instrument issued by a country to raise financing from its
diaspora community. Diaspora bonds are different from foreign currency deposits
(FCDs) that are used by many developing countries to attract foreign currency
inflows. Diaspora bonds are typically long-dated securities to be redeemed only
upon maturity in which migrants receive discounts on government debt from their
home countries. If successfully implemented, the measure can raise exports
receipts in the country. Israel and India have raised $35-40 billion each using these
bonds per year. However, many factors must be apparent for these bonds to be
successful including financial stability, international support, widely recognized
credit ratings and the structure of the bond itself. There is also need for the country
to prove that indeed it is open for business by fighting corruption which was the
main reason why the Ethiopian Diaspora bond failed in 2008. The most recent
attempt at raising funds through diaspora bonds has come from Nigeria, which
recently considered doubling its initial $100 million issuance.

ncentive for In an effort to facilitate inward investments by Zimbabweans in the diaspora,

Diaspora Zimbabweans in the diaspora can open Diaspora Investment Accounts with local
nvestments banks of their choice. The 7% Diaspora Remittance Incentive has got light in
Accounts in increasing the willingness to invest by local citizens who are in the diaspora. The
Zimbabwe diaspora can make a huge contribution towards building physical capital and
productivity, and ultimately helping to boost job creation, living standards, and
higher growth. What is needed is tailor-making incentives to their needs, reducing
remittance cost and communicating/raising awareness thorough their diaspora
networks
This measure is intended to further promote the use of plastic money which
Further Promoting significantly grew by 210% in 2017 from the 2016 position to reach a coverage of
he Use of Plastic more than 80% of total retail transactions in the country. Plastic money enhances
Money Towards a the ability for the government to track spending and business revenues and thus
Cash-lite Society creates better tax visibility. China is leading the world in online payments and its
growth remains strong, with iResearch reporting that online payments soared in the
first quarter of 2017. Mobile payments over the period grew 113.4%, to 22.7
trillion yuan and other online payments reached 6.4 trillion yuan, up 56.1% on
2016. The use of plastic money is therefore in sync with some other emerging
economies’ technology.
Strengthening The Bank is putting in place measures to ensure that the lending limit to
Financial Government does not exceed the regulated 20% of the previous year’s revenue of
Credibility the State. This measure is necessary to comply with good corporate governance and
to mitigate the unintended consequences of excess government overdraft on the
economy. Government is reported to have accrued a $1,2 billion overdraft instead
of $800million which points to fiscal indiscipline.
Acceptance of 99- Agriculture is the backbone of the economy of Zimbabwe and it contributed 14.6%
Year Land Leases to economic growth in 2017. Making the 99-year land leases acceptance by banks
s Security by can boost the agricultural sector. This will allow the private sector to play a
Banks dominant role in agriculture financing. Given that the government is heavily
constrained, it should leave the financing aspect to the private sector while it
concentrates on creating favourable policy and regulatory framework and one way
to do it is by resolving the issue of bankability of land leases.

Weaknesses/Areas of improvement

§ The monetary policy failed to acknowledge the basic fact that the RBZ overdraft at $1,2 billion and quasi fiscal activities were responsible for
influencing inflation in the economy. The RBZ is slowly drifting back to the era of quasi fiscal activities (Quasi-Fiscal Activities (QFA) are
defined as operations and actions whose effect can and should be in principle be carried out by budgetary measures in form of explicit tax,
subsidy or direct expenditure) . The Reserve Bank of Zimbabwe must stop engaging in quasi-fiscal activities and focus on private sector growth
to help economic recovery. QFA create contingent implicit liabilities which the government is expected to fulfil there by mortgaging the nation’s
future without proper approval and end up being funded by borrowings which leads to increased money supply.

§ The statement reiterates the calls for investors to consider investing in Zimbabwe, with the mantra “Zimbabwe is open for business” after changes
in the national cockpit. In line with this openness, the RBZ must resume public auctions of TBs if there is need to raise money required to
finance the government through Open Market Operations (OMOs) and move away from private placements in order to enhance transparency.
Directly conducting private investors to take up Treasury Bills to raise funds has got disadvantages of being inflationary and that system does
not guarantee a defined yield gap. Public Auction system guarantees a proper yield gap. Moreover, the Central Bank must continuously update
the nation on the amount of Treasury Bills that are in the market to stamp out speculation and promote transparency

§ The Monetary Policy is silent on specific measures to resolve the biting cash crisis which has resulted in foex premiums in the parallel markets
and the three tier pricing system in the economy. Reference is only made to the need for businesses to show respect to consumers and in making
this request, the RBZ was fully aware that the cash challenges in Zimbabwe are inextricably linked to the performance of the broader economy.
It is therefore paramount to mention that no matter what currency the country adopts, it is bound to suffer the same fate if the economy is not
performing. As such, a sustainable currency solution should be based as well as supported by the economic rebalancing imperative — increasing
production and exports whilst simultaneously reducing consumption and imports. The RBZ maintains that certain fundamentals should be in
place before this economic imperative is implemented. One of the apex bank’s key fundamental requirements is the attainment of three months
import cover, which is, of course, a downward revision from their previous cover of one year, ostensibly to reconcile with the Ministry of
Finance’s position. The indication by the RBZ that the roadmap for currency reform in Zimbabwe will be predicated on a Currency Board (CB)
and/or Gold Standard (GS) is quite sensible in view of the commodity-based nature of the Zimbabwe economy. It is quite easy to base the
currency on a commodity or commodities such as gold or tobacco. This way, we can forward sell of these commodities and unlock significant
billions of dollars to support the currency and rebuild the economy. That is why it is always important to have proper financing and marketing of
our commodities mainly gold and tobacco

§ It remains to be seen if the 2018 Finance Bill which makes these malpractice of multi-pricing and the refusal of plastic money illegal will be
effective. Experience has always pointed to the need to address economic fundamentals than rely on legislation which in itself if difficult to
enforce. It is also important to note that Zimbabwe can only move to a cash lite than a cashless society. The level of efficiency in Zimbabwean
payment technologies does not guarantee smooth and seamless services. Moreover, a cash lite society reduces transactional costs which
undoubtedly contributed to the spike in inflation in the last quarter of 2017.

CONCLUSION

Parliament comments the Reserve Bank for proposing monetary policy measures couched around boosting confidence and providing hope for
the future amidst an optimistic environment brought about by the coming in of the new dispensation. Moreover, the harmony between this
monetary policy and fiscal policy is commendable. The success of the proposed measures however depend on consistency with which
government approaches these measures. After such an austerity driven policy framework, what remains to be seen is real action on the ground
consistent with the mantra’ Zimbabwe is open for business.” Another underlying critical success factor is financial discipline. There is need for
concerted efforts to reduce the fiscal deficit while the RBZ needs to adhere to the set borrowing limit of 20% of the total revenue of the
previous year (RBZ Act Section 11(2)] to ensure financial stability and reduce spiraling of the country’s stock of domestic debt.

ANNEXES

ANNEX 1: Performance and Impact of the export incentive Scheme

Sector Export receipts Incentive amounts Bond Notes Issued to Banks (USD)
(USD) (USD)

Mining excluding gold 2,645,809.356 58,268,089 56 000 000

Services 744,571,608 37,233,513 35 000 000
Agriculture excluding Greenleaf Tobacco 426,171,579 21,308,579 20 000 000
Manufacturing 342,711,939 18,016,967 17 500 000
Other 37,152,463 1,857,624 1 800 000
Subtotal 4,196,416,945 136,684,772 130,300,000
Tobacco Growers 1,202,247,760 59,700,402 59 700 402
Gold - Producers 1,282,023,093 59,313,208 59 200 000
Diaspora Remittances 782,193,277 41,504,573 40 999 600
Grand Total 7,462,881,075 297,202,955 290,200,000
Source:RBZ

ANNEX 2: Payment System Transactional Activities for 2016 and 2017

Payment Streams 2016 % 2017 Proportion of total
2017
RTGS 48,109,325,214.79 69.51 61,719,667,657.05 63.28%
CHEQUE 113,083,273.59 0.16% 69,437,643.79 0.07%
POS 2,898,437,870.85 4.20% 6,635,840,710.92 6.77%
ATMS 2,283,533,146.98 3.32% 427,973,605.99 0.44%
CASH 74,83687,051 10.84% 3647133052 3.69%
WITHDRAWALS
MOBILE 5,815,862,225.76 8.38% 18,020,733,457.33 18.46%
INTERNET 2,503,914,145.97 3.61% 7,021,588,382.39 7.29%
TOTAL VALUE 69,207,842,928.94 100% 97,542,374,509.48 100.00%

Source: RBZ

ANNEX 3: Financial Inclusion Indicators - Dec 2016-17

Indicator Dec 2016 Dec 2017 Change %
Value of loans to SMEs ($m) 131.69 146.22 11.03
Percentage of loans to SMEs over total loans 3.57% 3.75% 0.18
Number of SMEs with bank accounts 71,730 76,524 6.68
Number of Women with Bank Accounts 769,883 935,994 21.58
Value of Loans to Women ($ m) 277.30 310.78 12.07
Number of Loans to Youth 38,400 61,529 60.23
Value of Loans to Youth ($ m) 58.41 138.93 137.85
Total number of Bank Accounts 1.49 m 3.07 m 106.04
Number of Low Cost Accounts 1.20 m 3.02 m 151.67

Source: RBZ

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