JULY 2014

MONETARY POLICY STATEMENT


BACK TO BASICS
Setting the tone for Zimbabwe’s Economic Recovery


BY

DR J.P. MANGUDYA
GOVERNOR

FOR IMMEDIATE RELEASE

TABLE OF CONTENTS


ROLE OF RBZ UNDER THE MULTIPLE CURRENCY SYSTEM...

Banker and Financial Advisor to Government


Supervisor of Bank Use Promotion & Suppression of Money Laundering


Absolute Amnesty to Exporters with Non-Recoverable Overdue Export Proceeds 59
Conditional Amnesty to Exporters with Recoverable Overdue Export Proceeds ... 62
Removal of Approval Requirements on Importation of Foreign Currency Notes by
Consolidated Framework for Review of External Loans and Foreign Investments .. 74
Removal of Restriction on the Participation of Foreign Investors on the Bond Market 76
Promotion of Securities Trading Efficiencies and Enhanced Risk Management ... 78
Renewal of Authorised Dealership Licence and Exchange Control Compliance Rating

MEASURES TO BUTTRESS THE MULTIPLE CURRENCY SYSTEM ... 81


APPENDIX

TABLES


FIGURES/GRAPHS


INTRODUCTION

1. My maiden Monetary Policy Statement is issued, in terms of the Reserve
Bank of Zimbabwe Act [Chapter 22.15] Section 46, at a time the nation is
seeking for solutions to deal with the challenges besetting the economy. I
feel greatly honoured to have been given the opportunity to serve the country
as Governor at this juncture in the history of Zimbabwe. At a time the nation
needs to work as a team to confront the challenges facing the economy. We
are in it together as a nation. We cannot be bystanders. We need to put in
place bold and pragmatic measures for the recovery of the economy. This is
our motherland where no one else is going do to it for us. We are by
ourselves. We are the people whom we have been waiting for.

2. It is undeniably clear that the indisputable panacea to the challenges that the
economy is facing is to stimulate PRODUCTION for economic recovery
through pursuing consistent, transparent and predictable economic policy
measures. This compels the nation to go BACK TO BASICS in order to
effectively tackle the challenges.

3. We need to increase production of goods and services in this economy in
order to increase economic growth, employment, exports, tax revenue, tax
base and liquidity. Economic growth is key to economic prosperity and
poverty reduction. Zimbabwe has come a long way and too many things
have happened and said about this country, good and bad ones. We now
need to move forward without looking backwards. Whatever made us to
be where we are today should now be treated as history. The time to move
forward to achieve the goal of economic prosperity is now. It's doable. We
can do it. We must do it.

4. It is against this backdrop that this Monetary Policy Statement, which takes
into account the objectives enunciated in the economic blueprint, Zimbabwe
Agenda for Sustainable Socio-Economic Transformation (ZimAsset), is
being presented to give impetus to economic recovery as was recently
proclaimed by His Excellency, the President, Cde R. G. Mugabe.

5. The solutions being proffered in this Statement require a TEAM
ZIMBABWE Approach and BACK TO BASICS values/principles to
pursue the ZimAsset shared vision of "Sustained Growth of the Economy
for the betterment of Zimbabweans" and to become a middle income
country by 2020. The BACK TO BASICS values include;

Respect of the rule of law;
Respect and love of each other as patriotic Zimbabweans;
Respect the environment;
Policy clarity, consistency, transparency and predictability;
Nurture positive business culture;
Nurture productive work ethics and culture to take responsibilities;
Visible fight against corruption, smuggling and profiteering;
Inculcate a culture of paying (bills, loans, duties, etc); and
Good citizenship.

6. As Monetary Authorities, we are confident and optimistic that the above
back-to-basics and discipline principles are achievable. We have, as
Zimbabweans, done it before and there is no reason to think otherwise. We
need to be positive and minimize negativity in order to turn around the
fortunes of this economy. The challenges we are facing as a nation are not
insurmountable.

CONTEXT OF THE ECONOMIC CHALLENGES

7. The current challenges facing the economy are so intertwined that sometimes
it is not so easy to separate the causes from the effects of the challenges. It is
however important that the challenges are properly contextualised and
diagnosed in order to come up with solutions that are appropriate and
relevant to underpin economic recovery.

8. The interwoven economic challenges include the following:

Tight liquidity conditions;
Company closures;
Rising formal unemployment;
Low production levels;
Non-performing loans; and
Disproportionate trade balance.

9. An analysis or diagnosis of these economic challenges shows that the
economy failed to hold on to the strong positive economic growth trajectory
stimulated by the liberalization of the foreign exchange system in 2009
because of the nation's failure to attract significant foreign financial inflows
(both foreign direct investment [FDI] and long term lines of credit) into the
economy to sustain and replace the short term expensive loans that were
granted by the local financial institutions at the commencement of the
multiple currency system.

10. The above phenomenon is compounded by the shortermism syndrome
that has crept into the economy coupled by the glaring lack of
discipline across the economy to do things in the right manner, high

gearing (high debts), the general laissez-faire attitude, the concomitant
crisis of expectation bedevilling the nation and the quick buck
syndrome that has its origin from the hyper-inflationary era of the
Z$/US$ arbitrage opportunities, the "burning period" when getting
rid of the Zimbabwe dollar, or burning, became the key to survival.

11. This unfavourable scenario is depicted in Figure 1 which is split into two
phases.

12.
Phase I is the euphoria phase, 2009-2011, the growth phase, ushered
in by the introduction of the multiple currency system in 2009. During
this phase, businesses and individuals rushed to obtain bank credit to
expand (restocking, retooling, etc) their businesses which had been
starved of cash during the hyper-inflationary era and the period, 2000 –
2008, of economic decline (shown in Figure 2). Indeed banks responded
by extending credit and the economy grew rapidly between 2009 and
2011 by an average of 10 % per annum. Unfortunately the expansion in
credit to support the needs of business and individuals was done by
utilizing highly priced short term funding to purchase long term assets,
thereby creating unsustainable funding mismatches. The funding
mismatches were done on the assumption or expectation that this phase
was going to continue or that it was sustainable leading to many
businesses going to the extent of adjusting salaries and wages to higher
levels than what the economy could absorb. The rapid economic growth
was, to the contrary, short lived as shown by the plateau in 2011 in
Figure 1.

13. Phase II, 2012 to date, is the reality check or a self-adjustment phase,
wherein the economy is being chocked with businesses now saddled with

high debts, high cost of doing business characterized by high finance
charges, high labour costs, antiquated or obsolete plant and equipment and
the scarcity of long term international financial inflows. This adjustment
phase or process has resulted in company closures, thus necessitating
retrenchments, low production, high imports, narrowing tax base/revenues
and the deceleration in economic growth.

14. It is this current phase that needs urgent attention for the recovery of
the economy which is the bedrock of this Monetary Policy Statement.


Phase I
Phase II
Figure 1
(Growth phase)
(Self-adjustment phase)

Figure 2


SALIENT SOLUTIONS TO THE CHALLENGES

15. Having graphically analysed the causes and effects of the current economic
challenges, it is evident that the solutions to the challenges that the
economy is facing are to putting in place credible, consistent and
predictable investment polices to stimulate growth. This would need to
be complemented by dealing with the high debts or non-performing
loans saddling the economy, mobilization of financial resources,
inculcating self- discipline, transparency and accountability across the
board.

16. This Statement is, therefore, intended to spell out the necessary bold,
robust and pragmatic monetary policy measures that we believe are needed

to pull the economy from the situation it is now, guided by the philosophy
that when a Central Bank wins or loses a fight, it is the wider society
which wins or loses.


ROLE OF RBZ UNDER THE MULTIPLE CURRENCY SYSTEM

17. Our ambition is to make the Central Bank return to its glory and help to
stimulate economic activity in an increasing integrated world economy. In
doing so we shall only be looking backwards for lessons and looking
forward for solutions.

18. We are repositioning ourselves by going back to the core principles or
functions of central banking, which are basically to be banker to
Government, administrator of the national payment system, regulator
of financial institutions, manager of Exchange Control, supervisor of
bank use promotion & suppression of money laundering, lender of last
resort and policy advisor to Government.

Banker and Financial Advisor to Government
19. With effect from 7 July 2014, the role of the Bank as the banker to
Government was restored by moving the exchequer account from CBZ
Bank to RBZ. The process was done smoothly.

20. As the agent for the State in terms of issuance of Government securities
(bonds and Treasury Bills [TBs]) RBZ has issued a cumulative total of
US$406 million TBs since the beginning of the year with the bulk of the
TBs pertaining to the RBZ debt takeover program by Government. It is
pleasing to note that Government has been able to settle all TBs (US$213

million since 2013) timeously on maturity including capital and interest on
TBs that were issued in 2012 in lieu of statutory reserves.

Regulator of Financial Institutions

21. The Bank supervises banking institutions and promotes the smooth
operation of the payment system in Zimbabwe through on-site and off-site
surveillance. From time to time the Bank issues various guidelines to
financial institutions to promote discipline and compliance within the sector.
Under this function, RBZ through the Registrar of Banks issues and revokes
banking licences.

Administrator of the National Payment System
22. The Bank also promotes the smooth operation of the payment system
through administering the National Payment System (NPS). The Bank is
the administrator of the Real Time Gross Settlement System (RTGS)
known as the Zimbabwe Electronic Transfer and Settlement System
(ZETSS) and the Central Securities Depository System (CSD). NPS
approves all new products relating to the payment system including
mobile banking products.

Manager of Exchange Control
23. As the steward of the Exchange Control function, the Reserve Bank is
responsible for managing and regulating all foreign exchange receipts and
payments for the country. The Bank supervises Authorised Dealers
(banks) in the implementation of exchange control rules and regulations.
The Bank also promotes foreign investments into Zimbabwe and ensures
that such investments are sufficiently protected.

Supervisor of Bank Use Promotion & Suppression of Money Laundering
24. As the supervisor of the national bank use promotion and suppression of
money laundering function, the bank promotes the use by the public of
financial institutions for the purposes of mediating, facilitating or obviating
cash transactions and to discharge the functions of supressing money
laundering. Under this function, the Bank is currently conducting, with
relevant stakeholders, a suppression of money laundering National Risk
Assessment exercise to identify, analyse and measure money laundering
risks in the country.

Lender of Last Resort
25. The Bank’s current challenge here is to be pragmatic enough to find
alternative tools to stimulate the economy within the given operating
environment of the multiple currency system. To this end, RBZ is earnestly
working on mobilizing financial resources to enhance liquidity within the
economy. As one of the Bank’s key objectives under the back to basics
strategy, the resources being mobilized would be utilised transparently
and productively for the establishment and promotion of the lender of
last resort function to assist solvent banks to stimulate economic
development in the economy. Such funds would not be available for
use by errant banks to finance their nefarious activities.

RBZ UNDER ZIM ASSET

26. The objective under ZimAsset of a continuous economic growth of 7.3%
on average per annum is commendable and achievable if we, as a nation,
put concerted effort to attract investment, both local and foreign, in order
to stimulate production. As alluded to in the blue print, the attainment of
the objectives in ZimAsset requires "robust and prudent fiscal and

monetary policy measures to buttress and boost the implementation of
ZimAsset".

27. As Monetary Authorities, we shall continue to come up with robust and
prudent monetary policy measures to address the needs of the economy
and compliment fiscal policy as envisaged in ZimAsset. This Statement is
being presented with that objective in mind as we envisage ZimAsset as a
national plan for Call to Action by Zimbabweans for Zimbabweans.

28. The Reserve Bank believes that identification and working around the
Quick Wins or Low Hanging Fruits spelt out in the blue print is the
way to fast economic recovery. Enhancement of production through
quick wins would need the nation to embrace the philosophy of building
around the operating companies and not mending what is not broken.
This is necessary for the quick recovery of the economy.

29. It is also necessary to note that the total funding requirement under
ZimAsset of US$27 billion is a snap shot. The $27 billion is ex-post and
not ex-ante. We believe that this distinction is critical in order not to
demotivate the nation and/or possible financiers in the mobilisation of
resources needed under ZimAsset. As highlighted in Figure 3 below,
ZimAsset would need to be propelled or powered from both domestic and
international financing resources.

30. As Banker to Government, the Reserve Bank shall do its part to
vigorously work on the mobilization of financial resources needed
under ZimAsset and we therefore hope and pray that the ZimAsset
blue print will be implemented, by the nation at large, consistently to
the letter and spirit for the public good of the nation

POWERING
ZIMASSET


ZIMASSET
Continuous
Economic Growth
Through Increased
Investments
Foreign
Direct

Investment

Portfolio Investment
Domestic
Investment

Investor Friendly
Policies
Regulations to
attract Portfolio
Investments
Empowerment
Credits to Unlock
Funding
Policy clarity, consistency &
predictability to attract
investment and long term
capital

Biased
Towards
Value
Addition,

Manufacturing,
Infrastructure

Development
Mining,
New
Agric

Ventures

Biased
towards
resource
based

sectors
&
distribution

Sustainable Growth

Food Security
& Poverty
Reduction
Employment &
Empowerment
Infrastructure &
Utilities
Value Addition &
Beneficiation
Social Services & Poverty
Eradication
Food Security & Nutrition
-‐Bonds

-‐Stock
Mrt

-‐Prescribed

Status

Requirement

-‐Tax
breaks

Investor Friendly
Polices
Youth, women
Housing
Agriculture
Interbank
Vocational training
SMEs
Empowerment credits to
unlock funding
Technological transfer
Employment
Infrastructure Dev.
Value addition
Exports
Vocational training
Figure 3
Employment &
Empowerment
Value addition
Infrastructure

ECONOMIC AND FINANCIAL REVIEW


GLOBAL ECONOMIC DEVELOPMENTS

31.
The Zimbabwe economy is intricately connected to what happens in the
region and globally. The country is a member of regional and
international organisations such as the Southern African Development
Community (SADC), Common Market for Eastern and Southern Africa
(COMESA) and World Trade Organisation (WTO).

32.
Global economic activity is expected to re-accelerate in 2014 spurred by
recovery in advanced and developing economies. The adverse effects of a
severe winter in the US and the Euro-Area in the first quarter of 2014,
coupled with financial market perturbations and political instability in the
Ukraine, however, moderated global economic activity in the first half of
2014.

33.
This notwithstanding, economic activity in advanced economies is
expected to improve from 1.3% in 2013 to 2.2% in 2014 on the back of
moderated effects of fiscal consolidation, improved labour market
conditions and supportive monetary conditions.

34.
Despite accompanying expansion in import demand from advanced
economies, growth in emerging market economies is projected to remain
subdued at 4.9% in 2014. This largely reflects the negative repercussions
of adverse investor perception with regards to policy weaknesses and
vulnerabilities.

35.
Political tension the Middle East coupled with a slowdown in economic
activity in China is expected to pose significant downside risks to
recovery prospects in emerging market economies.

36.
The deceleration of economic activity in China is expected to result in a
concomitant decline in the demand for commodities, as well as
accompanying effects on commodity prices. These adverse developments
are likely to spill over to commodity producing countries in Sub-Saharan
Africa such as Zimbabwe, in the form of reduced export revenues, and
deterioration in current account balances.

Table 1: Global Economic Growth (%)

World Output

Advanced Economies

US

Japan

Emerging Market & Developing
Economies

China

India

Sub-Saharan Africa

Latin America & the Caribbean

Source: International Monetary Fund, World Economic Outlook (April 2014)

37.
Nonetheless, growth in Sub-Saharan Africa is expected to increase from
4.9% in 2013 to 5.4% in 2014 (as shown in Table 1 above) on the back of
increased investments in extractive industries, and infrastructure
development.

Commodity Price Developments

38.
On account of the country’s commodity dependence, balance of payments
developments, are intricately bound to global economic developments.

39.
Since the fourth quarter of 2013, international energy prices have
remained fairly stable, notwithstanding the upward pressures from
increasing prices for natural gas and coal.


Figure 4: Commodity Price Indices (2005=100)

Source: IMF Commodity Price System, 2014

40.
Crude oil prices, however, rose by 4% from US$107.44/barrel in January
2014 to US$111.77/barrel in June 2014 amid geopolitical tensions in the
Ukraine and supply disruptions in Libya, Syria, Nigeria, Yemen and Iran
(please refer to Table 2). The surge in oil supplies from North America,
however, moderated the firming of oil prices.

41.
The rise in crude oil prices is, however, expected to exert considerable
pressure on the country’s fuel import bill, thus worsening the country’s
balance of payments position.

42.
In world food markets, favourable supply conditions for major crops are
projected to result in surpluses and downward pressure on prices. As
such, inventories for wheat and maize are expected to rise. This
notwithstanding, concerns of adverse weather conditions in South

America may weigh down on expected yields and exert upward pressure
on food prices.

43.
On the back of recovery in global economic activity, precious metal
prices have remained firm during the first half of 2014, although they
remain relatively low compared to levels attained over the same period in
2013. On the other hand, base metal prices were broadly subdued due to
concerns of weaker demand from China, the world’s largest consumer of
metals.

Table 2: International Commodity Prices

Gold

Platinum

Copper

Nickel

Crude
Oil

US$/oz

US$/oz

US$/tonne

US$/tonne
US$/barrel

January

1,241.82

1,420.43

7,294.77

14,096.36

107.44

February

1,299.83

1,409.51

7,149.38

14,158.50

108.69

March

1,336.71

1,451.11

6,668.90

15,673.10

107.79

April

1,298.80

1,431.40

6,665.78

17,346.10

107.99

May

1,289.06

1,451.79

6,880.58

19,396.25

109.20

June

1,278.49

1,452.60

6,797.20

18,575.83

111.77

%
Change

3.0

2.3

-‐6.8

31.8

4.0

Source: BBC and KITCO

DOMESTIC ECONOMIC DEVELOPMENT

GDP AND INFLATION

44. As stated above, the Zimbabwean economy continues to face challenges
which reflect some structural rigidities, inadequate domestic and foreign
investments and lack of long term funding.

45. Economic activity decelerated from 10.6% in 2012 to an estimated 4.5% in
2013, in real terms. It is expected that a further slowdown in GDP growth
is expected in 2014 to the revised 3.1%.

46. Inflation, however, has remained low and was in the negative territory
from February to June 2014. The rate of inflation reached deflationary
levels during the 5 months mainly due to low aggregate demand coupled
with a price correcting process since Zimbabwean prices are generally
higher than those obtaining in neighbouring countries.

47. In July 2014, inflation increased to 0.3% from the June level of -0.08%. It
is anticipated that inflation would remain below the 1% level for the rest of
2014.

FINANCIAL SECTOR DEVELOPMENTS

48.
The general slowdown in the performance of the domestic economy
continues to pose challenges to the banking sector. However, the
banking sector has demonstrated resilience under the current
macroeconomic environment and the sector has remained safe and
sound.

Architecture of the Banking Sector

49.
Currently there are 19 operating banking institutions, comprising 15
commercial banks, one (1) merchant bank and three (3) building societies
as well as one (1) savings bank and 156 microfinance institutions.

50.
Capital Bank voluntarily surrendered its licence, which was subsequently
cancelled by the Registrar of Banking Institutions on 4 June 2014.

Performance of the Banking Sector

Capitalisation

51.
As at 30 June 2014, a total of 14 out of 19 operating banking institutions
(excluding POSB) were in compliance with the prescribed minimum
capital requirements as shown in Figure 5 below.

52.
On aggregate, core capital for the banking sector amounted to $753.09
million as at 30 June 2014 (excluding Interfin Bank which is under
curatorship), compared to $790.35 million as at 31 December 2013. The
reduction in the total core capital is largely attributed to loan loss
provisions and subdued earnings performance by some banking
institutions.
Figure 5: Capitalisation of Banking Institutions

53.
Meanwhile, banking institutions have submitted recapitalization plans
which are hinged on organic growth, injection by shareholders, rights
issues and mergers and acquisitions for compliance with the minimum
capitalisation requirements.

54.
The efforts by banks to increase their capital positions have been
constrained by a number of challenges including the macroeconomic
environment and subdued foreign direct investment.

Banking Sector Profitability

55.
The banking sector remained generally profitable as at 30 June 2014, with
an aggregate net profit of $13.84 million for the half year ended 30 June
2014, up from $4.90 million during the corresponding period in 2013.

56.
A total of 12 banks recorded profits for the period ended 30 June 2014.
The losses recorded by the few banking institutions are attributed to high
levels of non-performing loans, lack of critical mass in terms of revenue
to cover high operating expenses and deliberate strategy by some banks
to clean up bad loan books through provisioning.

Deposits and Loans & Advances

57.
Total banking sector deposits increased by 4.86% from $4.73 billion as at
31 December 2013 to $4.96 billion as at 30 June 2014, while loans &
advances marginally increased from $3.70 billion to $3.81 billion, during
the same period.

Sectorial Distribution of Loans

58.
Loans granted by the banking sector to the various sectors of the
economy as at 30 June 2014 were distributed as follows:

Figure 6


59.
The banking sector loan portfolio is dominated by the industrial sector,
household, transport and agriculture, constituting 26.07%, 21.21%,
16.95% and 15.68 of total credit, respectively. The remaining sectors
contributed less than 10% each.

Non-Performing Loans

60.
In the face of challenging economic conditions and increasing cost of
doing business, the debt repayment capacity of the borrowers remained

under stress. Credit risk remains a key component in the risk profile of
the banking sector.

61.
As a result, the level of non- performing loans has risen from 15.9% as at
31 December 2013 to 18.5% as at 30 June 2014.


Figure 7

Source: RBZ

62.
The surge in delinquencies and loan losses has dampened banks’ risk
appetite. Resultantly, banks have increasingly adopted a risk averse
approach to lending.

Distressed Banks
63.
Across the globe, the existence and continued presence of weak banks is
a matter of concern to supervisory authorities.

64.
There are four banking institutions, namely Metbank, Allied Bank,
AfrAsia and Tetrad facing liquidity and solvency challenges due to macro

and institution specific factors. These banks command low market shares
in terms of loans (8.8%), assets (7.2%) and deposits (6.7%) as at 30 June
2014.

65.
Cognisant of the need to protect the interest of depositors and promote
banking sector confidence, the Reserve Bank has been engaging these
institutions to come up with credible plans to turnaround their waning
financial condition.

66. In this regard, shareholders and boards of the distressed banks have been
directed to finalise implementation of their turn around plans, failure of
which the Reserve Bank will be left with no option but to intervene and
institute appropriate supervisory action in terms of the Banking Act.

67. The Reserve Bank is on record that institutions should seriously consider
consolidations/mergers and voluntary surrender of licences when deemed
necessary.

Metbank

68. Although Metbank’s capital is compliant with the minimum capital
threshold of $25 million, the institution has been facing severe liquidity
challenges. The bank has embarked on capital raising initiatives and other
turnaround strategies to address its current liquidity challenges. The bank
remains under close monitoring by the Reserve Bank.

Tetrad Investment Bank

69. Tetrad Investment Bank is facing liquidity challenges resulting in the

institution failing to meet some outstanding payments.

70. The bank has entered into a scheme of arrangement with its creditors to put
a stay on litigations. The scheme of arrangement is for three (3) months up
to 31 October 2014 and is envisaged to protect the institution’s assets for
the benefit of all depositors and creditors.

71. In an endeavour to address its solvency status, the bank is in discussion
with a potential investor for the injection of capital. The scheme of
arrangement is also expected to provide ample time for the potential
investor
to
finalise
the
recapitalisation
initiatives.

AfrAsia

72. The bank is facing liquidity challenges and is instituting various measures
to ameliorate the liquidity situation. The institution is seeking liquidity
support from the major shareholder and concomitantly pursuing a private
placement transaction, whose successful consummation will bolster the
bank’s capital level.

73. The Reserve Bank is satisfied with the current efforts by the major
shareholder to strengthen the bank’s financial condition as evidenced by an
injection of $10 million which improved the bank’s capital to $19.20
million as at 30 June 2014.

74. The Reserve Bank will continue to work closely with the board and senior
management of the bank regarding their various initiatives to strengthen
the institution.

Allied Bank

75. The bank is facing both solvency and liquidity challenges and
consequently has been failing to pay maturing obligations. The board and
senior management are working on various capital raising initiatives
including engaging the major shareholder to raise funds to bolster the
institution’s capital and liquidity position.

76. The Reserve Bank will continue to closely monitor the situation at the
bank.

Financial Inclusion and Mobile Banking
77.
The subject of financial inclusion is continuing to receive increasing
focus internationally and is particularly important for developing
economies where a large proportion of the population has been
traditionally excluded from the mainstream economy.

78.
Accordingly, we continue to urge financial institutions to consciously
support micro, small and medium enterprises and individuals to facilitate
their participation in economic activities thus promoting inclusive growth
and development of the economy.

79.
The Reserve Bank is supportive of the efforts being undertaken by
banking institutions in furthering the objectives of financial inclusion in
the country by embracing mobile technologies to reach out to the
unbanked population at lower costs. In addition banking institutions are
pursuing other initiatives such as agent banking thus enhancing access to
financial services.

80.
The partnership between banking institutions and mobile network
operators has enabled banks to offer their customers mobile banking
services such as payments facilities, funds transfers, loan disbursements
and repayments.

81.
In this regard, we urge banking institutions and mobile network
operations to work towards infrastructure sharing while competing
on service delivery.

Consumer protection
82.
Consumer protection is critical as we seek to build an inclusive financial
system as well as public confidence in the system.

83.
Government has embarked on initiatives towards the development of
consumer protection laws. The Reserve Bank and other stakeholders are
also working towards the development of a robust consumer protection
framework in the financial sector.

84.
The Reserve Bank through its supervisory activities have noted that the
banking sector has generally not taken the initiative to ensure that
consumers of financial services are adequately protected.

85.
The Reserve Bank continues to receive complaints from some consumers
who enter into borrowing contracts without fully understanding the extent
of their obligations.

86.
Going forward, the Bankers Association of Zimbabwe is expected to
attune the Code of Banking Practice to the obtaining environment and
enforce the Code on its members.

Microfinance Act
87.
The new Microfinance Act [Chapter 24:29], which was gazetted in 2013,
provides for the regulation and supervision of both credit-only and
deposit-taking microfinance institutions.

88.
The new Act has strengthened the consumer protection framework for
microfinance clients through mandatory full disclosure by microfinance
institutions of the terms and conditions of their services, adequate prelending assessment to avoid over-indebtedness of clients and ethical
business conduct among other requirements.

EXTERNAL SECTOR DEVELOPMENTS

89.
Against the background of commodity price volatility and growing
import demand, the country’s external sector position remains under
considerable pressure. Lack of export competitiveness, coupled with
subdued capital inflows, continue to adversely affect the country’s
external sector position, as evidenced by the low foreign exchange
reserves.

90.
On the other hand, the continued decline in industrial capacity utilisation,
currently estimated at levels below 40%, due to lack of production and
competitiveness, continue to widen supply gaps in the domestic economy
thereby creating growing demand for imported goods, which further
jeopardize the country’s external financial position.

Merchandise Trade Developments

91.
Export receipts realized over the period January to June 2014 amounted
to US$1.23 billion, which compares unfavourably with imports, which
amounted to US$2.99 billion realized over the comparative period in
2014.

92.
Mining continues to make a significant contribution to the country’s
export earnings, accounting for 52%. Agriculture including tobacco and
horticulture accounts for 21%, followed by manufacturing (13%) and
services, which include transport and tourism (11%).

93.
The level of exports realised by June 2014 were 21% lower than what
was realised for the same period in 2013. This reflects the slowdown in
economic activity mainly due to company closures. As such, this subdued
level of exports further compound the liquidity situation and deceleration
in economic activity.

94.
Foreign payments for merchandise imports (excluding fuel & electricity)
and services account for approximately 60% of the country’s cumulative
total cross border payments, indicating the country’s heavy reliance on
imported goods and services. The merchandise import bill for 2014 has a
large proportion of consumption goods (51%), some of which can easily
be produced locally.

95.
The huge volume of merchandise imports and service payments continues
to be a cause for concern to Monetary Authorities, especially in an
environment characterised by limited foreign exchange resources. We,

therefore, urge market participants to exercise discipline in the use of the
limited foreign exchange resources, thus limiting the export of jobs and
income.

96.
The disproportionate gap between the country’s exports and imports has
inevitably culminated in a deficit of US$1.77 billion on the trade account,
for the first half of 2014, as shown in Table 3 below.


Table 3: Merchandise Trade US$ Million

Exports

Imports

Trade

Balance

Exports

Imports

Trade

Balance

January

279.6

606.7

(327.2)

278.2

487.9

(209.7)

February

279.0

499.2

(220.1)

192.5

478.8

(286.3)

March

253.9

532.8

(278.9)

156.4

499.9

(343.5)

April

209.9

963.6

(753.7)

179.0

491.5

(312.5)

May

278.3

580.0

(301.7)

184.3

510.1

(325.8)

June

244.9

714.1

(469.2)

238.0

528.2

(290.2)

Total

1,545.6

3,896.5

(2,350.8)

1,228.4

2,996.3

(1,767.9)

Source: Zimstat


Current and Capital Account Developments

97.
This trade deficit is projected to combine with net service payments to
result in a sizeable current account deficit of over US$3.5 billion in 2014
or over 25% of GDP. This current account deficit is unsustainably high,
compared to the SADC and COMESA macroeconomic convergence
target of not more than 9% of GDP.

98.
Despite previously recording surpluses on the capital account, the current
account has largely been financed by debt creating and volatile short term
and long term offshore lines of credit to the private sector, compared to
the more stable non-debt creating foreign direct investment flows, which
have remained relatively depressed.

Overall Balance of Payments

99.
Total declared foreign currency receipts which include exports, loan,
transfers, income, and investment receipts, for the period January to June
2014 amounted to USD3.2 billion compared to USD3.8 billion received
during the same period in 2013. The 17% decline in foreign receipts was
mainly attributable to low production and to some extent, the decline in
mineral prices.

100. For the period January to June 2014, total cross border payments
(including merchandised imports, energy, capital remittances, income and
service payments) processed through Authorized Dealers amounted to
USD4.3 billion compared to USD4.4 billion for the same period in 2013
representing a 4% decrease.

101. Against the backdrop of a huge current account deficit and subdued
capital and financial inflows, the overall balance of payments, after taking
into account errors and omissions recorded a deficit of US$366 million in
2013 and is expected to deteriorate further in 2014.

Table 4: Balance of Payments Summary (US$M)

Actual Actual Actual Actual Actual Estimate
Current Account
Balance

Trade Balance

Exports F.O.B
1660.4 1613.3 3243.7 4416.3 3808.2
3636.1
Agric

Mining

Manufacturing

Imports F.O.B
2629.5 3213.1 5161.8 7562.0 6710.2
6951.7
Food

Fuel

Capital Account
Balance

Errors And
Omissions

Overall Balance

Source: Reserve Bank of Zimbabwe


102. Against this background, the country’s official reserves have remained
low. Figure 8 below further amplifies the negative trend in the balance of
payments position.

Figure 8: Balance of Payments Summary (US$M)

Source: Reserve Bank of Zimbabwe

Diaspora Remittances

103. For the period January to June 2014, international money transfers
amounted to USD845.6 million, of which Diaspora remittances were
USD412.4 million and international organisations, such as NGOs,
USD433.2 million.

104. Diaspora remittances remain a critical source of liquidity in the market
and the Reserve Bank will continue to put in place effective systems to
encourage use of formal channels by our kith and kin outside Zimbabwe.

Foreign Investment Inflows

105. Under the multi-currency environment, foreign investment is expected to
have a significant and positive impact on market liquidity. Foreign

investment inflows into Zimbabwe have remained subdued due to the
perceived country risk. For the first six months of 2014, the country
received a paltry USD67 million compared to USD165 million during the
same period in 2013.

106. On a cumulative basis, and compared to other countries in the region,
Zimbabwe’s foreign direct investment inflows amounted to USD1.7
billion over the period 1980 to 2013, whereas, Zambia and Mozambique
received USD7.7 billion and USD15.8 billion, respectively. Of the total
of USD25.2 billion received between the 3 countries since 1980,
Zimbabwe has accounted for a mere 7%.

107. There is therefore need for the country to create an investor-friendly
environment so as to tap into these external capital resources to boost
employment, production and exports as enunciated in the country’s
blueprint, ZimAsset.

FINANCIAL SECTOR POLICY MEASURES
Enhancing Legal environment

108. Amendments of the Banking Act [Chapter 24:20] were approved by
Cabinet to strengthen the regulatory environment and the Bill is about to
be gazetted.

109. In terms of the proposed amendments to the Banking Act, provision will
be made for licensing of credit reference bureaus and supervision of the
Infrastructure Development Bank of Zimbabwe (IDBZ) and the Small &
Medium Enterprises Development Corporation (SEDCO).

110. The Bank is in agreement with Government on parameters to be used by
foreign banks to comply with the Indigenisation and Economic
Empowerment Policy. The parameters also take into account of the fact
that bank deposits are public funds.

New Minimum Capital Requirements for Banks

111. In the Monetary Policy Statement of January 2014, the Reserve Bank
reviewed the deadline for compliance with capital requirements to 31
December 2020.

112. The Reserve Bank has observed that the current operating environment
still presents numerous challenges in banks’ ability to grow capital
organically or raise capital from investors.

113. Most local shareholders lack financial capacity to inject the much needed
capital into their respective banking institutions. As a result, the local
shareholders have failed to follow up on their rights during capital calls.

114. In light of the macroeconomic challenges constraining the capitalization
initiatives, the Reserve Bank has taken measures to promote strategic
groups based on current banking classes, in line with Section 6 of the
Banking Act.

115. Accordingly, the Reserve Bank has come with three segments, namely
Tier I, Tier II and Tier III for banks’ compliance with minimum capital
requirements. The strategic groups, the applicable minimum capital
requirements and the respective activities are shown in Table 5 below:

116. Tier I segment comprises of large indigenous commercial banks and
all foreign banks. These will conduct their core banking activities,
and in addition, offer other activities such as mortgage lending,
leasing and hire purchase that have longer term maturities as well as
other sophisticated products.

117. Banks in the Tier I strategic segment will be required to have
minimum core capital requirements of $100 million by 2020 as
previously announced. The capital will enable the Tier I banks to
absorb the risk associated with the scope and complexity of their
activities.
Table 5 New Capital Requirements of Banks
Segments Type of Institution
Capital requirements
Activities
Current

Tier I
Large Indigenous
Commercial banks & all
foreign banks

$25 million
$100 million
Core banking
activities plus
additional services
such as mortgage
lending, leasing &
hire purchase
Tier II
Commercial
banks,
Merchant banks, Building
societies,
Development
banks,
Finance
&
Discount houses
$25 million
$25 million
Core banking
activities only
Tier III
Deposit
Taking
Microfinance banks
$5 million
$7.5 million
Deposit Taking
Microfinance
activities

118. The Tier II segment comprises of commercial banks, merchants
banks, building societies, development banks, finance houses and
discount houses that will only conduct their core banking activities.
The Tier II banking institutions should maintain minimum capital
requirements of $25 million.

119. Banks, other than foreign banks, that elect not to increase their capital to
$100 million threshold will automatically fall in the Tier II category
offering the limited product range.

120. Banking institutions in Tier II can migrate to the Tier 1 strategic
group provided they meet the capital requirements and the risk
management systems that are commensurate with the nature and
scope of the activities.

121. The Tier III segment which has a current minimum capital
requirements of US$5 million comprises of deposit taking
microfinance institutions. The minimum capital requirements of $7.5
million by 2020 for Tier III take into account start-up costs such as
acquisition of an IT system and establishment of branches. It is
envisaged that the institutions in Tier III will further bolster the
current financial inclusion initiatives.

122. Banking institutions will be required to submit revised capital plans
for December 2020 based on their chosen strategic group by 31
December 2014.

123. The Zimbabwean economy requires strong banks that can adequately
support the funding requirements of industries. Banks should therefore

ensure they build capital bases to levels that provide critical mass
necessary to make significant contribution to the economy.

124. The above strategic segmentation allows the existence of smaller,
profitable banks with strong governance and risk management systems
that play a meaningful role in the economy.

Resolution on NPLs

125. Globally, non-performing loans (NPLs) have been a hindrance to
economic stability and growth of economies. The Reserve Bank is
cognisant that the problem of high levels of NPLs which exceed the
international benchmark of up to 5% can be a threat to financial stability
and economic growth.

126. As such, addressing the problem of NPLs is essential in order to
invigorate the Zimbabwean economy. The resolution on nonperforming loans is therefore a necessary condition to improve the
economic status of the country and to address the vicious circle of low
economic growth, company closures and banks vulnerability.

127. As already indicated in Figure 4, NPLs have been rising from 1.6% in
2009 to 18.5% (US$705 million) as at June 2014.

128. Apart from being a source of concern for financial stability, there is
strong evidence that NPLs have led to a decrease in credit growth
which is undermining current economic recovery efforts.

129. Unfortunately the NPLs are now continuously growing even without new
lending by banks because of interest accruing on the unpaid loan

balances. To make matters worse, NPLs are traditionally charged
penalty rates of interest which means that they are now growing at a
much faster pace.

130. The rising NPLs in the banking sector since 2009 can be attributed to the
operating environment that has characterized the post multi-currency
period when businesses and individuals rushed to obtain bank credit to
expand their businesses which had been starved of cash during the hyperinflationary era. Indeed banks extended credit and economic activity
expanded. Unfortunately this was done by utilizing short term funding
to purchase long term assets (thereby creating funding mismatches) on
the expectation that this phase was going to continue or that it was
sustainable. The other fundamental causes of rising NPLs include
institution specific factors such as weak corporate governance
practices and risk management systems.

131. High cost structures, obsolete equipment, and intense competition from
relatively cheap imports have compounded the problem resulting in
borrowers failing to service their loans in terms of contractual agreements.

132. The situation in which banks are saddled with high NPLs that do not
decrease and remain at high levels for a long period would result in the
prolonged stagnation of the economy.

133. Across the globe, it has been noted that the problem of non-performing
loans has a mechanism to drag on the economy in a number of ways
including the following:

a) lowering banks' intermediary function due to erosion of bank profits;

b) deterioration of bank assets and erosion of their capital;

c) stagnation of economic resources, such as labour and capital, in areas
with low productivity; and

d) Decline in bank lending, as banks with high level of non-performing
loans in their portfolio may become increasingly reluctant to take up
new risks and commit new loans; and pose serious challenges to
the pursuit of macroeconomic stability and growth objectives by
government.

134. Increase in NPLs in Zimbabwe is causing banks to cut on lending to
business at a time companies require working capital and funds for
retooling. This is now having a huge bearing on the economy as
reduced credit is leading to a decline in economic growth, private
consumption, job losses and decrease in government revenue i.e.
taxes.

135. Figure 9 and 10 summarize the economic and financial implications of
NPLs and the associated vicious cycle of low economic growth, NPLs
and banks’ vulnerability.

Figure 9: Economic and Financial Implications of NPLs


Source: NPL in the Banking Sector of Bangladesh: Challenges & Realities, Bishu Kumar Adhikary


136. To this end, the Reserve Bank is pleased to advise that Cabinet has
approved the establishment of a National Special Purpose Vehicle
(SPV) known as Zimbabwe Asset Management Corporation (Pvt) Ltd
(ZAMCO) to acquire NPLs from Banks in order to clean up and
strengthen banks’ balance sheets and provide them with the liquidity
to fund valuable projects for the economy to rebound and to mitigate
loss of confidence

LOW BUSINESS CONFIDENCE CHALLENGES

VICIOUS CYCLE OF LOW GROWTH, NON-PERFORMING LOANS
(NPLS) AND BANK VULNERABILITY


Increase in:
• Country (political)
risk
• High cost of
borrowing etc
Low business
confidence
Negative perceptions:
• Sanctions induced
• Indigenisation
policy
misconceptions
Funding mismatches
• Short term loans
• Long term assets
Bank loan
repayments by
borrowers decline
Value of
securities
decline
Banks incur
losses
Economic
activity slows &
unemployment
increases
Banks
restrict
lending
Bank capital
(loanable
funds) declines
Figure 10
Source: Reserve Bank of Zimbabwe

137. Banks would sell NPLs to ZAMCO under commercial terms, assigning
collateral and all other rights attached to the loans.

138. ZAMCO will be funded by a combination of non-funded lines of credit,
new inflows, long term bonds and treasury bills.

139. ZAMCO would manage the loan portfolio professionally in order to
obtain maximum recoveries over time.

140. Once restructured, the troubled assets will be sold and the proceeds will
be used to retire the borrowing, treasury bills or the bonds.

141. NPLs in an amount of US$45 million have already been acquired by
ZAMCO from three banks as at 15 August 2014.

142. ZAMCO will be supervised by RBZ.

Structure of NPLs SPV

143. Generically, the SPV structure involves sourcing of funds to purchase
NPLs from banking institutions. The SPV will restructure, rehabilitate
and recover funds under the non performing portfolio. The schematic
representation of the SPV is outlined in Figure 11 below:

Figure 11: Structure of SPV Operations


Zimbabwe Asset
Management Corporation
(Acquires & Parcels NPLs)
Government of
Zimbabwe

BROAD BASED INVESTOR BASE
Local
Investors
Pension
Funds

Foreign
Investors
Redemptions/
Cash out
Fundraising/
Subscriptions
Purchase NPLs
for Cash & TBs
Banking institutions
Purchase &
Redemption
of TBs
Diaspora
Funds


Benefits
144. The Reserve Bank envisages that these measures will provide a holistic
solution to the issue of non-performing loans in the banking sector. The
restructuring of non-performing loans will provide relief to borrowers
whose fundamentals remain strong but require reasonable funding costs
and a tenure that can be accommodated in their cash-flows.

145. The reduction of NPLs will therefore, help revive credit growth, spur
activity of previously over borrowed clients and free up resources trapped
in unproductive uses. This will bolster the supply side of the economy.

146. A number of countries adopted similar strategies for resolving NPLs as
discussed hereunder.

Other Countries’ Experience With NPLs
Nigeria
147. Nigeria experienced an excessively high level of non-performing loans in
2009 with the percentage of non-performing loans to total loans ranging
from 19% to 34%. The high levels of NPLs were attributable to poor
corporate governance practices, lax credit administration processes and
the absence or non-adherence to the bank's credit risk management
practices.

148. In response, the Central Bank of Nigeria formed an Asset Management
Company of Nigeria (“AMCON”) in 2010 with a specific mandate to do
the following:

a) Acquire the non-performing loans of banks;
b) Put capital into the intervened banks to shore up their capital which had
become inadequate; and
c) Manage the acquired assets and recover the debt.

149. In line with its mandate, AMCON acquired the non-performing risk
assets of some banks worth over N1.7 trillion, which boosted the banks’
liquidity as well as enhance their safety and soundness.

150. With the intervention of AMCON, the banking industry ratio of nonperforming loans to total credit was significantly reduced from 34.4% in
November 2010 to 4.95% in December 2011. Within 4 years Nigerian
banks were cleaned up and were able to meaningfully participate in
economic development.
Malaysia
151. The measures taken by the Malaysian government in the advent of NPLs
were swift and effective. The Government of Malaysia established an
Asset Management Company (AMC), Danaharta, in June 1998 to reenergise the Malaysian financial sector by buying non performing loans
from financial institutions and maximizing their recovery value.

152. The AMC was formed in terms of the Pengurusan Danaharta Nasional
Berhad Act which gave it the power to acquire, manage, finance and
dispose the assets.

153. Danamodal, the organization for the infusion of public funds, pumped an
initial amount of 6.4 billion ringgit (equivalent to US$2 billion) into 10
banks.
China
154. China’s huge NPL burden amounting to $500 billion as at 31 December
2004 was largely attributable to non-performing loans at four large State
Owned Commercial Banks (SOCBs) largely emanating from sustained
losses at state-owned enterprises (SOEs).

155. The Chinese government transformed its four state-owned banks to
private entities, by creating four asset management companies (AMCs) to

handle the SOE-backed NPLs, and invited foreign investors to inject
capital and financial expertise into its banking system.

156. The purpose of the AMCs, established by the government with
predetermined ten year life spans, was to relieve Chinese banks of their
NPLs, thereby freeing up capital for new lending to commercial loans.

157. The AMCs were funded by bonds issued under the guarantee of the
Ministry of Finance, which then purchased bad loans directly at book
value from designated banks.

158. The Chinese AMCs primarily adopted the following recovery methods:
a) debt-for-equity swap;
b) restructuring of debt terms;
c) debt collection;
d) sale or lease of real estate property;
e) direct sales of packaged or individual NPLs; and
f) Securitizations - the securitized receivables from NPLs were the
expected stream of cash flows to be generated from the NPLs.
South Korea
159. The South Korean government resolved the problem of NPLs by setting
up an asset management company, the Korea Asset Management
Corporation, in December 1997. The asset management company
immediately purchased NPLs worth 35 trillion won (US$32.1 billion) and
recovered 18 trillion (US$16.2 billion).

160. The above country experiences indicate ways in which Zimbabwe can
resolve the NPL problem and inject some liquidity into the banking
sector.

161. In order not to incur new bad loans, banks require adequate knowledge
about the borrowers and the establishment of a Credit Reference Bureau
will assist in this regard.

Credit Reference Bureau (CRB)
162. Financial institutions in Zimbabwe are generally exposed to heightened
credit risk owing to high levels of information asymmetry and the lack of
an effective credit information sharing mechanism.

163. There are limited avenues for banking institutions and other credit
providers to check and/or share information on the credit history of
borrowers.

164. As a result, some multi-banked clients have also become serial defaulters
with non-performing loans at several banking institutions.

165. Cognisant of these challenges the Reserve Bank is working on bridging
the information asymmetry gap in the banking sector through establishing
a central credit registry system within its structures.

Features of the Proposed Credit Reference System
166. The credit reference system shall comprise a credit registry and private
credit reference bureaus.

167. The credit registry will be based in the Reserve Bank and will collect
credit information from all banking institutions and microfinance
institutions.

168. The credit registry will serve as a databank for licensed private CRBs.
The private CRBs will access the credit information from the credit
registry and provide reports to their subscribers.

169. The proposed structure of the credit reference bureau system is indicated
below:
Figure 12: Structure of CRB


170. In order to provide for the implementation of a credit reference system,
the Banking Amendment Bill shall be gazetted to provide for the issuance
of regulations governing the licensing and supervision of credit reference
bureaus and establishment of a credit information data bank. In addition,


Reserv e B an k
C r ed i tReg i s try


P r i vate C R B
2 . P r o v id e i n f o r matio n
( wi t h c o n s e n t )
4 . S ell e x p a n d ed r e p o r t s an d v a l u e ad d e d p ro d u ct s
O the r i n form at i o n
p rovid e rs ( Cre d i t st ores ,
i n di v i d u a l s , p ara s t at al se t c )
3 . P ro v id e i n f o rmatio n
1. Provide & receive
information from Credit
Registry

the amendments will also address sharing of credit information between
banking institutions, Reserve Bank and private credit reference bureaus.

171. The Banking Regulations will also spell out statutory obligations of credit
reference bureaus and the rights of borrowers.

Benefits of the Credit Bureau System
172. A credit information bureau serves as an information broker and is thus a
key component in promoting financial sector stability.

173. Some of the benefits which will be realised from the credit reference
system are as follows:
a)
reduce credit information asymmetry and potentially bring down
average interest rates;
b)
contribute to more robust credit risk management practices which
will help promote the safety and soundness of the banking system;
c)
assist the microfinance sector where lenders do not ordinarily have
savings history of borrowers;
d)
limit indebtedness of borrowers which is currently rampant in the
economy;
e)
reduction of credit risk will increase the supply of credit to
businesses to fuel growth and lower lending rates; and
f)
promote elaborate analysis, monitoring and oversight of individual
indebtedness in the banking sector; and provide input essential for
effective implementation of Basel II.

Lending Rates
174. The Reserve Bank noted that soon after the adoption of the multicurrency system in 2009, a number of banking institutions charged

penalty interest rates averaging from 30% to 60% per annum imposing a
huge debt overhang on default borrowers

175. Dollarisation brought about reduced business margins compared to the
hyperinflation period. Borrowers could not therefore afford the loan
repayments inclusive of lending rates of above 15%, let alone the penalty
rates. Consequently, the borrowers could not repay the loans resulting in
the growth of NPLs

176. Consequently, a number of borrowers have been caught in situations
where they are now finding it extremely difficult to extinguish their
debts, despite having made significant repayments, as the bulk of the
payments constitute the interest portion.

177. The Reserve Bank noted that, in general, borrowers risk premium which
is factored in the determination of interest rates is high due to information
asymmetry on their credit history.

178. The establishment of a credit reference system and the resolution of NPLs
through ZAMCO will have a positive impact on interest rates.

179. The credit reference system will enhance ‘reputational collateral’ of
borrowers which should translate to lowering their risk premium
which in turn is expected to promote a reduction in lending rates.
Additionally, resolution of NPLs will clean up banks’ balance sheets
making them attractive to access cheaper sources of funding. This is
expected to reduce the cost of funding concomitantly translating into
reduced lending rates.

180. In consultation and agreement with the Bankers Association of
Zimbabwe (BAZ), the Reserve Bank has formed a forum with BAZ to
review, on a quarterly basis, bank charges, interest rates and the credit
reference system for the betterment of the economy.

181. In addition, the Reserve Bank has also established a Banks CEO Forum
that also meets quarterly to share ideas on the efficacy of the financial
sector.

Bank Charges
182. It has been noted that some banks are struggling to manage costs against
the backdrop of declining margins hence the tendency to compensate
incomes with higher interest rates and bank charges.

183. The Reserve Bank has noted significant restructuring programs that have
been adopted by many banks to cut costs and improve profitability,
though with mixed success. Some banking institutions have instituted
various cost cutting measures including leveraging on technology to
improve operational efficiency.

184. Fees and other charges levied by financial institutions should be
reasonable, having regard to the actual costs incurred by financial
institutions in providing products and services to consumers.

185. The Reserve Bank urges banking institutions to continuously re-examine
their business models, interrogate their cost structures and improve on
efficiency.

Market Conduct

186. The Reserve Bank noted with concern a number of unethical practices
and indiscipline in the sector. The malpractices range from falsification
of records, deliberate misclassification of loans, camouflaging the
level of NPLs resulting in under provision and control overrides to
imprudent lending practices.

187. The malpractices cast doubt on the fitness and probity of the banking
officials involved. The business of banking is about trust and this calls for
high levels of honesty and integrity on the part of bankers.

188. The Reserve Bank calls upon banking institutions to uphold ethical
conduct in their dealings with members of the public in order to maintain
confidence in the financial sector.

Basel II

189. Basel II is a set of banking regulations which regulates finance and
banking internationally. Basel II attempts to integrate Basel capital
standards with national regulations by setting the minimum capital
requirements of financial institutions with the goal of ensuring institution
liquidity.

190. The Reserve Bank of Zimbabwe has adopted a gradual approach to Basel
II implementation in order to allow for a smooth transition from the
current system to the new approaches.

191. Basel II promotes the safety and soundness of banks and fosters sound
risk management through:

(i) Improved risk sensitivity of capital requirements.
(ii) Convergence of regulatory and economic capital.
(iii) A menu of approaches which can be varied across institutions to
reflect differing risk profiles.
(iv) Encouraging banks to improve further their internal risk
management systems


192. Banking institutions have made progress in implementing the revised
capital framework. Observations made during on-going on-site
examinations are that internal systems for banking institutions are
showing greater stability as banks continue to upgrade their systems.

193. However, the Reserve Bank noted the need for banks to involve
independent review units such as internal auditors as well as external
auditors in the validation of the Basel II related systems and processes.

194. In this regard it is expected that Basel II processes should now be part of
Internal and External Auditors’ work plans.

195. The Reserve Bank will conduct a final survey on the implementation
progress during the quarter ending 30 September 2014 before banks go
live using the Basel II compliant statutory returns beginning the first
quarter of 2015.

Supervision of IDBZ and SEDCO

196. The Reserve Bank in conjunction with the Ministry of Finance and
Economic Development and relevant stakeholders, are working on
bringing the Infrastructure Development Bank of Zimbabwe (IDBZ) and

the Small Enterprise Development Corporation (SEDCO) to be under the
supervision of RBZ. These two entities are set up in terms of the
Infrastructure Development Bank of Zimbabwe Act [Chapter 24:14] and
the Small and Medium Enterprises Act [Chapter 24:12], respectively.

197. These measures will promote financial sector stability through ensuring
adherence, by all players in the financial services sector, to sound risk
management practices and the protection of depositors through oversight
by a supervisory authority.

Fitness & Probity Assessment Criteria

198. The Reserve Bank conducts fitness and probity assessments in respect of
proposed directors, shareholders and senior managers of regulated entities
in terms of the Banking Act [Chapter 24:20] and the Banking
Regulations S. I. 205 of 2000.

199. In order to provide transparency in the vetting process and guidance to
regulated entities, a set of prudential standards has been issued with this
Monetary Policy Statement.

EXTERNAL SECTOR POLICY MEASURES

Amnesty to non-compliant market participants

200. The Reserve Bank as an Exchange Control Authority, is inundated with
cases of non-compliance, which emanated from different economic
environments, particularly the switch from the Zimbabwe dollar era to the
multi-currency system. While it is the Reserve Bank’s obligation to
ensure that market participants fully adhere to the country’s

Exchange Control laws, the authorities are also desirous to trade
market discipline and self regulation with an official amnesty
(pardon) to deserving cases.

201. The Reserve Bank recognises this initiative as a critical platform for
forging renewed relations with market participants, a necessary step
towards attainment of effective collaboration in the execution of
various initiatives aimed at economic reconstruction. This new thrust
will manifest in the re-orientation of the Exchange Control
framework to compliment its role of administration, accounting and
monitoring of foreign currency transactions in the market with that
of facilitating investment and business transactions.

202. Pursuant to this objective of boosting market confidence and
enhancing relationship management, the Reserve Bank has identified
two categories deserving to be granted official amnesty.

Absolute Amnesty

203. The first category is for those cases granted absolute amnesty, which
result in the complete exceptional reprieve of their pending cases. The
pardon is permanent in that it completely strikes off the violation from the
Exchange Control register. The following cases have been identified
under this category:
(i)
Exporters with non-recoverable overdue export proceeds; and
(ii)
Machinery exported under repair and return and declared
obsolete.


Conditional Amnesty

204. The second category is for cases granted conditional amnesty, which
gives the affected party a temporary reprieve (time-period) within which
to regularise and make good the violation. The following cases have been
identified under this category:

(i)
Exporters with recoverable overdue export proceeds;
(ii)
Unauthorised external loans;
(iii)
Unauthorised cross-border investments;
(iv)
Non-repatriation of investment income; and
(v)
Importers with outstanding Bills of Entry (Imports).

205. The Reserve Bank is concerned with increasing incidences of capital
flight which are largely attributed to lack of confidence and the negative
perception of the business environment by local domestic investors. It is
also disheartening that this lack of confidence in the economy manifests
itself in the externalisation of capital. The Reserve Bank is, therefore,
desirous to give non-compliant market participants a reprieve to allow
them to self-introspect and exercise discipline in the conduct of
foreign currency transactions.


Absolute Amnesty to Exporters with Non-Recoverable Overdue
Export Proceeds

206. In terms of Exchange Control policy, all export receipts should be
repatriated into the country within 90 days from the date of export or
when contractually due, and within any other period approved by
Exchange Control.

207. As at 30 June 2014, the total overdue export proceeds (Forms
CD1/CD3/PTS1) amounted to USD303.2 million. Of this amount,
USD108.4 million accumulated before January 2010 is not recoverable
owing to the following reasons:
(i)
Some exporters engaged in unauthorised set offs of export
proceeds against value of imported goods;
(ii)
Some companies declared external receivables as bad debts
without seeking approval from the Reserve Bank;
(iii)
Some consignees faced operational challenges and ended up being
closed or were liquidated;
(iv)
Some exporters relocated outside the country without notifying
the Reserve Bank; and
(v)
Some exporters who have been under sanctions had their export
proceeds seized by the US Department of the Treasury through the
Office of Foreign Assets Control (OFAC).

208. Table 6 illustrates the total non-recoverable overdue export receipts for
the period 2003 to 2009. Prior to the adoption of the multi-currency
system in February 2009, there was a high incident of exporters
repatriating their export earnings through unofficial channels. Some
exporters were trading on the parallel market to evade the statutory
requirements prevailing then. It is these exporters who are finding it
difficult to account for these proceeds to formally acquit their export
documentation with the Reserve Bank.1


1 In terms of the Exchange Control Act [Chapter 22:05] Section 5, any person who contravenes the
provisions of the Act other than observance of secrecy under the Act, should be convicted and made
liable to such a fine and/or imprisonment as the court deems fit.

Table 6: Overdue Export Receipts declared Non-recoverable
Year
Declared
Overdue Values
on Forms CD1
(USD)
Declared
Overdue Values
on Forms CD3
(USD)
Declared
Overdue Values
on Forms PTS1
(USD)
Total
(USD)


Total
71,920,511
32,103,089
4,415,821 108,439,422
Source: Computerized Export Payments Exchange Control System
(CEPECS)

209. In this regard, Exchange Control has developed transparent eligibility
criteria to write off these non-recoverable overdue export proceeds
amounting to USD108.4 million through an official pardon, effective 1
September 2014. Exchange Control shall in due course issue detailed
operational modalities to Authorised Dealers.


Absolute Amnesty on Unreturned Exported Machinery and
Equipment

210. Companies raise Forms CD1s for export of machinery and equipment for
repair and return. These Forms CD1s are normally acquitted upon
submission of Bills of Entry (Imports) as evidence of being returned into
the country after repair.

211. However, the Reserve Bank has on record a number of cases of noncompliance where such exported machinery and equipment has not been
returned long after the expected repair period. In some cases, exported

machinery and equipment is genuinely declared obsolete, whilst in some
cases there are false declarations.

212. Absolute amnesty will be granted to deserving cases. In the same
manner, a transparent eligibility criteria has been developed and shall
be communicated by Exchange Control through Authorised Dealers in
due course.

Conditional Amnesty to Exporters with Recoverable Overdue Export
Proceeds

213. As at 30 June 2014, recoverable export proceeds amounted to USD194.8
million of the declared Forms CD1/CD3/PTS1 raised after 1st January
2010.

214. Under this category, exporters whose export receipts are overdue and
categorised by Exchange Control as recoverable shall be granted
conditional amnesty to regularise their overdue positions within 90
days (1 September - 31 November 2014). The applicable temporary
reprieve on such exporters will be in the form of a graduated relief on
administrative penalties currently being imposed on non-acquittals using
the flagging criterion.

215. Table 7 below illustrates the total recoverable overdue export receipts for
the period January 2010 to date.


Table 7: Overdue Recoverable Export Receipts (2010-2014)

Year
Overdue
Forms CD1
(USD)
Overdue
Forms CD3
(USD)
Overdue
Forms
PTS1
(USD)
Total
(USD)


Total
164,440,768
6,715,224 23,691,088 194,847,075
Source: Computerized Export Payments Exchange Control System
(CEPECS)
* As at 30 June 2014

216. As at 30 June 2014, all exporters with Forms CD1/CD3/PTS1 that
became overdue during the period 1 January 2010 to 31 December 2012
shall be granted a three month (90-day) reprieve to benefit from the
reduced graduated export documentation access fee.

217. Exporters are expected to fully acquit their overdue export earnings
within the 90-day amnesty period after which, those exporters having
overdue positions after the expiry date shall continue to be subjected to
the normal administrative penalty fees, currently in force. The applicable
graduated Exchange Control flagging framework shall be communicated
to Authorised Dealers in due course.

218. Exporters with overdue positions from 1 January 2013 to date will
continue to access export documentation using the current flagging
framework.


Conditional Amnesty on Unauthorised External Loans

219. The Reserve Bank is fully aware that some companies have contracted
unauthorized offshore loans in an effort to sustain their local operations.
Exchange Control policy requires that all external loans should be
registered with the Reserve Bank.

220. In order to allow for the full accounting through formal regularization of
the unauthorised offshore loans, the Reserve Bank shall grant a three
month (90-day) conditional amnesty to such companies to register
their external loans with Exchange Control.

221. The 90-day temporary reprieve should allow Authorised Dealers and their
affected clients to exercise discipline and make good these unwarranted
cases of Exchange Control violations.

Conditional Amnesty on Unauthorised Cross Border Investments

222. The Reserve Bank has on record cases under investigation where some
Zimbabwean corporates established cross border investments without the
requisite Exchange Control approvals. Such unauthorised cross border
investments earn profits and dividends which are not repatriated back into
the country to benefit the domestic economy.

223. Similarly, Zimbabwean investors with unauthorised cross border
investments shall be granted a 90-day conditional amnesty to give
them sufficient time to regularise their offshore businesses with
Exchange Control.

224. The temporary reprieve on these delinquent cases, means that the
Reserve Bank will during that 90-day period, suspend its
investigations and referrals for possible prosecution.

Conditional Amnesty on Non-Remittance of Investment Income

225. Cross border investments authorised by Exchange Control are required to
make regular quarterly submissions to the Reserve Bank on their
performance offshore and repatriate investment income back into the
country to recoup the initial capital outlay.

226. The Reserve Bank is concerned that most of these cross-border
investments have not complied with Exchange Control provisions. In
fact, Exchange Control is inundated with requests for recapitalisation on the same non-performing unauthorised offshore
investments.

227. In some cases, offshore investors have falsely attributed the nonrepatriation of dividends to the need to recapitalise their failing
investments. The Reserve Bank is fully aware that some investors
continue to externalise foreign currency earned from these offshore
investments.

228. In the same vein, the Reserve Bank shall give such investors a
temporary reprieve of 90 days to comply with the Exchange Control
requirements of quarterly declaration of financial reports and
repatriation of investment income in the form of declared dividends.


Importers with Outstanding Bills of Entry

229. Following the introduction of the multi-currency system, the Reserve
Bank further liberalised the Current Account transactions. In this case, the

requirement for seeking prior Exchange Control approval for all import
payments was removed. However, the removal of import restrictions
has resulted in increased cases of capital flight through payment of
non-existent imports and rampant transfer pricing.

230. In order to account for imported goods, the Reserve Bank introduced an
administrative requirement for importers to acquit their Bills of Entry
(Imports) with Authorised Dealers as proof of receipt of imported goods
into the country.

231. The Reserve Bank is concerned that Exchange Control audits
conducted have shown that there is a significant amount of import
payments not matched with acquitted Bills of Entry (Imports). This
implies that some importers are making false payments which have no
corresponding value of imports coming into the country.

232. As at 30 June 2014, outstanding Bills of Entry (Imports) amounted to
USD5.8 billion, for advance import payments for the period January
2009 to June 2014.

233. Importers have not been acquitting their Bills of Entry (Imports) taking
advantage of the liberalised current account framework. This
development is worrisome as it demonstrates possible cases of illegal
externalisation of foreign currency by some importers and the general
lack of discipline in the economy.

Table 8: Overdue Bills of Entry (Imports) (USD million)
Year
Total
Merchandise
Imports Incl.
fuel
Overdue Bills
of Entry
(Imports)
% NonCompliance

44%

1,257

36%

3,791
1,461
39%

5,182
1,474
28%


22%
TOTAL
18,925
5,790
31%
Source: CEBAS System, Exchange Control

234. In order to curb externalisation and ensure that the country receives true
and fair value from its import payments, importers shall be granted
a conditional amnesty of 90 days (1 September – 30 November 2014)
to acquit their Bills of Entry with Authorized Dealers for advance
payments for all imported goods.

235. In instances where there were no imports being sourced the funds
externalised should be repatriated back to Zimbabwe during this
amnesty period.

236. After the expiry of this temporary reprieve period, the Reserve Bank
shall introduce an importers’ flagging criterion with high
administrative penalties similar to those currently being applied on
exporters with overdue export receipts. Exchange Control shall issue
the applicable flagging framework for importers to be effected on
delinquent importers with effect from 1 December 2014.

Review of Nostro Account Balances Threshold

237. As part of the Reserve Bank’s broad measures to improve market
liquidity, Authorised Dealers are currently required to maintain a
maximum of 30% of their Foreign Currency Account (FCA) balances
which exclude domestic FCA balances in Nostro Accounts to meet their
day to day international payment obligations.

238. It should be noted that keeping large balances in Nostro Accounts is
tantamount to providing liquidity to those offshore jurisdictions
where accounts for Authorised Dealers are domiciled. The boosting
of liquidity in those countries is at the expense of Zimbabwe’s
liquidity situation.

239. As at 30 June 2014, total FCA balances excluding domestic FCA
balances held with Authorised Dealers amounted to USD1.7 billion, of
which USD276.6 million were balances held in Nostro Accounts,
representing an average of 16.5% or 5.7% of total bank deposits of
US$4.8 billion. This shows that the historical bank holdings in Nostro
Accounts have been more than sufficient to meet Authorised Dealers’
international payment obligations. These developments undoubtedly
create more room for the downward review of the Nostro Account
balances threshold to allow for further injection of cash resources from
Nostro Accounts into the domestic economy.

240. In order to sustain the gains achieved by the policy on improving market
liquidity and to simplify the method of calculating the compliance
threshold, with immediate effect, the maximum Nostro Account
compliance threshold shall be reviewed from the current 30% of
FCA balances excluding domestic FCAs to a simplified threshold of
5% of total FCA balances. There will be no need to split banks’

deposits between domestic and non-domestic FCAs for the purpose of
complying with this new threshold of 5% on the basis of going back to
basics.

241. Authorised Dealers shall continue to be allowed the normal 48-hour
adjustment period in the event account movements result in them
exceeding the maximum threshold.

242. Exchange Control shall issue the applicable penalties to be levied for
non-compliance.

243. Furthermore, the implementation of the first phase of the Computerised
Exchange Control Nostro Account Monitoring System (CENAMS) has
improved compliance levels by Authorised Dealers. In this regard, the
second phase of CENAMS to enhance the declaration and performance of
Authorised Dealers’ Nostro Accounts has been developed and will be
rolled out in due course.


Compliance with International Anti-Money Laundering Measures

244. Zimbabwe is a member of the Eastern, Southern African Anti-Money
Laundering Group (ESAAMLG), and is committed to fight against
money laundering and the financing of terrorism. As part of its
commitment to fight against money laundering, the country is expected to
closely monitor the movement of cash across its international borders.

245. The Financial Action Task Force (FATF) experts have concluded that
most criminal and terrorist groups launder their funds mainly through:
(a)
Cash exports by individuals;
(b)
Cash deposits to or withdrawals from bank accounts; and

(c)
Wire transfers.

246. Money laundering has adverse effects, both in economic and social terms.
If left un-checked it can erode a nation’s economy through changing the
demand for cash and the country can be black-listed and will be barred
from conducting any international transactions.

247. In complying with the international anti-money laundering
measures, most countries have imposed restrictions on movement of
cash across their borders as shown in Table 9 below:


Table 9: Limits on Foreign Currency Exports by Individuals
COUNTRY
LIMITS ON CASH
EXPORTS
(US$ EQUIVALENT)
(GDP NOMINAL)

US$
Angola
5,000 per year
124 billion
China
5,000 per exit
9.3 trillion
India
5,000 per exit
1.7 trillion
Kenya
4,999 per exit
45 billion
Russia
10,000 per exit
2.1 trillion
South Africa
500 per exit
354 billion
USA
10,000 per exit
16.7 trillion
Zimbabwe
10,000 per exit
13.2 billion
Source: International Air Transport Association (IATA)

248. As part of anti-money laundering measures and consistent with similar
countries’ limits on export of cash and the need to promote the use of
plastic money, the limit on export of cash has, with effect from 26
August 2014, been reduced from US$10,000 per exit to US$5 000 per
exit.

249. Similarly, importation of goods and services above US$ 5 000 should
ordinarily be processed through normal banking channels.

250. The Reserve Bank and ZIMRA are working on ways and means on
strengthening the use of the Form 47 in order to avoid its abuse by
using Zimbabwe as an arbitrage economy.

Removal of Prior Exchange Control Approval on Importation of
Foreign Currency Notes by Banks

251. Importation of foreign currency notes currently requires specific prior
Exchange Control approval. Given the improved compliance status of
banks following the implementation of EXCORS, there is need to remove
this approval requirement and allow banks to freely import cash under the
delegated Exchange Control authority.

252. Therefore with immediate effect Authorised dealers shall be allowed
to import foreign currency notes from their Nostro Accounts without
prior approval from the Reserve Bank.

253. Total cash holdings of each bank shall, however, not exceed 15% of
total FCA balances with effect from 1st September 2014. This policy
measure is intended to avoid abuse by market players and to comply
with anti-money laundering measures.

Imports of Non-Essential Merchandise Goods
254. In recent years, the Zimbabwean economy has experienced a widening
trade deficit as a result of the country’s continued reliance on imported
goods.
255. An in-depth analysis of merchandise imports shows that the country is
importing non-essential goods as well as goods that can be produced
locally. Over and above worsening the liquidity situation, the increased

appetite for non-essential imports has added to the collapse of domestic
production to the detriment of both employment and tax collections.

256. The Reserve Bank, therefore, urges market participants to exercise
restraint and use limited foreign currency resources responsibly to
avoid the collapse of domestic economy and the exportation of jobs
and incomes.

257. The Reserve Bank also calls upon all the relevant arms of
Government that are responsible for issuance of import permits to
exercise restraint by ensuring that the country does not continue to
incur a huge import bill from non-essentials or goods that can be
produced locally and to levy appropriate duties to encourage
domestic production.

258. Effective collection of duty is also very essential to avoid the current
porosity at border posts wherein goods are finding their way into the
country duty free much to the detriment of the local economy.

259. The productive sector should work towards improving production
efficiency and lower costs of production in order to be competitive.

Foreign Investment Promotion and Facilitation
260. The country’s funding requirements underscore the need for an enhanced
approach towards the mobilization of increased cross-border financial
inflows, to provide liquidity.

261. As part of measures to boost and sustain market liquidity, the Reserve
Bank is expected to play a facilitative role through the provision of an
investor-friendly regulatory framework. There is need, therefore, to

create conducive conditions that allow the free and unfettered inflow
of foreign investment.

262. Pursuant to this, the Reserve Bank has considered the removal of selected
Exchange Control capital restrictions, notwithstanding that the capital
account has not been liberalised.

Removal of Restrictions on Capital Remittances
263. In terms of the current Exchange Control policy on capital remittances,
all disinvestment proceeds arising from pre-May 1993 investments
require prior Exchange Control approval and are eligible for reinvestment on the domestic market for a period of 5 years prior to
remittance.

264. With immediate effect, all disinvestment proceeds arising from both
pre-May 1993 and post-May 1993 shall be fully remittable. In this
regard, investors may remit offshore any capital plus appreciation to any
destination of their choice, after Exchange Control approval has been
granted.

Review of the External Loans Threshold

265. Current policy states that all loans of USD1 million and above require
ELCC approval, whilst external loans below USD1 million are approved
at the Authorised Dealers’ level. The requirement for a limit on loans
approved at bank level is necessitated by the need to curb externalisation
through fictitious loans and enable full accounting of the country’s
external liabilities.

266. Given the need to streamline the approval processes so as to enhance
timeous accessing of offshore loans, the threshold for approval of
offshore loans by Authorised Dealers without need for prior Reserve
Bank approval is hereby increased from the current USD1 million to
USD7.5 million.

267. This relaxation of Exchange Controls is necessitated by improved
compliance levels by Authorised Dealers following the implementation of
the Exchange Control Compliance Rating System (EXCORS) by the
Reserve Bank. In this regard, the Reserve Bank has noted that EXCORS
has
improved
Authorised
Dealers’
operational
efficiency
and
effectiveness.

Consolidated Framework for Review of External Loans and Foreign
Investments
268. Currently, applications for foreign equity and for contracting external
debt are processed separately by the Exchange Control Review
Committee (ECRC) and External Loans Coordinating Committee,
respectively. However, all external debt and foreign equity proposals are
subject to Exchange Control rules and regulations.

269. The current set-up is bureaucratic and negates the back to basics
principle as it prolongs the approval process for investors wishing to
bring their capital into Zimbabwe. In some cases, a foreign investor’s
application for equity participation comes with an external loan
component which is then split for consideration by another committee.

270. In order to streamline and expedite the approval process, the
processing of external loans and foreign investment applications shall

with immediate effect be done under a consolidated and synchronised
External Loans and Exchange Control Review Committee.

Promotion of Offshore Investments

271. The Reserve Bank has approved a number of investments by local
corporates venturing into the region and internationally. At a time when
the country is faced with liquidity challenges, such investments lead to
the creation of long term foreign assets, which have the potential to earn
the country foreign currency in investment income.

272. Furthermore, these investments have the potential to unlock debt and
equity capital which is currently, evasive owing to the country’s
perceived risk. The success of such investments will undoubtedly result
in Zimbabwe being ranked highly as an investment destination of choice.

273. The Reserve Bank supports such investments which create
Zimbabwean offshore companies and have a potential to yield quick
and long-term gains to the country. However, key to the success of
the offshore investments is the promotion of discipline by local
investors in ensuring remittance of investment income in the form of
profits, dividends and other income back into the country.

274. The Reserve Bank shall continue to objectively consider such proposals
with the aim of promoting Zimbabwean offshore companies. The
investments should clearly outline the benefits which the country will
accrue to ensure the investments payback, the initial capital outlay and
provide further income to the economy. Exchange Control will enhance
its monitoring of these approved investments for periodic reporting

requirements, and on-site audits/visits to monitor and verify reported
performance of the offshore investments.

Removal of restrictions on the participation of foreign investors on the
Bond Market

275. The Reserve Bank takes a keen interest in efforts by various stakeholders
in developing money and capital markets given their criticality in
enhancing financial deepening. It is therefore, necessary to align policies
to ensure the successful mobilisation of external finance to boost market
liquidity.

276. In terms of current policy on investment, in the bond market, foreign
investors may subscribe for up to 35% of primary issues of bonds
provided the purchase is financed by inward transfer of foreign currency
through normal banking channels. The same policy also prohibits foreign
investors from making purchases from the secondary market.

277. In order to encourage foreign investment inflows and further develop
the country’s bond market, exchange control restrictions on the level
of foreign participation on primary issuance of bonds and
participation by foreign investors in the secondary market are
removed, with immediate effect. The purchase of bonds shall be
financed by confirmed inward transfer of foreign funds through normal
banking channels.

278. The Reserve Bank shall put in place enhanced reporting and monitoring
structures to ensure the full accounting of these foreign capital inflows.

Increased participation by Diasporans on the ZSE

279. In 2004, as part of opening up the capital account to allow the
participation of Zimbabweans in the Diaspora on the Zimbabwe Stock
Exchange, the Exchange Control limit of such participation was increased
from 40% to the current 70%.

280. The Bank continues to recognise the important role that
international remittances play in the development of emerging
economies. As such, Diasporans play a critical role in economic
development of their home economies. In order to allow
Zimbabweans in the Diaspora to fully participate in the economic
development of their country, all non-resident Zimbabweans shall be
permitted to invest in any listed counter on the Zimbabwe Stock
Exchange without any limit, i.e. up to 100%.

281. The Reserve Bank will re-orient Homelink Pvt Ltd to provide a
facilitative platform through which Zimbabweans in the Diaspora can be
assisted to invest back home. Homelink will collaborate effectively with
the Zimbabwe Stock Exchange, Zimbabwe Investment Authority and
other financial institutions to develop various investment instruments,
such as high yielding Diaspora Bonds. The Bank will also put in place
appropriate risk management measures to assure Zimbabweans in the
Diaspora safety on the value of their investments.

Promotion of Securities Trading Efficiencies and Enhanced Risk
Management

282. The Reserve Bank, in its effort to create a monetary regime supportive of
the country’s overall foreign investment promotion activities, stands
ready to support initiatives that are meant to attract all forms of foreign
investment into the country.

283. One such area involves the institutionalization of the Central Securities
Depository (CSD), which is meant to usher in the electronic trading of
securities on the Zimbabwe Stock Exchange (ZSE). Chengetedzai
Depository Company Limited has been mandated by the Securities
Exchange Commission to establish the depository.

284. The establishment of the depository will bring in efficiency gains which
will facilitate trading with enhanced risk management and an increase in
the attractiveness of the capital market to external investors.

285. As Monetary Authorities, we are supportive of these efforts given the
underlying need for reducing the settlement cycle from the current (T+7)
to (T+3) which is the norm obtaining on other external exchanges, and
meets international best practice.

286. To facilitate the attainment of this noble objective, the Reserve Bank
shall collaborate closely with the Zimbabwe Stock Exchange,
Securities Exchange Commission and the Depository Company to
align its Exchange Control regulatory framework to accommodate
the electronic trading of securities in the country.

Disposal and Remittance of Immovable Property Proceeds

287. Current Exchange Control regulations require specific applications to be
made to Exchange Control for the remittance of proceeds arising from
disposal of immoveable property.

288. In order to have clarity, as well as allow property owners to make use
of their sale proceeds in a manner that enhances liquidity in the
market, the following shall apply:-

Immoveable Properties Acquired Using Offshore Funds
289. The disposal of immovable property and remittance of the proceeds by
foreign individuals shall be handled by Authorised Dealers after the
client has provided documentary evidence confirming inward transfer
of funds to purchase the property.

290. The disposal of such immoveable property by foreigners shall be eligible
for 100% remittance upon request.
Renewal of Authorised Dealership Licence and Exchange Control
Compliance Rating System (EXCORS)


291. In June 2013, Exchange Control introduced a Compliance Rating System
to systematically and effectively monitor all Authorised Dealers by
classifying them according to their compliance levels with Exchange
Control Rules and Regulations.

292. The Compliance Rating System assigns ratings to all banks on a scale of
1 to 5, depicting a bank’s level of compliance. Successful renewal is
predicated upon attainment of a minimum compliance level of a rating of
three (3). The scale is applied as in table 10.

Table 10

OVERALL RATING
RATING
Excellent

Very Good

Good

Unsatisfactory

Poor

293. Authorized Dealers have displayed increased levels of compliance with
Exchange Control Rules and Regulations since the introduction of
EXCORS.

294. Table 11 below shows the statistical analysis of compliance ratings that
were awarded to Authorised Dealers in 2013 and 2014.

Table11:
Statistical Analysis of Compliance Levels
NO
STATISTICAL DISCRIPTION
RATINGS IN

RATINGS IN

1 HIGHEST RATING
4.500
4.300
2 LOWEST RATING
3.510
3.000
3 MEAN
4.203
3.790
4 MEDIAN
4.273
3.770
5 STANDARD DEVIATION
0.230
0.320

295. The liberisation of the current account has seen an increase in Exchange
Control transactions at branch level and the compliance framework
requires renewal of Authorised Dealership licence on an annual basis.
The new compliance monitoring framework is also being automated to
apply best practices and Exchange Control’s capacity building
programme will be intensified to build the necessary competencies in
Exchange Control operations.

296. In this regard, and pursuant to the new Authorised Dealers licencing
framework, the licensing fees have been reviewed from the current
$400, as follows;
• Head Office
USD 1, 000 per annum
• Branch

USD 500 per branch per annum

297. The Reserve Bank urges banks to exercise extreme caution in the
conduct of cross border transactions, and apply as much as possible
the KYC principle, in ensuring adherence to the existing Exchange
Control framework.

MEASURES TO BUTTRESS THE MULTIPLE CURRENCY SYSTEM

Upholding the Multiple Currency System

298. A lot of debate has been going on about the longevity of the multiple
currency system in Zimbabwe. Government’s consistent and official
position is that the country is using the multiple currency system.
This position has been well articulated by the Minister of Finance
and Economic Development, Hon Patrick Chinamasa, and is the
bedrock under ZimAsset. The local currency would only be
resuscitated when the country’s foreign exchange reserves and
domestic production levels are significant enough to sustain its
rebirth.

299. The current low levels of production within the economy concomitant
with the high levels of imports are not conducive for the return of the
local currency. It would therefore be economic suicide for

Government to do so without foreign exchange reserves to anchor the
local currency.

Deflation under the Multiple Currency System

300. Again a lot has been said and written on this subject matter. Our
considered view is that deflation which is defined as the reduction in the
general level of prices in an economy was inevitable in the Zimbabwean
economy. The prices of goods and services that are being charged in
Zimbabwe continue to be higher than those charged within the region and
international markets, thus the reduction in prices was an unavoidable
price correction process or a self-adjustment process for companies
and individuals to remain in business in a tight liquidity economy.
The high domestic prices also contribute to the incidence of high
propensity to import within the economy. Table 12 provides a comparison
of prices of selected products in Zimbabwe and the region.

Table 12
Regional average price comparisons of selected goods (US$)

Commodity
Zimbabwe S. Africa
Botswana Mozambique Zambia
Milk (1 litre)

White bread (loaf)

White rice (1kg)

Eggs (12)

Cheese (1kg)

Apples (1 kg)

Oranges (1kg)

Tomatoes (1kg)

Potatoes (1kg)

Local transport(1 way)

Apartment (85 m2)

Petrol (1 litre)

Newspapers


Importation of coins

301. The most plausible reason given by the Retail Association of Zimbabwe,
businesses and individuals across the nation for the discrepancy of prices
as indicated in Table 12 in Zimbabwe and the rest of the world is lack of
change within the economy to the extent that sweets and
tokens/vouchers are issued as change to the general public. Barter
trade is also in use especially in the rural areas. In order to
ameliorate this problem of change and it's unintended consequences
on the price levels in the economy, the Reserve Bank shall be
importing special coins of 1c, 5c, 10c, 20c, and 50c whose values
would be at par with the US cents. Rand coins of 10c, 20c, 50c, R1,
R2 and R5 are also being imported to buttress the multiple currency
system which is dominated by US$s and Rands. These coins would be
distributed to business through normal banking channels from the
Reserve Bank.

302. The Bank through its Bank Use Promotion Unit shall monitor that the
coins are utilised as change to bring decency in the economy.

Mobilisation of Financial Resources

303. As already indicated, RBZ is in the process of arranging medium to
long term offshore funding to shore up liquidity in the economy for
enhancing gold production and the lender of last resort function.
This is in line with Cabinet approval for the restoration of the Bank’s
role to arrange and negotiate financing facilities for the economy at
large. The Bill will be gazetted in due course.

Interbank Market

304. The African Export Import Bank (Afreximbank) guaranteed interbank
market facility (or Aftrades facility) of US$100 million is earmarked to
be operational between end of August and mid-September 2014. This
facility would go a long way to augment the current bilateral like-minded
intermarket trades taking place in the financial sector. The Aftrades
facility is a sector-wide facility that shall also complement the lender of
last resort function of RBZ. The delay in the launch of this facility was
attributable to the need to make the instruments under Aftrades
tradable in the secondary market. This has been completed.

Demonetization

305. As Monetary Authorities we are convinced that demonetization of the Z$
currency is a necessary process that Government should do to
compensate the banking public. Consistent with the 2014 Budget
Statement, Government should therefore come up with a permanent
solution to this matter to restore confidence and good will. The old
local currency should be retired since it was replaced by the multiple
currency system.

POLICY ON RESERVE BANK SUBSIDIARIES

306. The Reserve Bank has four subsidiaries, namely, Fidelity Printers and
Refiners, Aurex (Pvt) Ltd, Export Credit Guarantee Corporation of
Zimbabwe (ECGC) and Homelink (Pvt) Ltd. The Reserve Bank is in the
process of ensuring the operations of these companies are enhanced so
that they play a meaningful role in the economy.

Aurex
307. Zimbabwe has a diversity of precious and semi-precious minerals,
namely, gold, emeralds, platinum, diamonds, silver and many others. In
line with ZimAsset, leveraging own resources is critical for sustainable
growth and development of the economy. Value addition and
beneficiation to the country’s natural resources is one of the key pillars of
ZimAsset.

308. Against this background, the Reserve Bank is working towards reviving
Aurex, whose capacity utilization had declined due to the harsh economic
environment, to promote beneficiation of the country’s minerals.

309. Aurex adds value to the locally available gold, diamonds and silver,
which benefits the economy through local sales and exports, as well
as job creation.

310. Once the company has been adequately capitalized, obsolete equipment
will be replaced to enhance production efficiency and product quality.
This will enable the company to take a leading role in the beneficiation of
the country’s precious minerals.

Export Credit Guarantee Corporation of Zimbabwe

311. In view of subdued export performance that has undermined the country’s
foreign exchange generative capacity, with negative repercussions on
liquidity conditions, there is need to promote the country’s productive
and export sectors.

312. Against this background, the Reserve Bank is in the process of
recapitalising ECGC, with a view to enable it to guarantee credit exports.

This is particularly important, as a well-capitalized ECGC would provide
guarantees against exports and trade related losses. Importantly, this is
envisaged to support export growth and unlock export earnings.

313. In addition, ECGC will assume an additional role to guarantee domestic
loans accessed by small to medium scale enterprises (SMEs). This
coupled with the simultaneous establishment of the Credit Reference
Bureau is envisaged to promote lending by banks to SMEs and businesses
requiring micro financing.

314. This added function of ECGC is expected to help in mainstreaming
informal sector SMEs, pull their savings and enable them to access
formal banking services.

315. These measures are envisaged to provide strong impetus to
formalizing the informal sector and promote the production of
domestic and export commodities.

Fidelity Printers & Refiners
316. As stated in our January 2014 Monetary Policy Statement, Fidelity
Printers and Refiners (FPR) is now the sole buyer and exporter of gold in
the country. This position is critical to ensure transparency in the
accounting and marketing of gold.

317. As at 31 July 2014, 7.3 tonnes had been purchased and processed for
export by FPR. This is quite remarkable given that gold output had
declined to 3 tonnes in 2008. FPR are projecting an output of 13 tonnes
by year end and to continue with the application for accreditation to the
London Bullion Marketers Association that needs a threshold of 10 tonnes
per year for admittance.

318. The Bank is working closely with the Ministries of Finance and
Economic Development and Mines and Mining Development to establish
Gold Service Centres to harness gold from artisanal miners and SMEs
and to put in place supportive measures to enhance gold production
in the country. The Gold Service Centres are over and above the
existing gold buying centres that FPR is using at ZB Bank branches
around the country.


Gold Bonds
319. Government has commenced to redeem, through Treasury Bills, the
previous debt owed by RBZ to creditors. RBZ and/or FPR do not have
liabilities from the current purchases of gold. Artisanal miners and
SMEs are paid upon delivery whilst the large scale producers are
paid within 48 hours.

Homelink
320. The Bank is quite appreciative of the contribution of the Diasporans to
economic development in Zimbabwe with remittances from the Diaspora
of US$412 million for the first six months of this year far exceeding the
US$67 million from FDI for the same period. It is against this
background that Homelink shall be revamping its operations to provide
tailor made products and services that meet the needs of the Diasporans.

POLICY ADVICE
Promotion of Foreign Direct Investment

321. The growing import dependence that has typified the negative trade
developments over the past few years, has largely been occasioned by

attendant supply gaps in the economy. A significant number of
manufacturing companies have either closed shop or relocated to other
countries which has resulted in output gaps widening in the economy.

322. It is against this background that the country has increasingly relied on
imported finished goods from South Africa and the Far East, to bridge the
domestic supply gaps. Additionally, the country has persistently
experienced a net outflow of liquidity through absorption of
disproportionately high levels of imports.

323. Attempts to regain lost export and domestic markets have remained
constrained by lack of competitiveness, largely emanating from high
production costs. This reflects the country’s costly production models
on the back of outdated and antiquated machinery. On the other
hand, the country’s regional and international competitors have
adopted low cost, efficient and advanced technology.

324. As such, imports have taken over the domestic market as they attract
lower prices, while exports have lacked the competitiveness required to
capture new and previously lost markets.

325. On the back of these developments the need to invest in the latest
technology to regain the much-needed competitive edge in the domestic
market and international export destinations should be prioritized.

326. In this regard, there is need for Government to implement deliberate
policies that attract foreign direct investment and exploit the liberalised
exchange control policies on capital and dividends for the benefit of the
economy. This is largely so, as non-debt creating investments, create
employment, effectively plug supply gaps, reduce import dependence

and moderate the haemorrhaging effect of imported finished
products. The Bank is therefore pleased by the call of His Excellency,
the President, Cde R. G. Mugabe at last week’s Southern African
Development Community (SADC) Summit for South Africa to empower
the region through value addition investments in SADC.

Clarity of Investment Regulations
327. Whilst the Reserve Bank is clear on the topical subject on the
Indigenisation and Economic Empowerment Policy, the Policy is
unfortunately misunderstood or misinterpreted by both local and foreign
investors. Zimbabwe has a clear Indigenisation and Empowerment
Policy which has been clearly articulated over time by his Excellency, the
President, Cde. R G Mugabe and the Minister of Youth Development,
Indigenisation and Empowerment, Hon Francis Nhema.

328. The Indigenisation and Economic Empowerment Regulations, especially
Section 5 paragraph 4, shows that the Policy is not ambiguous. It
takes into account flexibility in terms of time and scope (joint
ventures, build own operate and transfers projects, land use
agreements and contract farming etc) for compliance, use of
empowerment credits for compliance purposes and that it is not a one
size fits all Policy. The Policy as captured in the Act and Regulations
is clear but its publicity is not.

329. In view of the above, it is essential that Government consider guiding
investors in a clear manner through the gazetting of sector-specific
investment regulations and guidelines. Additionally, defining and
gazetting clear empowerment credits for compliance with the
Indigenisation and Economic Empowerment Policy in line with the

regulations is critical to promote investment and to ensure that the
Policy is consistent and compatible with ZimAsset. The Policy should
also ensures that local investors feel at home so that they become
good ambassadors for the attraction of more investment into the
country.

330. Such clear regulations when put in black and white would put to rest
most of the current misunderstandings and misconceptions
surrounding the country’s noble objectives under the Indigenization
and Economic Empowerment Policy.

Dealing with the Negative Effects of Sanctions

331. The country’s investments drive would need to be complimented by
dealing with the negative perception and adverse effects of the sanctions
albatross on foreign financial flows, including FDI on the
Zimbabwean economy. Thus apart from blocking funds under the
Office of Foreign Assets Control (OFAC) rules as part and parcel of
the restrictive measures, the collateral damage of the sanctions is
quite high and severe as sanctions have a direct effect of increasing
political and/or country risk premium of doing business in
Zimbabwe. The net effect is that FDI is discouraged from coming into
Zimbabwe, whilst lines of credit dwindle and foreign banks shunning
Zimbabwe.

332. The sanctions risk is not insurable. Other undesirable and
unintended consequences like corruption, smuggling of goods, etc
have as a result manifested under the guise of fighting sanctions

much to the detriment of the economy and peace loving
Zimbabweans.

333. We therefore genuinely welcome the positive initiatives by the European
Union on this matter and we would like to urge the United States of
America to continue to review the OFAC rules to assist this small
economy to attract the much needed capital for recovery.

Debt Resolution

334. The country’s outstanding debt, which is largely in arrears, has grown to
be a constraint on the country’s growth and development aspirations.
Essentially, a country in arrears attracts offshore loans at unfavourable
conditions, on account of the risk premium attached to it. Notably,
interest rates are high and conditions precedent on offshore credit
facilities become difficult for domestic potential borrowers, even before
making any draw-downs.

335. Against this background, the expeditious resolution of the country’s debt
burden remains critical in efforts geared at unlocking medium to longterm offshore credit lines, required by industry to recapitalize and re-tool.

336. In this regard, the amicable resolution of the country’s external debt in a
timely manner should rank high on Government’s policy agenda, as this
would help ease the country’s tight liquidity situation, while at the same
time rejuvenating industrial activity.

337. It is against the above that the country would need to continue to engage
the multilateral and donor community in order to attract international
capital inflows.

IMF Staff Monitored Program
338. Government is implementing an International Monetary Fund (IMF)
supported Staff Monitored Program (SMP) to help the country establish a
track record of sound macroeconomic policies and pave way for effective
debt restructuring and resolution. The Fund, in its first and second
reviews of the SMP, has expressed satisfaction with the progress made by
the country this far.

339. This notwithstanding, there is need for the country to continue
implementing prudent policies, so as to remain within structural
benchmarks and quantitative targets agreed with the IMF. As such,
great prominence must be attached to the successful implementation of
the SMP in order to consolidate the gains achieved so far from a fiscal
and monetary standpoint.

340. The country’s successful performance under the SMP would provide
strong impetus to the commencement of an effective debt resolution
program and open new options for increased foreign exchange and
investment inflows into the country.

Infrastructural Development & Management of Recurrent
Expenditure

341. Infrastructure rehabilitation and development is critical in promoting the
country’s economic growth. Developing reliable and robust infrastructure
enhances productivity, improves competitiveness of firms and makes the
country an attractive destination for foreign direct investment.

342. Over the last three years the proportion of capital budget to total budget
was relatively low at 14%, 10% and 12% in 2012, 2013 and 2014,
respectively.

343. Government would need to find appropriate and well-structured
mechanisms for reducing recurrent expenditure to create space to
increase the capital budget allocation in order to establish a strong
foundation for growth and development. Banking institutions are also
called upon to support or complement Government initiatives through
raising offshore funding for infrastructure projects.


Security of Land Tenure

344. It is noted that the majority of farmers have offer letters which are
considered by banking institutions as a weak form of security. There is
therefore need to expedite the issuance of bankable and transferable 99
year leases to qualifying farmers. Leases with such features are
considered better forms of security than offer letters or leases which are
not transferrable.

345. It is also advisable for Government to acknowledge the responsibility to
compensate farmers for improvements on farms that were acquired
under the Land Reform Programme and to come up with a validated
quantum of the compensation. This position is consistent with His
Excellency, the President, Cde R. G. Mugabe’s stance that compensation
for improvements would be done when financial resources become
available. In this regard, the Bank is pleased to note that Government has
since 2011 paid compensation in an amount of around US$5 million.

Information Communication Technology

346. A robust Information Communication Technology (ICT) system is one of
the major driving forces for economic recovery and sustainable growth.
ICT promotes improvements in innovation and productivity which are
central to the economic performance of many countries.

347. In an endeavour to promote a cashless society, utility service
providers should adopt measures to promote use of plastic cards and
mobile payments in the payment of utility services.

348. Concomitantly, there is need for a deliberate government policy for
investment in telecommunications systems such as fibre optic which are
critical in enhancing connectivity. In addition policies that promote the
revamping of point of sale systems in retail outlets and ensure the
interoperability of payment platforms is also critical in that regard.

349. As such, banking institutions are urged to invest in technology that
will allow expansive provision of point of sale systems that can be
shared among banking institutions.

CONCLUSION

350. The theme of this Monetary Policy Statement, BACK TO BASICS,
implies returning to the basic principles of economics, banking and
business and the pursuit of consistent and pragmatic policy measures
necessary to stimulate production for economic recovery that is
needed for economic prosperity and poverty reduction enunciated
under ZimAsset.

351. These policies would need to be buttressed by a vigorous promotion
of FDI to augment local investment. This policy stance is critical
because what this country needs most at this juncture is the fishing
rod (FDI) much more than the fish (imports) for sustainable
development.

352. As Monetary Authorities, we have a critical role to play in this
process and this Statement presents policy measures that I believe
are robust and prudent to reinforce and boost the earnest
implementation of ZimAsset and thus setting the tone for
Zimbabwe’s Economic Recovery.

353. The measures also require the nation, at all levels, to adhere to good
corporate governance, transparency, integrity and above all the spirit
of love and respect for each other as patriotic Zimbabweans united in
our resolve.
354. The measures in this Monetary Policy Statement also need significant
support from the international community towards the normalisation
of relations with Zimbabwe through the removal of sanctions as the
restrictive measures continue to have a debilitating effect on the
economy. The sanctions are quite disproportionate given the small
size of the Zimbabwean economy with a GDP of around US$13
billion and total banking deposits of around US$5 billion.

355.
The nation needs to fight the negative perception that Zimbabweans
continue to create, knowingly or unknowingly, for ourselves. The
negative perception towards the country by foreigners is mainly
emanating from within Zimbabwe. Charity begins at home. We need
to position ourselves in line with the African proverb that says “Until

lions start writing down their own stories, the hunters will always be the
heroes.” [Simoen Messan Adagba]

356.
We need to minimise self-condemnation and self-hatred. There is need
for self-introspection, be proud and thank God for where He has taken
us thus far.

357.
It is so deep rooted in my heart and I have faith and optimism that
Zimbabwe’s economic recovery is in sight.

358.
May God bless Zimbabwe.

I THANK YOU


DR. J. P. MANGUDYA
GOVERNOR
AUGUST 2014