MONETARY POLICY STATEMENT
STRENGTHENING THE MULTI-CURRENCY SYSTEM FOR VALUE PRESERVATION & PRICE STABILITY
01 OCTOBER 2018
TABLE OF CONTENTS
SECTION 1: EXECUTIVE SUMMARY
SECTION 2: POLICY MEASURES
SECTION 3: CONCLUSION
SECTION 1: EXECUTIVE SUMMARY
This Monetary Policy Statement is issued in terms of Section 46 of the Reserve Bank of Zimbabwe Act [Chapter 22:15], which requires the Governor of the Reserve Bank to produce a Statement of Monetary Policy giving an account of the monetary policy measures pursued in the preceding six months and the new measures to be pursued in the subsequent six months’ period. The Monetary Policy Statement thus gives the Bank an opportunity to reflect on its past achievements and the basis to further fine-tune the financial system in order to achieve the Bank’s mandate of maintaining price and financial stability which is the bedrock for economic development.
The Statement comes at a time when the economy is expanding on account of high consumer demand, increased business confidence within the national economy and positive expectations following the peaceful completion of the electoral process and the subsequent formation of a new lean cabinet led by His Excellency, President E. D. Mnangagwa. The country showed strong resilience to adverse inflationary pressures and speculative tendencies which characterized the run-up to the harmonized election period. Moreover, the economy has also been resilient to the negative effects of escalating foreign currency premiums, which have been a key driver of inflationary pressures.
Developments during the first half of 2018 were encouraging. We are optimistic that the economy will surpass the initial growth projection of 4.5%, and register growth of around 5% this year. This optimism is underpinned by better-than-anticipated performance across the key sectors of the economy, in particular agriculture, mining, tourism and manufacturing during the first six months of the year. In agriculture, tobacco outperformed initial projections to record output of 250 million kilograms in 2018. This is the highest tobacco output ever produced in Zimbabwe. This compensated for the expected lower maize output due to poor rainfall patterns at the beginning of the rainy season. In the first half of 2018, there was also significant growth realized in respect of gold, platinum, chrome and coal, among other key minerals. The good performance in agriculture and mining is expected to result in spillover effects in other sectors of the economy, such as manufacturing, distribution and services, thus cumulatively resulting in expanded national output in 2018.
The Bank has continued to work on efforts to improve the foreign currency situation currently bedeviling the economy, while at the same time keeping in check the adverse inflationary expectations emanating from the parallel market activities and multiple pricing mechanisms which are a result of deep seated disparities within the economy. The Reserve Bank has been working on supply-side measures to address some of the disparities through the nostro stabilisation facilities, which saw some improvement in the foreign currency situation in the economy. Demand pressures attributable to fiscal imbalances have, however, continued to increase the supply of money within the economy, thereby eroding the gains and putting too much pressure on prices and the foreign currency market as evidenced by the thriving parallel market rates. Despite these pressures, the Bank expects inflation to remain within the SADC healthy inflation benchmark of not exceeding 7%.
The Bank is also encouraged by the quantum leap in the usage of plastic money, electronic and mobile money payment systems, by the Zimbabwean public. Specifically, the Bank’s plastic money policy thrust has been a resounding success as shown by the unprecedented increases in value, volume, devices and access points, which has seen the usage levels rising to above 95 percent of retail transactions – now one of the highest in the region. Government will continue to invest heavily in expanding the electronic payment infrastructure, as the economy continues to move towards a cash-lite society.
The positive expectations under the new Administration provide an antidote for anchoring the adverse inflationary expectations and negative investor perceptions, which had characterized the economy in the past years in undermining the economy’s growth potential. Indeed, the country is witnessing a paradigm shift both on the economic policy and political fronts, which is critical in breathing a new growth impetus to the economy. The package of reforms that have been put in place by Government since November last year provides a strong springboard upon which the economy is showing great signs of sustained recovery. Accordingly, this Monetary Policy Statement seeks to cement these reforms, by putting in place measures to strengthen the multi-currency system in order to safeguard financial and price stability which is important for sustainable economic growth envisaged in Vision 2030 of becoming a middle income country with a per capita income of US$3500 that equates to a Gross Domestic Product (GDP) of around US$65 billion. Strengthening the multi-currency system is also critical as the economic pre-requisites to contemplate currency reforms are not yet in place.
It is against this background that the Bank shall continue with its supply-side efforts, aimed primarily at increasing the productive capacity of the economy and foreign currency generation, while continuing to advocate for the reduction of fiscal imbalances as a panacea for right sizing or rebalancing the economy. Measures in this Monetary Policy Statement would therefore need to be supported by a package of measures to reduce fiscal imbalances that are exerting pressure on money supply and hence inflation as a result of increased consumer spending which in turn requires increased foreign currency inflows. The country needs to live within its means.
SECTION 2: POLICY MEASURES
- Strengthening the Multi-Currency System by introducing separate FCA accounts for Nostro and RTGS funds.
In February 2018, the Bank introduced a policy that requires banks to ring-fence foreign currency for foreign exchange earners that include international organizations, diaspora remittances, free funds, export retention proceeds and loan proceeds. Numerous enquiries received by the Bank point to the fact that this policy has not been implemented by some banks on a transparent basis that promotes confidence within the economy. With immediate effect, all banks are therefore directed to effectively operationalise the ring-fencing policy on Nostro foreign currency accounts by separating foreign currency accounts (FCAs) into two categories, namely Nostro FCAs and RTGS FCAs.
Accordingly all banks are directed to use their know-your-client (KYC) principles to comply with this directive to separate the accounts without requiring their clients to complete any other documentation other than for new bank accounts. Banks have been provided with a period of up to 15 October 2018 to fully comply with this policy measure. Banks are also expected to provide reasonable deposit rates on the Nostro FCAs in line with international best practice on such accounts.
This policy measure is expected to encourage exports, diaspora remittances, banking of foreign currency into the Nostro FCAs and to eliminate the commingling or dilution effect of RTGS balances on Nostro foreign currency accounts. The relationship between the two categories of the FCAs shall continue to be at parity. This is essential in order to preserve value for money for the banking public and investors during the transition to a more market based foreign currency allocation system that shall be implemented once the economic fundamentals are appropriate to do so.
As a further support to this measure and to provide credit enhancement or deposit protection for the Nostro FCAs, the Reserve Bank is finalising discussions with the African Export-Import Bank (Afreximbank) towards a US$500 million Nostro Stabilisation Guarantee Facility (NSGF) to provide Nostro FCA holders with assurance that foreign currency shall be available when required by the account holders. The NSGF which will be similar to the AFTRADES Facility that guarantees interbank trading in Zimbabwe is targeted to be in place by the end of October 2018.
For the avoidance of doubt, foreign currency in the Nostro FCAs pertains to free funds, diaspora remittances, international organisations’ remittances, portfolio investment inflows, loan proceeds and export retention proceeds. It is also essential to note that all exporters retain 100% of their export proceeds with the exception of gold producers that retain 30% of export proceeds; platinum, diamonds and chrome 35% and; 20% for tobacco and cotton producers.
- Credit Lines for Strategic Requirements
The Bank has finalised putting in place facilities in an amount of US$500 million to cater for importation of strategic requirements that include fuel, electricity, cooking oil, wheat, packaging, etc. The facilities are from Gemcorp US$250 million, Afreximbank US$150 million and Afrigrain US$100 million. These facilities are over and above the US$100 million from CDC/Standard Chartered Bank, US$100 million from Ecobank, US$30 million from IDC of South Africa to Agribank and US$25 million from the African Development Bank (AfDB) to CABS Building Society.
The Bank is also negotiating with a number of international financial institutions for medium to long term financial facilities that are needed to continue to bring sanity in the foreign exchange market and to assist in the sustainable recovery of the economy. This is in addition to the external resource mobilisation programme being vigorously pursued by Monetary Authorities to clear the country’s external debt arrears to various creditors.
- Foreign Payment Transactions.
In order to minimize incidents of externalization of foreign currency, the following measures, which are in line with international best practice, have been put in place for banks and the banking public to adhere to:-
- Use of Letters of Credit (LCs) for high value transactions.
- All imports to be supported by invoices whose banking details match with the payee’s name and bank account details.
- Strict adherence by banks to customer due diligence (CDD).
- Export proceeds to be remitted on a timely basis in line with existing rules and regulations.
- Purchase of Fuel in Zimbabwe by Foreign Truckers in Foreign Currency
It has come to the attention of the Bank that foreign truckers plying the Zimbabwean routes are involved in foreign currency arbitrage activities in Zimbabwe by trading in the parallel market of foreign currency and purchasing fuel in Zimbabwe at the official rate of exchange. In order to deal with this rent seeking behaviour, with immediate effect, all foreign truckers plying the Zimbabwean routes shall pay for their fuel in Zimbabwe in foreign currency.
The same shall apply to foreign traders buying goods in Zimbabwe for sale in the neighbouring countries.
- Purchase of Gold by Jewelers in Foreign Currency.
The current policy provides that where a jeweler purchases gold from Fidelity Printers and Refiners (FPR) using RTGS funds, upon export of the jewelry, the jeweler retains 35% of the gross export value for own use. The 65% balance is transferred to the Reserve Bank Nostro account for national requirements.
In order to mitigate against arbitrage opportunities or abuse of this facility, with immediate effect, all purchases of gold by Jewelers from FPR shall be in foreign currency and that Jewelers shall retain 100% of their export proceeds.
- Settlement of Capital Gains Tax in Foreign Currency when using Offshore Funds.
In February 2018, the Bank introduced a policy that allows individuals, with justification, to sell their immovable properties to buyers using offshore funds and, in some instances, to retain the sale proceeds offshore provided prior Reserve Bank approval is obtained. The policy has been well received by the real estate sector and the Bank wishes to enhance the efficacy of this policy by ensuring that all sellers of immovable property to buyers with offshore funds are required to pay Capital Gains Tax from offshore sources into a ZIMRA Designated Nostro FCA. Evidence of payment shall be required during ZIMRA interviews to enable issuance of tax clearance certificate.
- Cross Border Investment and Offshore Capital Raising Initiatives.
The Reserve Bank fully supports the presence of local businesses in the region and across the globe for purposes of expanding markets and raising funds to support local operations.
In order for the country to derive maximum benefits from offshore investments undertaken by local entities, going forward, all offshore investments in the form of offshore holding companies intending to dispose of part of their shares to foreign investors shall be required to repatriate all the realized proceeds to Zimbabwe. In cases where the offshore holding company intends to expand into other countries, a minimum portion of raised capital equal to the level of dilution should be remitted to Zimbabwe to support local operations.
- Introduction of Statutory Reserve Requirement to mop up excess liquidity
Given the increased creation of money within the economy mainly as a result of fiscal imbalances, the Bank shall be introducing the statutory reserves requirement with effect from 1 November 2018 at a level of 5% on RTGS FCAs on a weekly compliance basis in order to mop up excess liquidity from the market.
The AFTRADES window shall remain in place as a lender of last resort facility to cater for financial institutions that require accommodation.
The Table below shows the statutory reserve requirement levels for some of the countries in the region and beyond for comparison purposes.
Statutory Reserve Percentages for Selected Countries
|Southern African Countries||Reserve Ratio (%)|
|United States of America||3.00|
- Issuance of Treasury Bills (TBs) Through an Auction System.
In order to promote transparency in the issuance of TBs, with effect from 1 November 2018, the Bank shall be inviting tenders on behalf of Government, for investors to participate in the auction system of TBs.
- Continuation of RBZ Savings Bonds
The Bank shall continue to use Savings Bonds for mopping up excess liquidity from the market. As at 31 August 2018 the Savings Bonds had raised $1.5 billion.
- Construction Finance Facility.
The Reserve Bank has expanded the productive sector facilities to include the establishment of a $50 million Construction Finance Facility for retooling and working capital requirements for the construction industry in line with the growing economy. This facility, like all other facilities, shall be disbursed through normal banking channels with an all-inclusive interest rate of 10%.
- Strengthening the Monetary Policy Committee
The Bank is in the process of strengthening the Monetary Policy Committee (MPC) to provide an effective process for Monetary Policy in line with best practice.
- Capitalisation of Banking Institutions
As the capital deadline approaches, banking institutions are required to revisit their respective capitalisation plans to ensure compliance with their preferred strategic tier capital requirements on the set date, and submit revised plans to the Reserve Bank by 30 June 2019. For the avoidance of doubt, the following minimum capital requirements shall apply with effect from January 2020:
Minimum Capital Requirements
SECTION 3: CONCLUSION
The policy measures proffered in this Statement are designed to boost confidence and transparency in the foreign currency market and to rein in inflation by mitigating against rent seeking behaviour and mopping up excess liquidity within the economy. The measures are necessary as a starting point towards right sizing or rebalancing the economy. Rebalancing the economy requires tough and painful measures to deal with the root causes of the economic challenges facing the Zimbabwean economy. A package of measures that includes reducing fiscal imbalances to manage high consumer spending; increasing productivity and exports; fast-tracking the State Owned Enterprises reform programme and enhancing access to foreign finance are the most critical policy measures that are required to right sizing the economy. Currency reforms without the implementation of these tough but necessary measures will be tantamount to putting the cart before the horse which will produce undesirable unintended consequences.
The Bank is therefore pleased that these monetary policy measures are coming at a time when Government has made it a priority to deal with fiscal imbalances that continue to put pressure on inflation, the financial sector and the foreign currency market. Commitment by Government to deal with the adverse effects of fiscal deficit on the economy is critical to contain the significant mismatches between the electronic money balances and foreign currency reserves. This is quite urgent and essential because the genesis of money creation and pressure on the currency is fiscal. Money creation is not caused by mediums of exchange that include mobile banking platforms (Ecocash, OneMoney, Telecash), internet banking, RTGS or bond notes. Mediums of exchange are used to facilitate trade of goods and services or to withdraw or access money from banks and other banking platforms. Mediums of exchange per se do not increase the quantity or stock of money in an economy.
The Bank is encouraged by the positive response by exporters to the export development initiatives that the Bank has put in place. The growth in export production and exports has been significant. The same is true for the financial inclusion initiatives that the Bank has been pursuing through timely provision of targeted empowerment facilities to interest groups such as women, SMEs, the youth and the disabled. These facilities have had significant impact in supporting broad-based and inclusive growth for both local consumption and export generation. As part of the National Financial Inclusion Strategy, the Women’s Microfinance Bank and Empower Bank are now operational. These special banks will help in improving access to formal financial services by women and youth, who fall under the country’s marginalised groups, and hence the majority of the previously financially excluded population.
The Bank and the Ministry of Finance and Economic Development are continuing to give priority to the re-engagement programme on the basis of the 2015 Lima, Peru, arrangement for the clearance of external debt arrears which are a great hindrance to accessing long term finance from the International Financial Institutions (IFIs) for sustainable economic development. Detailed debt sustainable models and options are being examined to ensure that in the short to medium term the arrears are settled.
I THANK YOU
JOHN PANONETSA MANGUDYA
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