HomeAnalysisA synopsis of mid-term monetary policy

A synopsis of mid-term monetary policy

Reserve Bank of Zimbabwe Governor John Mangudya delivered a productivity-oriented mid-term Monetary Policy Statement on August 3 2017.

Kipson Gundani

The statement is framed around stimulating the national economy with a vision for Zimbabwe to regain its status of being the bread basket of Africa. This is ostensibly to adopt a sustainable growth model that moves the country from the consumptive mode to one of a productive and high exporting country.

There is acknowledgement that this new economic development model calls for fundamental structural reforms in addressing the well-known and documented macroeconomic problems the country is facing. The statement, themed “produce and create,” came at a time when the country expects to leapfrog in terms of agricultural output buoyed by the above normal rainfall the country has been receiving which complemented the command agriculture scheme the government undertook in 2016.

This review, which was expected to usher in some hope with respect to the easing of cash shortages and foreign currency pressures, was presented against a background of high national debt, high country risk with respect to foreign direct investment, poor export competitiveness, lack of fiscal consolidation, sluggish economic growth, and persistent current account deficit.

Mangudya is ardently confident that agriculture, mining and tourism will stimulate economic growth to 3,7% in 2017.

Economists concur that any economic growth that is less than 5% will not translate into any meaningful change in the lives of ordinary citizens, and this has been the trend since 2012 when Zimbabwe last registered significant economic growth of 10,6%.

At the same time, there is also an urgent call to embark on structural reforms for sustainable and diversified economic growth, and steer the economy away from embryonic sectors such as agriculture and mining.

Policy measures

The central bank governor introduced a raft of measures in attempting to correct the disequilibrium in the economy. The measures enunciated include a portfolio fund, an enhanced nostro stabilisation facility, limits on exports of cash, diaspora remittances incentive, refocussing the Industrial Development Corporation as well as the expansion of the bond notes facility. Below is an attempt to predict the likely impact of each policy measure.

Establishment of Portfolio Fund

The fund will be in place with effect from 1 September 2017 and is meant to facilitate the efficient repatriation of portfolio and related funds to foreign investors invested specifically on the Zimbabwe Stock Exchange (ZSE) and will be administered on a pro-rata basis. Foreign portfolio flows have provided both liquidity and stability on the market which has been positive for not only listed firms but also the country as a whole. This is a direct consequence of the inefficiencies associated with the RBZ import prioritisation. More importantly, repatriation of foreign exchange for securitiesrelated transactions was not supposed to be a major source of worry. What exacerbates the problem is the stampede to repatriate the earnings due to a confidence gap in the economy. The fund in isolation will not cool down the nerves of such investors.

In order to ease pressure on the international payments system, the RBZ has negotiated for an enhanced nostro stabilisation facility of US$600 million from Afreximbank. The facility is meant to assist in managing the cyclical nature of Zimbabwe’s foreign currency receipts, and will be available for drawdown after the closure of the tobacco selling season towards the end of August.

In order to ensure that the nostro stabilisation facility is supported by a continuous stream of export receipts, and by so doing, improve the efficient utilisation of foreign exchange and bring equity in the foreign exchange market, foreign exchange receipts from platinum and chrome shall also be treated in the same manner as gold, diamonds, tobacco and cotton.

This policy measure, which is with immediate effect, is consistent with best practice in other jurisdictions that include Angola and Nigeria where fuel foreign exchange receipts are managed by the central banks, just like what diamonds are to the Bank of Botswana and copper to the Bank of Zambia.

Whether this facility is adequate or not to meet the country’s annual import bill of over US$6 billion remains unknown. Time will tell. Furthermore, though this is a noble initiative, its sustainability is in in doubt given underlying pressures to the nostro accounts, making export expansion the ultimate solution.

Export competitiveness

The major highlight of this month’s monetary policy announcement is the proposal to introduce additional US$300 million bond notes as an export incentive, as well as easing cash shortages. The additional injection of bond notes will be accessed under a “standby liquidity support” from the Afreximbank. To date, Zimbabwe has drawn down US$175 million from the initial $200 million Afreximbank facility to give exporters incentives as well as dealing with foreign currency challenges.

Mangudya is on record as saying this scheme has resulted in 14% rise in export receipts. One question that comes to mind is how it happens that a “standby facility” is 150% higher than the initial facility. The concern is that Mangudya’ s access to this bond notes facility seems unlimited, and might send the country back to the 2007/08 era of high inflation and runaway exchange rate that was driven by unrestricted or huge money supply. Speculation in some quarters is about huge premiums for the US dollar with the coming of additional bond notes. Currently, the US dollar is attracting a premium of 30% against the bond notes.

At the same time, three-tier pricing system is expanding, despite being illegal. Three neighbour tier pricing system is where commodity suppliers are charging three different prices for the same product, and these prices vary if the buyer is using foreign currency, bond notes or point of sale machine (POS). In fact, continued issuance of additional bond notes will fuel the parallel market and inflationary pressures, and subdue the efficacy of the multi-currency regime.

This is also coming at a time when there have been a series of complaints relating to exportation of the bond notes to neighbouring countries. More bond notes will certainly crowd out remaining US dollars and at the same time the bond note is expected to discover its true price, implying the parity to US dollar might not hold even in the formal businesses.

Aftrades as Lender of Last Resort

Following the maturity and full settlement of the US$200 million initial African Export-Import Bank Trade-Backed Securities (Aftrades) on 13 February 2017 and the positive impact this had on the interbank market, the bank has renewed the facility at an enhanced level of US$400 million for another two years to mature in 2019. Already, more than 75% of that amount has been subscribed. This facility is the bank’s lender of last resort window wherein the Zimbabwe country risk is transferred offshore to Afreximbank. The facility has managed to bring stability within the banking sector over the past three years as banks are able to borrow from this window to support their liquidity requirements through the bank. However, the increasingly biting liquidity constraints have become a real constraint to the well-functioning of the interbank market.

Export of cash

The carrying of foreign currency cash on person per exit from Zimbabwe has been reviewed to an equivalent of US$2 000 per individual per exit from US$1 000. Amounts in excess of this amount require prior authorisation from Exchange Control through normal banking channels. This is therefore a slight relief on travellers. However, this may also fuel exportation of hard currencies, exacerbating the liquidity position of the country.

Circulation of money

The current stock of money in circulation in Zimbabwe is made up of bond coins ($25 million), bond notes ($175 million) and multi-currencies dominated by the US dollar at approximately $800 million, to give a total of around $1 billion. This quantity of money in the economy is quite sufficient to support the usable bank balances, as measured by the RTGS balances, currently sitting at around $1.6 billion within the banking system. The amount of money in circulation is around 62.5% of RTGS balances and/or 15.5% of the total deposits as measured by M2 of around $6.2 billion.

For all intents and purposes, and in line with international best practice, the money in circulation in the Zimbabwean economy is sufficient to support money supply as measured by M0, M1 or M2. What therefore makes the situation in Zimbabwe unique is that money in the economy is not circulating efficiently within the formal economy. It is confined to the informal sector and/or the parallel markets. This inefficient circulation of money is a root cause of shortages of cash in the formal economy and the banks.

Savings bonds

To encourage individuals, families, households, small and medium enterprises, schools, universities, public and private institutions, corporates, churches and investors in general, to start saving and to nurture a culture of saving and building national wealth, the RBZ has developed a Savings Bond which offers simplicity and guaranteed returns with minimum investment from as little as $1 00 with no commission, agency or service fees. The Savings Bonds will help to accelerate the empowerment of the banking public by providing an investment instrument with high-yielding returns as well as offering safe and secure investment. The Savings Bonds will be made available through banks, selected agencies and electronically on a platform to be established. The bonds will be accepted as collateral on all borrowings and convertible to cash on a simple, open and transparent fixed conversion rate on any trading day.

Reduction of licence fees

The reduction of licence fees for authorised dealers is intended to increase competition in the remittances market and increase remittance access points.

In order to ensure the efficient and effective utilisation of foreign exchange, authorised dealers are being reminded to continue to exercise financial discipline and integrity in the allocation of foreign exchange among competing demands. In this regard, Authorised dealers should prioritise the importation of raw materials and other inputs, critical for increasing local production and exports, a key component for the revival of the national economy.

Diaspora remittances incentive

The Diaspora Remittances Incentive (DRIS) has attracted international remittances to flow through formal channels, but informal remittances are still high. The remittances market also has a high appetite for cash as the majority of recipients are not banked. In order to enhance financial inclusion for remittances recipients, the central bank will increase the DRIS for remittances received through banking or wallet accounts from 3% to10%, with effect from August 2017. The incentive for Money Transfer Agencies and remittances received as cash shall remain at 2% and 3%, respectively.


While the Monetary Policy Statement digresses from its traditional function of interest rate adjustment through open market operations, there is some hope on its continued effort to improve foreign currency generation and ease cash shortages.
However, a lot needs to be done to improve the infrastructure and stability of the electronic payments system, confidence in Mangudya and the banking system, suspicion over additional bond notes, and economic structural reforms. It is also high time the role of the manufacturing sector became significant in the economic growth discourse.

Ironically, the manufacturing sector contributes less than 5% to foreign currency receipts, and around 13% to economic growth, yet its industry leaders are the loudest in terms of foreign currency allocation and protection from import competition.

Ultimately, dealing with the two great forces at play — fiscal deficit and market indiscipline — in the national economy is critical. While fiscal deficit is necessitating the creation of money, market indiscipline is withdrawing that money from the system, thereby undermining the efficient circulation of money.

Kipson Gundani is the chief economist of Buy Zimbabwe. The views expressed in this paper solely belong to the author. The aim is to provide independent professional advice as well as objective in-depth analysis of monetary and other economic policies in Zimbabwe. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) cell +263 772 382 852 and email kadenge.zes@gmail.com.

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