2016 MID-TERM MONETARY POLICY STATEMENT

BY
DR. J. MANGUDYA
GOVERNOR

RESERVE BANK OF ZIMBABWE


WALK THE TALK TO RESTORE TRUST AND
CONFIDENCE

TABLE OF CONTENTS

Current and Capital Account Developments .......................................................................... .20


SECTION 4: IMPACT OF POLICY MEASURES TAKEN BY RBZ IN MAY 2016 ... 52


LIST OF FIGURES

LIST OF TABLES
Table 11: Foreign Currency Inflows and Export Incentive Entitlements USD (5 May-4 Aug

SECTION 1
BACKGROUND AND CONTEXT

This Mid-Term Monetary Policy Statement is issued in terms of Section 46 of the
Reserve Bank Act (Chapter 22:15). The major objectives of this Statement are
to highlight the global and domestic financial developments; to provide an
assessment of the monetary policy measures taken by the Bank in May 2016 to
stabilize the economy; to present new measures to restore confidence within the
economy; and to offer policy advice to deal with the fiscal and current account
deficits in order to change Zimbabwe’s economic narrative to production and
productivity which is very vital or imperative to restore trust and confidence
within the national economy.

The policy measures presented in this Statement are designed to augment the
measures taken by the Bank in May 2016. The new measures include the
elimination of administrative hurdles of contracting offshore loans, resuscitation
of the credit guarantee scheme to enhance local production by small to medium
scale enterprises, putting in place nostro stabilization facilities to deal with delays
in the remittance of outgoing foreign payments, promotion of internal devaluation
using market-based mechanisms to restore competitiveness in the national
economy, and encouraging the fast-track elimination of bottlenecks that are
hampering the ease of doing business within the economy especially in the export
production sectors.

The measures and policy advice which are well aligned to those presented by the
Honourable Minister of Finance and Economic Development in the Mid-Term
Fiscal Review Statement are designed to deal with the structural imbalances that
continue to stress the economy. The structural imbalances are evidenced by the
large current account and fiscal gaps generated by the difficult internal and

external
conditions,
a
legacy
of
dollarisation
policy
inconsistencies/contradictions, policy slippages and procrastination in the
implementation of critical Government policies. These imbalances are further
exacerbated by adverse weather conditions and weak investor sentiment leading
to the under performance of the national economy.

The under performance of the economy which started in 2012 - three years after
dollarisation - is also greatly attributable to the legacy of policy inconsistencies/
contradictions when the country went into dollarisation in March 2009, by default
and not by design, to tame hyperinflation. This was soon after the formation of
the Government of National Unity in February 2009. The policy
inconsistencies/contradictions which were secondary to the political settlement
include over liberalisation of both the current and capital accounts at a time when
the country had very limited access to foreign finance due to debt overhang, and
non- conducive investment climate due to sanctions and unattractive domestic
investment policies; wrong choice of trading currency and; failure to benchmark
with regional comparators to maintain competitiveness.

It is therefore a combination of the current internal and external imbalances and
historical challenges that need to be urgently addressed for the proper functioning
of the multi-currency exchange system that, de facto, is currently totally
dominated by the use of US$. This situation requires the nation to do things
differently and WALK THE TALK to transform the economy by changing the
narrative from consumption to production. The economy is hungry for production
and productivity. With the public sector wage and salary bill being one of the
highest in the world at more than 90% as a share of fiscal revenue and inflation at
-1.4% being low or in negative territory (deflation) for two years now since 2014,
real wages and salaries have increased, crowding out capital and social

expenditure – thus undermining the economy’s capacity to enhance employment
and to be competitive.

The business climate, on the other hand, affected by limited access to foreign
finance; unfinished business on land security tenure and investment regulations;
and high input costs, has not been conducive to attracting the much needed
domestic and foreign investment. In addition the increasing fiscal gap in the
absence of external financing has led to a decline in private sector activity and a
reduction in domestic credit as financial institutions try to contain foreign
exchange induced demand pressures attributable to lending activities.

As if the above harsh conditions are not enough, the economic impact of the ElNino induced drought also increased the need for imports to reduce food
insecurity, whilst the decline in mineral prices depressed export proceeds. In
addition, amid low investor sentiment, the appreciation of the US$ induced higher
than expected demand for this currency, reduced remittances in US$ terms,
especially from South Africa and the United Kingdom (following Brexit) and
generated speculation. With South Africa being Zimbabwe’s main trading partner
- accounting for around 50% of total trade - where the rand depreciated against
the US$, competitiveness has also been severely eroded.

Whilst efforts taken by Government to deal with the above fragile economic
situation have been commendable, a stronger than anticipated impact of
exogenous shocks highlighted above continued to exacerbate the economic
slowdown and precipitated the decline in fiscal space and the cash shortage
situation.

Walking the Talk within the above context of weak economic conditions requires
policy precision and urgent implementation of necessary reform measures to

transform the economy. The process won’t be easy but must be done. It requires
national sacrifice, sincerity and integrity. It requires the ability to share the
adjustment or transformation burden across the board and between the fiscal and
monetary policies. Reliance on one policy instrument to manage the current
structural imbalances would not be sustainable to transform the economy and to
restore trust and confidence.

Overall, transforming the economy from a consumptive to a productive one
requires fiscal discipline, production discipline, policy discipline, and
message/communication discipline (speaking with one voice) in order to achieve
the optimal levels of economic turnaround depicted by the following economic
functional identities:

i. Liquidity = f*(Exports/Forex Earnings)
ii. Exports /Import Dependence = f(Production)
iii. Production = f(Investment Climate/Incentives/ Ease of Doing Business)
iv. Investment Climate = f(Policy Measures/Policy Consistency)

The rest of this Monetary Policy Statement is organized as follows; Section 2
discusses external sector developments and their implications on domestic
economic activities. Section 3 looks at the status of the financial sector. Section 4
discusses the impact of policy measures introduced by the Reserve Bank in May
2016. Section 5 provides new policy measures to enhance confidence and
production in the economy. Section 6 provides policy advice and Section 7 is the
Conclusion. The Appendixes provide an update on the re-engagement, a brief
RTGS and Nostro concepts within the context of the multicurrency exchange
system and an update on closed banks.

* f is read as function of

SECTION 2
EXTERNAL SECTOR AND INFLATION DEVELOPMENTS
Global Economic Developments
Global economic recovery has remained fragile with adverse consequences on
developing economies like Zimbabwe. The situation has been exacerbated by the
referendum outcome which approved Britain’s exit (Brexit) from the European
Union.

The Brexit vote has deepened economic, political and institutional uncertainty
within the EU, threatening the growth momentum witnessed in the first half of the
year. This uncertainty has negatively affected investor confidence and financial
market conditions. Moreover, the bumpy adjustment in China also continues to
undermine sustained global economic recovery.

The recent global economic developments, have compelled the International
Monetary Fund (IMF) to downwardly revise the initial global economic growth
projections for 2016, by 0.1 percent, on account of the negative macroeconomic
consequences, especially in advanced European economies. Consequently, the
IMF is now projecting the global economy to grow by 3.1 percent in 2016 and 3.4
percent in 2017. Table 1 below shows recent global economic developments and
projections for 2016 and 2017:

Table 1: Global Economic Developments and Outlook (%)

Actuals
Projections
Diff. from April
2016 Proj.

World Output

Advanced Economies

US

Eurozone

Japan

Emerging Market &
D
l
i
E
i

China

India

Sub-Saharan Africa

Zimbabwe

Latin America & the
Caribbean

Source: IMF World Economic Outlook Update (19 July 2016), Ministry of Finance and
Economic Development and RBZ projections

Growth in Sub-Saharan Africa is expected to decelerate from 3.3% in 2015 to
1.6% in 2016, representing a 1.4% decline from the initial forecasts in April 2016.
This slowdown is primarily driven by the downturn in international commodity
prices and Brexit fallout. Moreover, economic growth prospects for regional
economies, notably, South Africa, Botswana and Zambia remain vulnerable to the
downturn in international commodity prices and the depreciation of domestic
currencies.

International Commodity Price Developments
International commodity prices have generally remained subdued over the recent
past mainly on account of weakening growth prospects in China, the world’s
largest metal consumer. This notwithstanding, global commodity prices reflected
a modest recovery, albeit from a low base, during the first half of 2016 on the

backdrop of transient stabilisation of global markets. Figure 1 shows global
commodity indices for the period March 2009 to June 2016.

Figure 1: Commodity Price Indices (2010 = 100)

Source: World Bank Commodity Price Data

Specifically, gold prices firmed by 16.3%, from an average price of US$1
096.68/oz in January 2016 to US$1 274.99/oz in June, 2016. Similarly, platinum
increased by 15.3% from US$853.65/oz in January 2016 to US$984.45/oz in June,
2016.

Base Metals and other commodity prices
Base metals recorded a steady recovery during the first half of 2016, boosted by
production cuts and renewed demand. In this context, over the period January to
June 2016, copper and nickel prices picked by 3.7% and 4.8% to US$4
634.34/tonne and US$8 888.43/tonne.

Crude oil prices, which declined to record low levels in January 2016, recovered
steadily to average US$49.83/barrel in June, 2016. Discussions among major oil

2009M03
2009M06
2009M09
2009M12
2010M03
2010M06
2010M09
2010M12
2011M03
2011M06
2011M09
2011M12
2012M03
2012M06
2012M09
2012M12
2013M03
2013M06
2013M09
2013M12
2014M03
2014M06
2014M09
2014M12
2015M03
2015M06
2015M09
2015M12
2016M03
2016M06
Energy
Agriculture
Base Metals
Precious Metals

producers (Russia, Saudi Arabia, Venezuela and Qatar) to curtail crude
oil production shored up oil prices.

Agricultural commodity prices increased by 12.5% in the first half of 2016 owing
to the adverse effects of the El Nino weather conditions due to relatively high
inventory levels.

Implications of global economic developments on domestic economic activity
The effects of the weak global economy are being transmitted to the local economy
mainly through depressed commodity prices and weakening trading partner
currencies on the back of a relatively strengthening US$.

The sustained low commodity price environment, particularly for precious
minerals and base metals have implications on the domestic economy as the
country mainly depends on primary and semi-processed minerals. Weaker prices
for precious and base metals imply lower export revenues for Zimbabwe, while
depressed oil and food prices have a moderating effect on the country’s fuel and
food import bill.

Moreover, the strengthening of the US$, coupled with sustained low commodity
prices environment, has weakened growth prospects of the country’s major trading
partners, notably South Africa, Botswana and Zambia. This development has
resulted in sustained depreciation of these countries’ domestic currencies to the
detriment of Zimbabwe’s trade competitiveness.

Resultantly, the manufacturing sector in Zimbabwe has continued to lose
competitive ground. The exchange rate based loss in competitiveness has
conspired with other supply side rigidities affecting the economy to intensify the
influx of relatively cheaper imports into the economy.

BALANCE OF PAYMENTS DEVELOPMENTS

Merchandise Trade Developments
The economy has continued to be affected by sustained mismatches between
export receipts and imports as evidenced by the disproportionate import
absorption relative to exports especially for the period 2008-2015; a sign of weak
economic fundamentals and over liberalisation of current and capital accounts.
Figure 3 shows the Zimbabwe’s merchandise exports, imports and real GDP
growth over the period 1990-2015. The graph also shows the sensitiveness of the
economy to various shocks and vagaries, including droughts.

Over the period January to June 2016, merchandise exports declined by 8.7%,
from US$1,232.3 million realized in 2015 to US$1,125.0 million in the
corresponding period in 2016. Similarly, merchandise imports for the period
January to June 2016 amounted to US$2,496.6 million, a 14.4% decline from
US$2,917.1 million realized over the comparative period in 2015.

Figure 2 shows monthly merchandise exports and imports development for the
period January to June 2016.

Figure 2: General Merchandise Trade for Jan – Jun 2016 (US$m)

Source: ZIMSTAT

Figure 3: Merchandise Exports, Imports, Real GDP Growth & 990 – 2015

Source: RBZ & Zimstat

Jan
Feb
Mar
Apr
May
June
Exports

Imports

Trade Balance


Exports
Imports
Trade Balance


Exports (US$m)
Imports (US$m)
Real GDP Growth (%) - (RHS)

The decline in export and import performance is a reflection of the overall
slowdown in economic activity, emanating from the drought induced contraction
in agriculture, depressed commodity prices, suppressed capacity utilization in the
manufacturing sector, as well as continued difficulties in accessing external lines
of credit.

A combination of foreign currency management measures, including the
prioritization of imports announced by the Reserve Bank in May 2016 and
restrictions on selected imports by the Ministry of Industry and Commerce in July
2016, as well as the effects of a stronger US$ on the country’s terms of trade are
expected to lead to a 0.9% decline in the import bill in 2016. Food imports (maize
and wheat) are, however, expected to surge owing to the El Nino induced drought
that ravaged the Southern African region, including Zimbabwe.

Continued reliance on imports of finished goods is unsustainable as it undermines
current efforts to resuscitate domestic industrial production, leading to significant
trade and current account deficits.

International Remittances
The continued appreciation of the US$ against regional currencies has also
affected the dollar denominated value of remittance inflows, particularly from
South Africa, which have over the years been a significant source of foreign
currency in the country. The weakening of the South African rand against the US$,
imply that Zimbabweans who are in South Africa are no longer in a position to
send the same amount of money in US$ they used to remit back home. The rand
value remittances have gone down in US$ terms.

This is evident from the decline in diaspora remittances of 13% from US$457.9
million for the period January to June 2015 to US$397.3 million in the

corresponding period in 2016. This development has, therefore, affected general
market liquidity in the economy with adverse effect on aggregate demand and
sustained economic recovery.

Figure 4: Diaspora Remittances: January to June 2015 & 2016


Source: RBZ

Foreign Private Capital Flows
Private sector offshore external loans have been an integral source of liquidity in
the economy since adoption of the multi-currency exchange system in 2009. These
loans, as opposed to equity injection, have mostly been utilized for working capital
and capitalization.

In the period from January 2016 –June 2016, the Bank approved and registered a
total of 156 facilities with a monetary value of US$976.4 million. As is the norm,
the agriculture sector has the highest contribution of 49% which is mostly buoyed
by the tobacco sector. A comparison with the same period in 2015 shows that as

Jan-June 2016
Jan-June 2015
Remittances (US$M)

Jan
Feb
Mar
Apr
May
Jun
Monthly Remittances (US$M)

at 30 June 2015, a total of 185 facilities had been approved with total monetary
value of US$1.2 billion.

It is evident that due to the perceived unfavourable investment climate in
Zimbabwe, investors have since devised a method to mitigate this perceived risk
by using loans to finance their investments in the country as opposed to equity
financing. This is also particularly true for some significant investors who have
resorted to using the Engineering Procurement and Construction (EPC) model of
investment as opposed to cash injection or equity into Zimbabwe like what they
do in other countries such as Angola, Ethiopia, Mozambique, Zambia and Nigeria.
Table 2 below shows monthly private sector loan approvals for 2015 and 2016.

Table 2: Comparison of Loan Approvals per Month in 2015 and 2016

Month
Number of
Facilities
Approved
Amount (USD
Millions)
Number
of
Facilities
Approved
Amount (USD
Millions)
January

27.4

98.8
February

133.1

129.8
March

126.6

170.4
April

73.9

373.9
May

427.5

111.3
June

187.8

278.5
TOTAL

976.4

1,162.7
Source: RBZ

Foreign Payments
For the period January to 30 June 2016, banks processed, on a cashflow basis, total
outgoing payments amounting to US$2.7 billion. This represents a 24% decline
from US$3.5 billion for the same period in 2015.

All categories of outgoing foreign payments as indicated in Table 3 experienced
decreases. This is attributable to the limited foreign exchange reserves within the

economy and the positive effect of the import compression policies which promote
the importation of critical goods and services not available on the local market.

Table 3: Outgoing Foreign Payments (Jan-June 2015/2016)
Category

Variance
Share

Share

Consumption Goods

-22%
25%
24%
Capital & Intermediate
Goods

-16%
24%
22%
Fuel & Electricity

-31%
13%
15%
Service Payments

-11%
22%
19%
Capital and Income
Payments

-42%
16%
20%
Total Outflows

Source: RBZ

Current and Capital Account Developments
The current account deficit is projected to narrow down, from a deficit of
US$1,519 million in 2015, to a deficit of US$1,069 million in 2016, partly on
account of the projected decline in the import bill. The projected decline in imports
in 2016 is mainly a result of the various measures being implemented to compress
imports as well as the economic slowdown which has reduced the country’s import
absorptive capacity.

A sustained current account deficit poses significant challenges as the country
relies on export revenues to generate liquidity to support domestic economic
activity. In this regard, the need to attract both domestic and foreign investment to
rejuvenate industry and generate adequate foreign exchange reserves to cushion

the economy from external vulnerabilities, remains integral to economic revival
efforts.

The capital and financial account balance is also projected to decline from a
surplus of US$1,632 million in 2015 to a surplus of US$845 million in 2016, as a
result of the projected decline in private sector offshore loans. The projected
decline in private sector offshore loans reflects the reduced absorptive capacity of
the private sector in concomitance with weakening economic activity.

Foreign direct investment (FDI) into the country is also projected to decline in
2016. This underscores the need to build investor confidence to attract foreign
capital which is critical for growth.

The overall balance of payments position is projected to deteriorate from a deficit
of US$25.8 million in 2015 to a deficit of US$224.0 million in 2016. Table 4
below shows balance of payments developments and projections for 2016.

Table 4: Balance of Payments Developments (US$ million)

Actual
Actual
Actual
Estimate
Projection
Current Account
Balance

-1,838.9

-2,539.2

-2,247.5

-1,519.4

-1,069.2
Trade Balance

-2,706.3

-2,947.1

-2,589.1

-2,448.1

-1,890.4
Exports F.O.B

4,004.0

3,861.8

3,717.2

3,614.2

3,551.7
Agriculture

Mining

Manufacturing

Imports F.O.B

6,710.2

6,808.9

6,306.3

6,062.3

5,442.1
Food

Fuel

Capital Account
Balance

1,515.0

1,687.6

2,095.8

1,632.3

845.2
Errors And Omissions

Overall Balance

Source: RBZ, Ministry of Finance & Zimstat

Within the context of the multiple currency system, monetary and liquidity
developments in the country remain closely linked to developments on the balance
of payments. The external sector is a critical source of liquidity in the economy
and it is against this backdrop that the Bank introduced the export incentive
scheme to boost the country’s export earnings, which have been a significant
source of liquidity.

ZIMBABWE INFLATION DEVELOPMENTS

Annual headline inflation remained in the negative territory, albeit accelerating
from -2.19% in January 2016 to -1.4% in June 2016. The continued decline in
prices in 2016 was driven by both food and non-food inflation, underpinned by

the sustained depreciation of the South African rand; subdued international oil
prices; and waning domestic demand. Figure 5 below shows the annual headline
inflation profile for the period January 2014 to June 2016.

Figure 5: Annual Inflation Profile (%)
Source: Zimstat, July 2016
Annual food inflation which averaged -4% over the period January to June 2016,
was weighed down by declines in the prices of meat; bread and cereals; milk,
cheese and eggs; oils and fats; and vegetables, among others, owing to improved
supplies and competition from cheaper imports.

Declines in prices of housing, water, electricity, gas and other fuels; furniture and
household equipment; transport; clothing and footwear among others, however,
continued to weigh down on non-food inflation, which remained in the negative
during the period under review.

Education is the only sector that registered significant increases during the last 12
months under the non-food category.


0.5

Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
(%)

Zimbabwe’s inflation remains the lowest and the only one in the negative territory
in the SADC region, as shown in Table 5 below.

Table 5: Annual Inflation rates (%) for selected SADC Countries and USA

Zimbabwe SA
Botswana Mozambique Tanzania Zambia Malawi USA
Jan-2016

Feb-2016

Mar-2016

Apr-2016

May-2016

Jun-2016


Source: Country Central Bank Websites, 2016

Inflation Outlook
Inflation is expected to remain broadly subdued in 2016. On one hand, the
persistent weakening of the South African rand against major currencies, coupled
with the low aggregate demand, are likely to continue exerting further downward
pressure on domestic prices.

On the other hand, the anticipated increase in electricity and communication
tariffs, the upward movements in food prices emanating from the drought induced
food shortfalls, and the resurgence of oil prices experienced since mid-January
2016, if sustained, are expected to induce inflationary pressures in the economy.

In addition measures taken by the Central Bank, including the prioritization of
imports, are expected to restrict the importation of cheap finished goods and are
likely to have a positive impact on inflation in the medium term

SECTION 3
FINANCIAL SECTOR DEVELOPMENTS
Structure of the Banking Sector
The banking sector is composed of 14 operating commercial banks, including
POSB, 4 building societies, 4 deposit taking microfinance and 164 credit only
microfinance institutions. The sector has demonstrated remarkable resilience on
the back of a strong solvency position, largely due to proactive supervisory
interventions by the Reserve Bank to, inter-alia, ensure that banks have adequate
and high quality capital; cleanse the banking sector of toxic assets and weak banks.

National Building Society Limited (NBS) commenced operations on 18 May
2016. With an estimated 1.5 million people on the national housing waiting list,
the entry of an additional player is expected to boost the provision of housing,
especially to low income groups and other vulnerable members of society.

Further to the provision of housing loans by building societies, commercial banks
have also scaled up their mortgage lending activities since 2014. As at 30 June
2016, six (6) commercial banks, including POSB, were offering mortgage finance,
with tenors ranging from 10 to 20 years. Meanwhile, Lion Microfinance Limited
was licenced on 31 May 2016, bringing the number of licensed deposit-taking
microfinance institutions to four (4).

Performance and Condition of the Banking Sector

Table 6 below shows the trend of the financial soundness indicators for the sector

Table 6: Key Financial Sector Indicators
Key Indicators
June -15
Dec -15
Mar -16
Jun-16
Total Assets (US$b)
$7.59
$7.83
$7.79bn
$8.01
Total Loans (US$b)
$3.97
$3.87
$3.81bn
$3.73
Net Capital Base (US$b)
$1.01
$1.14
$1.16bn
$1.21
Core Capital (US$m)
$899.10
$982.5
$976.25m
$1.04
Total Deposits (US$b)
$5.45
$5.62
$5.67bn
$5.91
Net Profit (US$m)
$34.01
$127.47
$38.54m
$67.79
Return on Assets

Return on Equity

Capital Adequacy Ratio

Loans to Deposits

Non-Performing Loans
Ratio

Liquidity Ratio

Cost to Income Ratio

Source: RBZ

Banking Sector Capitalization
The banking sector’s aggregate core capital increased by 5.80% from US$982.50
million as at 31 December 2015 to US$1.04 billion as at 30 June 2016, on the back
of improved earnings performance.

The banking sector average capital adequacy and tier 1 ratios of 24.17% and
21.51% as at 30 June 2016, respectively, were above the minimum required capital
adequacy and tier 1 ratios of 12% and 8%, respectively. As at 30 June 2016, all
banking institutions were adequately capitalized and in compliance with
prescribed minimum capital requirements as shown in Table 7 below.

Table 7: Capital adequacy levels for individual banks 30 June 2016
Institution

COMMERCIAL BANKS
Core Capital
as at 30 June
2016 (US$
Prescribed
Minimum Capital
requirements (US$
CBZ Bank*
212.72

Stanbic Bank
96.47

BANC ABC
65.58

Standard Chartered Bank
59.96

ZB Bank
53.82

Steward Bank
49.76

Barclays Bank
49.71

Ecobank
48.67

NMB Bank
45.16

FBC Bank
43.01

MBCA Bank
41.56

Metbank
39.45

Agribank
34.49

BUILDING SOCIETIES


CABS Building Society
92.29

FBC Building Society
37.48

National Building Society
22.37

ZB Building Society**
15.97

SAVINGS BANK


POSB
34.15

*includes CBZ Building Society **Society being merged with ZB Bank

Most banking institutions have set deadlines to comply with the December 2020
capital requirements, largely through increased recapitalization of retained
earnings, following improvement in asset quality and subsequent decrease in loan
loss provisions. As at 30 June 2016, six (6) other institutions had core capital levels
above US$50 million.

Banking institutions are therefore urged to continue with the recapitalisation
initiatives and consolidate the gains recorded to date. The Reserve Bank will

continue to monitor progress towards compliance with the 2020 minimum capital
requirements.

Banking Sector Deposits
Total banking sector deposits increased by 5.2% to US$5.9 billion as at 30 June
2016, from US$5.6 billion as at 31 December 2015. Figure 6 below shows the
trend of banking sector deposits over the period 30 June 2009 to 30 June 2016.

Figure 6: Trend of Banking Sector Deposits: June 2009 – June 2016(US$
millions)


The composition of total banking sector deposits as at 30 June 2016 under Figure
7 below


30-Jun-09
31-Dec-09
31-Dec-10
31-Dec-11
31-Dec-12
31-Dec-13
30-Dec-14
31-Dec-15
31-Mar-16
30-Jun-16
Source: RBZ

Figure 7: Composition of Deposits as at 30 June 2016
Source: RBZ

During the period January to June 2016 however, the banking sector was exposed
to cash shortages largely as a result of macroeconomic challenges facing the
country, including lack of fiscal space and the current account deficit.

Banking Sector Liquidity
The banking sector average prudential liquidity ratio, at 52.47% as at 30 June
2016, was above the regulatory minimum requirement of 30%. Eighteen banks
were compliant with the prudential liquidity ratio as at 30 June 2016. Figure 8
shows the trend in the banking sector average prudential liquidity ratio since
March 2014.


Demand Deposits
50.75%
Interbank Deposits
12.50%
Time Deposits
22.33%
Savings Deposits
5.84%
Foreign Deposits
5.20%
Other Deposits
3.37%

Figure 8: Prudential liquidity ratio Dec 2013 - June 2016
Source: RBZ

Notwithstanding the high average prudential liquidity ratio, the banking sector
has been experiencing cash challenges. The worsening trade deficit and an
inclination towards holding and externalising physical cash have continued to
drain cash from the economy, and the adverse effects are transferred to the
banking sector manifesting in cash shortages at banking institutions.

In response to this liquidity constraint, the Reserve Bank adopted a number of
policy measures to ameliorate the cash challenges including importing cash,
the promotion of the usage of plastic money and the use of other currencies
within the multi-currency basket and cash withdrawal limits.

Banking Sector Loans and Advances
Banking sector loans and advances declined from $4 billion as at 30 June 2015
to US$3.7 billion as at 30 June 2016, largely as a result of cautious and prudent
lending measures by banking institutions in response to the operating
environment that requires banks to contain foreign exchange induced demand


Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16

pressures attributable to lending activities. Disposal of non-performing loans
to ZAMCO has also significantly contributed to the reduction in the banks’
loan portfolios.

Figure 9 below shows the trend of banking sector loans and advances from 31
December 2011 to 30 June 2016.

Figure 9: Trend of Banking Sector Loans & Advances: Dec 2011 - June 2016

Source: RBZ

Sectoral Distribution of Loans and Advances
Lending to individuals, manufacturing and agriculture continued to dominate the
banking sector loan portfolio during the first half of 2016, as shown in Figure 10.
It is important to note that some of the lending to individuals is for business
purposes, especially agricultural activities.

Dec-11
Mar-...
Jun-12
Sep-12
Dec-12
Mar-...
Jun-13
Sep-13
Dec-13
Mar-...
Jun-14
Sep-14
Dec-14
Mar-...
Jun-15
Sep-15
Dec-15
Mar-...
Jun-16
US$ millions

Figure 10: Sectoral Distribution of Credit as at 30 June 2016

Source: RBZ

The Reserve Bank is pleased to note that banks have scaled up their funding
support to Micro, Small and Medium Scale Enterprises (MSME) in line with the
Bank’s guidelines. The measures aimed at increasing support to the MSME sector
include MSME funding targets for achievement over a 3 to 5 year period,
establishment of dedicated MSME Business Units and provision of training in
areas such as entrepreneurship and human resources management. These
initiatives will go a long way in ensuring that the sector is adequately supported
and realises its full potential.

Non-Performing Loans
There has been an improvement in the level of banking sector non-performing
loans (NPLs) to 10.05% as at 30 June 2016, from 10.82% as at 31 December 2015
AGRICULTURAL
15.05%
MANUFACTURING
15.38%
SERVICES
10.13%
INDIVIDUALS
16.57%
MINING
12.04%
DISTRIBUTION
12.07%
CONSTRUCTION
1.27%
FINANCIAL SERVICES
1.99%
STATE
0.52%
OTHER
14.98%

and a peak of 20.45% as at 30 September 2014. Figure 11 below shows the trend
in NPLs from 2011 to 30 June 2016.

Figure 11: Non-Performing Loans as at 30 June 2016

Source: RBZ

The declining trend in NPLs is a reflection of the successful efforts by banks to
reduce their exposure to non-performing assets, including strengthening of credit
risk management systems and intensified collections and workout plans, among
others.

The establishment of ZAMCO in 2014 also paved way for banking institutions to
hive off non-performing assets to the asset management company and free up the
balance sheet to underwrite more business. ZAMCO continues to discharge its
mandate of purchasing qualifying NPLs from banking institutions, with a total of
US$528.4 million worth of loans purchased as at 30 June 2016.


Sep-14
Dec-14
Sep-15
Dec-15
Mar-16
Jun-16
Level of NPL Ratio

In the Monetary Policy Statement of July 2015, the Reserve Bank set target
thresholds for banking institutions to reduce non-performing loans to 10% and 5%
in June 2016 and December 2016, respectively. I am pleased to advise that as at
30 June 2016, significant progress has been made in meeting the NPL ratio targets,
with 13 out of 19 banking institutions, having met the June 2016 target of 10%.
Five (5) banking institutions were already within the December 2016 target of 5%.
The remaining banks are instituting various measures to improve the quality of
their credit portfolio.

It is envisaged that the gradual decline in interest rates, enhancement of credit
infrastructure (establishment of credit reference system and collateral registry) and
ongoing macroeconomic stabilization measures, should result in further
improvement in banks’ asset quality. Further, it is anticipated that, with a credit
reference system, interest rates charged to borrowers will be reflective of their risk
profiles and there will no longer be any justifiable basis for banks to charge high
risk premiums to compensate for lack of credit information.

Earnings Performance
Notwithstanding the adverse operating macroeconomic environment, the banking
sector has remained profitable, recording an aggregate net profit of US$68.0
million for the period ended 30 June 2016, from US$34.0 million in the
corresponding period in 2015. Seventeen out of eighteen operating banking
institutions recorded profits during the period ended 30 June 2016.

The increase in profitability was largely driven by lower loan loss provisions, in
line with improving asset quality, lower interest expenses, as well as continued
realignment of cost structures at most institutions. Banking institutions are taking
various measures to enhance their earnings capacity through embracing

technology in banking which is more cost efficient than traditional approaches to
banking.

Interest Rates
As part of measures to instill confidence in the banking sector, stabilize and
stimulate the economy, the Reserve Bank has been engaging the banking sector to
reduce lending interest rates to a maximum of 15% agreed in May 2016. To that
end, I am pleased to report that most banking institutions have heeded the call
resulting in a continued decline in lending rates, however, there some banks which
are still lending at rates above the 15% agreed threshold. These banks are urged
to reduce their lending rates to levels below the threshold.

The Reserve Bank continues to monitor the levels of lending rates through
ongoing supervisory activities, while banking institutions are required to
adequately disclose and communicate the effective lending rates to their
borrowers. The envisaged lower interest rate environment will go a long way in
reducing the cost of capital and thus improve the competitiveness of our products
on the international markets.

Performance of the Microfinance Sector
Total loans for the microfinance sector as at 30 June 2016 were $183.4 million, a
marginal decline from $187.2 million as at 31 December 2015. The trend in the
performance indicators of credit only microfinance institutions is as indicated on
Table 8.

Table 8: Performance of Microfinance Institutions: March 2015 –June 2016

Mar 15
Jun 15
Sep 15
Dec 15
Jun 16
Number of
licensed
institutions

Total loans
$163.53 m $162.20 m
$173.31 m
$187.16 m
$183.40 m
Total Assets $202.58 m $208.76 m
$207.74 m
$225.13 m
$250.97 m
Portfolio at
Risk
(PaR>30
days)*

Number
of
Active
Clients

Number
of
Outstanding
Loans

Number
of
Branches

Source: RBZ

As at 30 June 2016, the microfinance sector was highly concentrated, with the top
20 microfinance institutions controlling 86.97% of total microfinance sector loans.
While productive lending is still below consumptive lending, the sector has
registered notable re-orientation of the microfinance lending portfolios towards
productive lending. Consumptive lending declined from 70.9% of total loans in
2013 to 54.0% as at 30 June 2016.

Legal & Regulatory Developments
The Banking Amendment Act No. 12 of 2015 which was gazetted on 13 May 2016
seeks to enhance financial sector stability and boost market confidence. The new
regulatory framework encompasses a comprehensive framework that will promote

consumer protection, enhance corporate governance and risk management within
banking institutions, as well as, facilitate speedy resolution of problem banks
through enhanced authority of the Reserve Bank to deal with problem banks.

These measures are expected to build and maintain investors, depositors and
public confidence in the banking sector thereby promoting financial stability,
growth, efficiency and innovation over the long term.

In line with internationally recognized principles of consumer protection and
efforts to enhance market conduct, the consumer protection provisions now call
for more transparency and disclosure requirements and will promote equitable and
fair treatment of consumers. This will promote responsible conduct by banking
institutions including protection against abuse of deposits and depositors by
provision of a complaints handling mechanism. The new law is expected to
promote confidence in the banking sector, increase access to financial products
and services, as well as, enhance fair competition among financial service
providers.

Directors of banking institutions and principal officers would now be held
accountable and answerable for their actions. The Banking Act now calls for more
enhanced oversight by the shareholders, directors and principal officers. The
fitness and probity criteria is now specifically provided in the law. Directors,
principal officers and shareholders are required to be vetted for fitness and probity
prior to appointment. The law now specifically requires independent directors to
be in the majority on the board as this allows for more checks and independent
thought.

The Banking Act now clearly lays out statutory duties of directors. The directors
duties were previously only provided for in the Companies Act [Chapter 24:03]

and are now also specifically provided for in the Banking Act. Any disregard of
the corporate governance requirements or violations of the law which lead to loss
of money by depositors will result in the directors being held personally liable for
their actions and decisions. The new law helps boost confidence in the sector as
consumers are assured that any loss that they may suffer as a result of directors’
disregard of the law will be recovered from the said directors.

Previous delays in the resolution of troubled banks left many depositors severely
prejudiced due to the loss in value of their deposits. This significantly contributed
to the erosion of public confidence in the banking sector. The new amendments
provide a detailed framework on problem bank resolution, which empowers the
Reserve Bank to swiftly resolve problem banking institutions in the public interest
and also places responsibilities on the Reserve Bank to protect assets of depositors
during resolution. Further, these provisions enhance the stability of the financial
system.

Another safety net measure for the depositors is the Deposit Protection
Corporation (DPC) whose capacity will be enhanced so that it can participate more
effectively in problem bank resolution. The turnaround time for the paying out to
small depositors has been restricted to 60 days and pay-outs to small depositors
will also be increased to US$ 1,000. The delays tied to the timelines in the
liquidation and winding up processes have now been streamlined, which will
result in the winding up process of a banking institution being resolved speedily.

The Reserve Bank expects a strict culture of compliance and shall be monitoring
and enforcing strict compliance with the new legal framework. The Banking Act
requires banking institutions to have stand - alone risk management committees
and an independent compliance function. Banking institutions with controlling
companies are required to register the bank holding companies. The Reserve

Bank is developing registration requirements for controlling companies and the
requisite statutory instrument will be gazetted in due course.

For a director, the tenure of appointment to the board of a banking institution is a
continuous period of 10 years, such a director will not be eligible for
reappointment to the board, unless at least 5 years have elapsed since he last served
on that board.

Banking institutions are also required to submit their plans to comply with the
new requirements in respect of any director who may have served in excess of ten
years to date. Further, banking institutions should take a cue from the new limit
of ten years and make suitable arrangements to facilitate rotation of directors and
introduction of fresh minds and perspectives in the interests of the banking
institution.

In respect of section 19(1) (a) and (b) of the Banking Act on the number of other
directorships, the Reserve Bank confirms that the law now places restrictions on
the number of directorships to three. An affected director may, however, bring
themselves within compliance by reducing the said number of other directorships.

In respect of those who are affected and will not be able to bring themselves within
compliance, banking institutions are required to provide the Reserve Bank with
such information and dates on which their terms of office will be coming to an end
or when they are next due for appointment by shareholders at the institution’s
annual general meeting.

In respect of insider loans, the Reserve Bank confirms that in terms of section
35(3) of the Banking Act, as read with section 35(10) of the Banking Act, no new
insider loans may be granted before the maximum amount to be prescribed in

terms of section 35(3) of the Banking Act has been so prescribed. This will also
be prescribed in due course.

Credit Infrastructure
Robust credit infrastructure is critical for efficient operation of financial systems.
By definition credit infrastructure is the set of laws and institutions that enable
efficient and effective access to finance, stability, and socially responsible
economic growth. The key elements of an effective credit infrastructure are credit
reference systems; secured transactions & collateral registries; and insolvency and
debt resolution frameworks.

The Reserve Bank in collaboration with Government has been seized with reforms
aimed at enhancing the efficient operations of financial markets. The current
initiatives to enhance credit infrastructure is expected to reduce the level of
information asymmetry thus unlocking the potential for thousands of businesses
to borrow, invest and grow. In addition, credit infrastructure is expected to reduce
the cost of credit thus lowering the cost of doing business and promoting price
competitiveness and production.

Credit Reference System
The Reserve Bank is pleased to advise that the Banking Amendment Act
empowering the Reserve Bank to establish a credit registry, license and supervise
private credit bureaus was promulgated on 13 May 2016. The amendment also
empowers the credit registry to collect credit information from participating
institutions including non-regulated credit providers and utility bodies.

Subsequent to the announcement in the January 2016 Monetary Policy Statement,
relating to the acquisition of Credit Registry system, a number of milestones have
been achieved. I am pleased to announce that the deployment process of the credit

registry has commenced. Meanwhile, with effect from 29 August 2016, all
banking institutions started providing credit test data to the Reserve Bank.

The Reserve Bank will ensure that the credit registry system is stabilized before
reports are generated for the market. It is anticipated that the deployment of the
credit registry system will be completed by 30 September 2016.

Collateral Registry and Secured Transactions
The Reserve Bank is pleased to advise that a robust legal and regulatory
framework for the collateral registry has been developed in collaboration with the
Ministry of Finance & Economic Development and the World Bank. The Movable
Property Security Interest Bill seeks to empower the Reserve Bank to establish a
Collateral Registry and includes provisions on:
a) the creation of security interests;
b) perfection of security interests;
c) priority of security interests; and
d) enforcement of security interests.

It is anticipated that the Bill will be presented to the legislature in the last quarter
of 2016. The establishment of the collateral registry will go a long way in assisting
members of the public who were unable to access credit and other banking
facilities for lack of immovable security.

Basel II Implementation
The Reserve Bank has circulated for comments a guideline on the minimum
supervisory expectation on the structure and coverage of Internal Capital
Adequacy Assessment Process (ICAAP) reports. The guidance outlines key areas
to be covered in ICAAP reports, including governance arrangements, strategy and

risk appetite, risk analysis, stress testing and scenario analysis, capital planning
and forecasting, as well as quality assurance and adoption of the ICAAP.

Adoption and Implementation of IFRS 9: Financial Instruments
Further to my January 2016 Monetary Policy Statement regarding the adoption
and implementation of International Financial Reporting Standards (IFRS), I
would like to advise that the Reserve Bank in collaboration with the Public
Accountants & Auditors Board (PAAB) and Institute of Chartered Accountants
Zimbabwe (ICAZ) are working on a roadmap for the implementation and adoption
of IFRS 9: Financial Instruments, whose mandatory effective date is beginning 1
January 2018.

The new standard, which is a comprehensive response to the global financial crisis
provides a logical model for classification and measurement; a single, forwardlooking ‘expected loss’ impairment model; and a substantially-reformed approach
to hedge accounting. IFRS 9: Financial Instruments, is expected to contribute to
more robust financial reporting and assist board and senior management of
banking institutions in making informed decisions, proactively manage provisions
and effects on capital plans. This is expected to ultimately result in a more sound,
lower-risk banking system with more efficient banks and better allocation of
capital.

The new standard represents a fundamental change of approach and will require,
among other, the substantial re-engineering of process and changes in accounting
systems and procedures. To this end, the Reserve Bank shall be issuing guidance
to the market on the implementation and adoption processes, by 30 September
2016. In this regard all banking institutions are advised to activate processes to
ensure implementation of IFRS 9: Financial Instruments.

Recovery & Resolution Planning for Banking Institutions
As part of measures to enhance the safety and soundness of the banking sector,
the Reserve Bank is developing guidance to the banking sector on the development
of recovery plans, in line with standards established by the Financial Stability
Board after the Global Financial Crisis.

The benefits of recovery plans include increased awareness by banks of possible
stress scenarios and enhanced ability to proactively plan for such scenarios. In
addition, it assists supervisors to identify appropriate actions that can restore the
viability of banks in the shortest possible time and at minimal cost.

A recovery plan should cover the following, among other elements:
a)
Coverage: The recovery plans should include a liquidity recovery plan,
a capital recovery plan and a business continuity plan.
b)
Governance structure: The recovery plan must clearly articulate roles
and responsibilities for all staff involved in the development of the
recovery.
c)
Group structure and key information on legal entities: The recovery
plan must identify interdependencies of an operational and financial
nature among legal entities within a banking group.
a)
Trigger framework: The recovery plan should identify triggers for the
implementation of the plan. The triggers should be an extension of the
banks’ risk appetite and risk management framework for capital,
liquidity and business continuity.
b)
Stress Scenario: Banking institutions are required to use reverse stress
testing to develop stress scenarios for capital, liquidity and business
continuity. These stresses should be more severe than the stresses
applied in other processes such as the ICAAP.

c)
Recovery options: The recovery plan must identify and prioritise
suitable recovery options. The recovery options should be an extension
of existing capital plans, liquidity contingent funding plans as well as
business continuity and disaster recovery plans, but should allow the
bank to recover from more severe stresses.

The guideline will be issued for comments to the market by 30 September 2016
and all banking institutions will be required to submit to the Reserve Bank their
recovery plans by 31 December 2016.

It is anticipated that the development of robust recovery plans will enable banking
institutions to adequately prepare for severe stress scenarios, thereby minimizing
the risk of failure. This development, together with other financial stability
measures are expected to translate to restoration of confidence in the banking
sector by the banking public, whose confidence was eroded by past bank failures.

Financial Inclusion
The Reserve Bank has in earnest embarked on the implementation of the National
Financial Inclusion Strategy, which was launched on 11 March 2016. The
implementation of various initiatives under the strategy is designed to positively
impact the economic lives of target groups and communities through financial
inclusion.

In order to inform the Strategy implementation process, the Reserve Bank is
currently engaging key stakeholders, including government ministries, other
financial sector regulators, tertiary and higher learning institutions, banking
institutions, and development partners. In this regard, eight (8) thematic working
groups comprising key stakeholders focusing on financial inclusion initiatives
have been constituted as follows:

Table 9: Thematic Working Groups on Financial Inclusion
Working Group
Terms of Reference
Women
Financing
and
Development
Promote development of innovative financial products for
women and facilitate capacity building programs for women to
improve access to financial services.
SMEs Finance & Development Facilitate minimisation of challenges encountered by SMEs in
their efforts to be financially included, promote innovative
financial products for SMEs and other capacity building
programs.
Rural and Agricultural
Finance & Development
Develop and recommend agricultural finance solutions for
small holder farmers and the rural community.
Insurance, Pensions and
Capital Markets
Facilitate the development and uptake of appropriate
insurance, pensions and capital market products for low
income groups and ensure effective capacity building and
awareness programmes.
Digital Finance
Promote the development of innovative and affordable digital
financial products and services that promote financial
inclusion.
Financial Literacy and
Consumer Protection
Facilitate the design and implementation of tailored financial
literacy strategies for special groups e.g. school children,
youth, women and SMEs.
Facilitate the design and implementation of a sound framework
for financial consumer protection.
Microfinance
Advisory
Council

Promote development of innovative products, delivery
channels and capacity building in the microfinance sector, and
positive contribution of microfinance to financial inclusivity.
Youth
Promote development of innovative financial products for
youth and facilitate capacity building programs for youth to
improve access to financial services.

Development of Policies and Guidelines
The implementation of the National Financial Inclusion Strategy necessitates the
development of various policies and guidelines to guide stakeholders. In this
regard, the following policy documents will be issued:

Prudential Standards No. 01-2016/BSD: Agency Banking
It is encouraging to note that, in keeping with the thrust of the National Financial
Inclusion Strategy, a number of banks have introduced agent banking as an
innovative way of reaching out to the unbanked in remote areas and to date, more
than 3,000 access points have been opened.

Agency banking brings with it a number of benefits to the banking public,
including improved access to banking products and services at lower costs while
banking institutions are able to broaden their customer base. In addition, agents
are able to augment their income through commissions earned from facilitating
bank transactions.

The introduction of agency banking will be beneficial to members of the public as
there will be more outreach to the areas where the public are having challenges in
accessing banking facilities. In this regard, the Reserve Bank has developed
Prudential Standards which outline the minimum regulatory expectations with
respect to the conduct of agency banking business.

Financial Consumer Protection Prudential Standards
The ever-increasing complexity and diversity of the range of products and services
offered by financial institutions, and the increasing transfer of opportunities and
risks to consumers call for enhanced protection of consumers of financial services.
It is against this background that the Reserve Bank will be issuing Prudential
Standards on Financial Consumer Protection. The prudential standards constitute
minimum standards of market conduct for banking institutions to achieve
acceptable consumer protection when conducting their banking business.

The standards will also increase public awareness of financial services and
products, promote greater transparency and minimize information asymmetry

between financial services consumers and banking institutions. The standards also
seek to ensure availability of adequate consumer redress where there are
grievances.

The prudential standards are anchored on seven general consumer protection
principles namely:

i.
Equitable and fair treatment of customers;
ii.
Disclosure and transparency;
iii.
Financial education and awareness;
iv.
Responsible business conduct of institutions and authorized agents;
v.
Protection of customer assets against fraud and misuse;
vi.
Protection of consumer data and privacy; and
vii.
Complaints handling and redress.

Overall, the prudential standards will foster public confidence and trust in the
banking sector. Banking institutions are required to prime their risk management
systems and processes to ensure compliance with the provisions of the Banking
Act as amended, and the Prudential Standards which will be issued by 30
September 2016.

Financial Literacy Framework
It is generally recognized that, financial education, when conducted alongside
effective financial inclusion and consumer protection frameworks, enables
individuals to effectively use financial products and services and to meaningfully
participate in financial and economic activities.

In this regard, the Reserve Bank is developing a Financial Literacy Framework to
enable the implementation of tailored financial literacy programs for target groups

such as school children, youths and women entrepreneurs and SMEs under the
National Financial Inclusion Strategy.

The Financial Literacy Framework seeks to increase awareness of and access to
effective financial education; determine and integrate core financial competencies;
improve financial education infrastructure; identify, enhance, and share effective
practices;
increase
individual
knowledge
and
skills
and
help
individuals/businesses understand financial laws and ethics.

The Framework will be issued by 30 September 2016 and all banking institutions
will be required to develop and implement financial literacy programmes for the
various segments of their customers to raise awareness of their products and
services as well as capacitate the customers.

Establishment of SME Units and Women Desks
In line with the January 2016 Monetary Policy Statement, where banks were
encouraged to set up SME units and women desks, I am pleased to report that there
is commendable progress in that regard. A total of 12 banks have set up SME units
and eight (8) banks have established women desks, while the remaining are
working on the establishment of the same.

Through the SME units and women desks, banks are now able to focus on
developing products and services that meet the specific needs of MSMEs and
women entrepreneurs. A significant number of banks have tailor-made products
that meet the specific needs of SMEs and women entrepreneurs.

Collection of Disaggregated Data
In order to achieve our overall financial inclusion target of 90% by 2020, the
Reserve is currently working on targets for specific segments, including women,
youth and SMEs.

To clearly understand and develop targeted initiatives aimed at promoting
financial inclusion of these segments, the Reserve Bank is collaborating with
various stakeholders, including development partners to establish the level of
financial inclusion.

In this regard, the Reserve Bank has also designed a template with financial
inclusion indicators to facilitate collection of disaggregated data from banking
institutions on a quarterly basis.

Financial Inclusion of Women
The level of financial exclusion of women has remained relatively higher in many
countries and the exclusion rate is more pronounced in developing countries,
Zimbabwe included. According to the World Bank 2014 Global Findex data, 58%
of women had a bank account compared to 65% of men. This gender gap has
remained at 9% for developing economies since 2011.

Statistics recently collected from the Zimbabwe banking sector revealed that
lending to women constituted less than 10% of total banking sector loans and
advances as at 30 June 2016.

It is, therefore, critical for women to have access to the full range of financial
products and services, including credit, savings and micro-insurance which are
essential to fully develop their productive assets to facilitate graduation of their
income-generating activities from survival level into viable businesses.

In this regard, all banking institutions are required to submit to the Reserve Bank,
by 31 December 2016, their 2017 targets for lending and other financial products
and services targeted at women, including accompanying capacity building
activities such as tailored financial literacy or other training programs. Banks
should also capitalize on available funding from regional and international funders
targeting women.

Value Chain Financing Model
The Reserve Bank has partnered with key stakeholders, including financial
institutions, government ministries/departments and development partners and is
operationalising the value chain financing model through implementing projects
that can be replicated across the country. The initial focus is on small-scale
agriculture and rural financing and beneficiaries will be supported in groups /
clusters.

Each model project is expected to address the following minimum expectations:
i. Production requirements;
ii. Financing;
iii. Capacity building programs;
iv. Access to markets;
v. Access to an information centre; and
vi. Use of digital finance, agent banking etc. as enablers.

The model projects are envisaged to have high impact in transforming people’s
lives and will involve many actors along the value chain.

Financial Inclusion Commitments under the Maya Declaration
As a way of demonstrating the country’s commitment towards defined financial
inclusion targets, Zimbabwe has submitted commitments under the Maya
Declaration.

Maya Declaration represents the world’s first commitment platform which enables
Alliance for Financial Inclusion member institutions to make concrete financial
inclusion targets, implement in-country policy changes, and regularly share
progress updates.

It provides a mechanism that allows policymakers to apply positive peer pressure
to promote financial inclusion. This public declaration will ensure that initiatives
aimed at promoting an inclusive financial sector are developed and implemented
within the stated timelines.

Zimbabwe made financial inclusion commitments in the following areas:

i.
National Financial Inclusion Strategy;
ii.
Financial Literacy and Consumer Protection;
iii.
Digital Financial Services;
iv.
Financial Infrastructure; and
v.
Gender.

SECTION 4
IMPACT OF POLICY MEASURES TAKEN BY RBZ IN MAY 2016

In response to the myriad of challenges besetting the economy, the Reserve Bank
introduced the following measures in May 2016 to deal with the scourge of
imports and cash shortages within the national economy whilst at the same time
promoting exports of goods and services in order to increase liquidity in the
economy;

i.
Promotion of cashless payment systems that include the use of plastic
money through point of sale (POS) machines, on-line banking, transfers
and other electronic banking systems. The uptake of these electronic
payment systems has been quite satisfactory, with total electronic payments
having increased from US$4.1 billion in January 2016 to US$5.5 billion in
July 2016, as shown in Figure 12 below. The increase in the usage of plastic
money is testimony of the efforts by banks to promote electronic payments
to make it easier and cheaper for the banking public to use cards. Efforts are
also being made by the Reserve Bank, Zimswitch, financial institutions and
mobile banking providers to ensure that a stable infrastructure to support the
electronic payment system is available.

Figure 12: Total Electronic Payments

Source: RBZ

ii.
Limitation on cash withdrawal amounts to US$1000 for individuals and
US$10 000 for corporates per day in line with international best practice.
Despite the recurrence of queues in banking halls on Government paydays,
cash shortage has subsided especially in view of the surge in the use of
cashless payment systems and the fact that the Bank is continuously
importing cash to service the market. In addition, and in order to strike a
balance between the availability and demand for cash, banks have had to put
their internal prudential limits to manage the physical shortage of cash.

The Reserve Bank has also invoked the Bank Use Promotion Act [Chapter
24:24] to ensure that traders bank their surplus cash in line with policy. This
exercise has greatly assisted in compelling some of the unscrupulous traders,
who had never bothered to bank their cash since the introduction of
dollarisation in 2009, to use the banking system.


Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Volumes in Millions
Values in US$ Billions
Value
Volume

iii.
Prioritisation of imports to ensure that foreign exchange is utilised
efficiently on productive imports of goods and services as per the import
priority list shown in Table 10. Adherence to this policy objective has started
to bear fruit as non- essential imports like water and vegetables have gone
down whilst local production of import substituting products including
plastics, recharge cards and confectionaries is going up. The Reserve Bank
has on its part put in place a foreign currency committee to have an oversight
role on the management of foreign exchange in compliance with the import
priority list and for the purposes of supplementing forex resources through
banks for essential imports such as fuel, electricity and grain from forex
receipts of gold and other minerals retained by RBZ under the auspices of
local content regulations.

Sustainability of this local content biased policy measure is dependent on the
country’s capability to continuously enhance forex receipts through the ease
of doing business.

Table 10: Foreign Payments Priority List Guidelines
PRIORITY
LEVEL
FOREIGN CURRENCY PAYMENTS CATEGORY
Priority
One
(HIGH)


i.
Net Exporters who import raw-materials or machinery
to aide them to produce and generate more exports;
ii.
Non-exporting importers of raw materials and
machinery for local production (value addition) that
directly substitute import of essential finished goods;
iii.
Imports of critical and strategic goods such as basic food
stuffs and fuel, health and agro-chemicals granted these
goods are not available locally;

PRIORITY
LEVEL
FOREIGN CURRENCY PAYMENTS CATEGORY
iv.
Repayments of offshore lines of credit procured to fund
productive activities;
v.
Payments for services not available in Zimbabwe;
vi.
Foreign investment (Capital disinvestments, profits and
dividends).
vii.
Remittance of rental income from properties owned by
non resident Zimbabweans and foreign investors who
would have purchased property using funds originating
from offshore and transferred through normal banking
channels
viii.
Remittance of pension income for non-resident
Zimbabweans who formally emigrated from Zimbabwe
ix.
Importation of packaging material not available in
Zimbabwe
x.
University and college fees.
Priority
Two
(MEDIUM)
i.
Bank borrowing clients in the productive sector who
engage in critical and strategic imports.
ii.
Capital remittances from disposal of local property for
elderly people.
Priority
Three
(LOW)


iii.
Cash depositing clients in the retail and wholesale
service industry. The customers generate cash which can
either be recycled for local use or repatriated to
replenish Nostro accounts.
iv.
Other borrowing clients who have engaged in the
importation of non-strategic goods.

PRIORITY
LEVEL
FOREIGN CURRENCY PAYMENTS CATEGORY
Not
Priority
i.
Capital remittances from disposal of local property
ii.
Capital remittances for cross border investments
iii.
Funding of offshore credit cards
iv.
Importation of trinkets, low local content consumer
goods and/ or goods readily available in Zimbabwe
including non-commercial vehicles, maheu, bottled
water, tomatoes, vegetables.
v.
Payments for services available in Zimbabwe
vi.
Donations


iv.
Introduction of an export incentive scheme of up to 5% to promote the
export of goods and services. Given that the multi-currency foreign
exchange system is here to stay and that its sustainability is dependent
on the economy’s capacity and ability to generate foreign exchange to meet
its domestic and foreign requirements, development and promotion of
foreign exchange revenue streams such as exports of goods and services and
diaspora remittances, is therefore critical to enhance foreign exchange
reserves of the country.

The above reality together with the country’s trade deficit of around US$2.5
billion per annum requires a substantial policy shift to promote exports in
view of lack of competitiveness of Zimbabwean exports due to global
shocks that include the strong US$, sharp decline in commodity prices and
tighter global financial conditions.

It is against the above background that Government, through the Reserve
Bank of Zimbabwe, introduced the performance related export bonus
scheme of up to 5% to be awarded to exporters of goods and services to
address the challenges of low productivity and promote exports with the
overall aim of liquefying the multi-currency exchange system.

The funding mechanism of the export incentive scheme will be through
bond notes in order to preserve the offshore US$200 million countercyclical facility that has been arranged to support the export bonus scheme
from externalization and/or capital flight which has continued to negatively
affect the economy since dollarization in 2009. The bond notes will be zerocoupon, tax-exempt debt instruments.

The issuance of bond notes has a self-control mechanism in that when there
are no exports there will be no bond notes. The bond notes will be gradually
released into the economy in sympathy with export receipts through normal
banking channels up to a maximum ceiling of the facility of US$200
million. The ceiling would be attained when total exports are around US$6
billion. At the rate at which the country is exporting and based on statistics
in Table 11, we anticipate that bond notes equivalent to around US$75
million will be in the market by the end of December 2016.

The bond notes which will start to circulate by end October 2016 will be at
par with the US$ (i.e. one to one) and will be used and treated in the same
manner as bond coins. In simple terms exporters will receive the incentive
proceeds in US$ and the incentive will be credited to their US$ accounts in
US$ currency. An exporter will then transact through RTGS, make foreign
payments for imports of goods and services and transact freely within the

multi-currency exchange system. It is also important to note that bond notes
shall not be forced on people who do not like them.

The Bank has heard and taken note of the public’s concerns, fear, anxiety
and skepticism of bond notes which all boils down to the general lack of
trust and confidence within the economy. The Bank is addressing the
concerns by planning to introduce smaller denominations of bond notes of
$2 and $5. In addition the Bank has proposed for the setting up of an
independent board to have an oversight role on the issuance of bond notes
in the economy.

Doing nothing to incentivise exporters of goods and services whilst at the
same time desiring to maintain the multi-currency exchange system is not
only contradictory but also imprudent.

It is critical to emphasise that the introduction of bond notes does not mark
the return of the Zimbabwe dollar through the back door. The
macroeconomic fundamentals or conditions for the return of the local
currency are not yet right to do so.

Key economic fundamentals or conditions for the return of the local
currency are as follows:

a) Minimum foreign exchange reserves equivalent to one (1) year of
import cover;
b) Balanced and sustainable government budget;
c) Sustainable interest rates;
d) High consumer and business confidence;
e) Sustainable level of inflation; and

f) Healthy job market.

The country is still very far from attaining these economic fundamentals.


Table 11: Foreign Currency Inflows and Export Incentive Entitlements
(May-Sep 2016)
Sector
Total Foreign
Currency
Receipts (USD
Equivalent)
Total Incentives

Grand Total


5%
2.50%
Mining

Agriculture excl
Tobacco

Manufacturing

Services

Other

Tobacco - Value
Addition

Total Banks

Tobacco Growers
(Green Leaf Purchases)*

Gold Producers

Grand Total

Source: RBZ
* Tobacco figures are for the entire selling season i.e. 30 March – 20 August 2016

v.
Gold Deliveries to Fidelity Printers and Refiners
As at 30 June 2016, delivery to Fidelity Printers and Refiners was 9.6 tonnes
of gold compared to 8.1 tonnes delivered during the same period in 2015,
representing an increase of 18%. Including gold processed from Platinum
Group Metals (PGMs) amounting to 1.1 tonnes between January and June
2016, total gold production during the period amounted to 10.7 tonnes.

The projected annual gold delivery for 2016 is 24 tonnes. In this regard, the
half year delivery of 10.7 tonnes indicates that the targeted 24 tonnes is
achievable as more gold is usually produced during the second half of the year.

Table 12 below shows gold deliveries to Fidelity Printers & Refiners as at 30
June 2016 including gold from PGMs.

Table 12: Gold Deliveries to Fidelity (kgs) as at 30 June 2016

%
change

Primary
Small
Scale
Total Primary
Small
Scale
Total
Jan

1,184

1,458

Feb

1,152

1,576

Mar

1,476

1,567

Apr

1,400

1,641

May

1,397
1,087

1,689

Jun

1,573

1,696

PGM
(Gold)

-

1,068
-
1,068

Total


Source: Fidelity Printers

The specific factors that have contributed to an increase in gold output during the
first half of 2016 include:

a) The reduction in royalties from 5% to 3% on incremental output with
a cap of 5% for large scale primary producers, and from 3% to 1%
for small scale and artisanal miners;

b) The firming of international gold prices, from an average of US$1
181.21 per ounce in the first quarter to about US$1 259.35 per ounce
during the second quarter of 2016;

c) The relative stability of power availability in the second quarter of
2016.
d) The 5% export incentive scheme introduced by the Reserve Bank in
May 2016; and

e) Sterling efforts being implemented by the gold mobilization and
monitoring committee.

vi.
Resuscitating of Aurex, a RBZ subsidiary, after an injection of US$1.2
million for the procurement of state of the art diamond cutting and
polishing equipment from India. The new plant, with a cutting and polishing
capacity of between 2500 and 10 000 carats of rough diamonds per month,
depending on the stone size, has now been in operation since August 2016.
The company is currently involved in the development of external markets
for cut and polished diamonds, an effort which seeks to bring more revenue
to the fiscus and create local employment.

SECTION 5
POLICY
MEASURES
TO
ENHANCE
CONFIDENCE
AND
PRODUCTION

The following policy measures are being put in place to enhance confidence and
production in the economy, while simultaneously ensuring sustained financial
stability:
i.
Ease of securing offshore loans;
ii.
Incentivising inflows from the diaspora and private unrequited
transfers;
iii.
Nostro stabilisation facilities of US$215 million;
iv.
US$20 million gold development initiative for small scale gold
producers;
v.
US$10 million horticulture/floriculture pre- and post-shipment
facility;
vi.
Resuscitation of the credit guarantee scheme;
vii.
Establishment of an offshore financial centre;
viii.
Guidance on interest rates charged by microfinance;

i.
Ease of Securing Offshore Loans. The current Exchange Control policy
states that all external loans and commercial credit applications above
US$10 million, for both the private sector and state owned enterprises,
need prior approval by the Reserve Bank.

In order to enhance the ease of securing offshore lines of credit, the
threshold of external loans that do not need prior Exchange Control
approval is, with immediate effect, increased to US$20 million.

Authorised dealers will still be required to register all such loans, in the
usual manner, with the Reserve Bank.

In the same vein, the banking public should ensure that all unregistered
offshore facilities should be regularised with the Reserve Bank through their
banks.
ii.
Incentivising inflows from the diaspora and private unrequited
transfers. In view of the critical role of diaspora remittances in the
economy and in order to enhance the remittance of such funds, the Bank
shall be extending the export incentive scheme at a level of between 2.5-5%
to diaspora remittances including any form of private unrequited transfers
on funds remitted to Zimbabwe through normal banking channels with
effect from 1st October 2016.

iii.
Foreign Exchange/ Nostro Stabilization Facilities of US$215 million. In
order to deal with the current delays in the processing of outgoing
foreign payments by banks the Bank has managed to secure facilities in
an amount of US$215 million from international finance institutions to
deal with the outgoing foreign payments backlog. In addition,
negotiations are at an advanced stage to raise US$330 million from
regional sources to enhance production and improve the liquidity
situation in the country

iv.
US$20 million gold development initiative facility to support small scale
and artisanal miners. The Reserve Bank has secured US$20 million for
Fidelity Printers and Refiners (FPR) to support small-scale and artisanal
mining operations in order to increase gold production in the country.

With underground gold reserves estimated to be around 13 million tonnes,
Zimbabwe’s rich gold reserves are clearly under-exploited. Only 586 tons
have been officially mined over the past 36 years from 1980 to August 2016
as shown in Table 13. There is therefore great scope to vigorously promote
the mining of gold across the country in order to liquefy the economy.

Table 13: Zimbabwe Gold Production (Including PGMs Gold) kgs


Year
Total (Volume /Kg
Price/Ounce
US$ Million

11 414.99
594.00
242.2

11 539.41
400.00
164.8

13 250.10
447.00
211.5

14 089.90
380.00
191.2

14 867.48
308.00
163.5

14 691.00
327.00
171.6

14 867.48
390.90
207.6

14 711.97
486.50
255.6

14 961.00
410.15
219.2

16 018.31
401.00
229.4

16 920.32
386.20
233.4

17 884.53
353.15
225.6

18 278.00
333.00
217.4

18 599.91
391.75
233.6

20 683.84
383.25
252.3

23 959.00
387.00
303.1

24 699.00
369.00
297.5

24 225.00
387.05
268.1

25 175.00
288.70
236.3

30 232.62
290.25
229.8

22 021.29
272.65
216.4

18 474.00
276.50
225.5

15 669.00
342.75
159.2

12 446.07
417.25
152.3

21 342.29
435.60
262.8

13 453.45
513.00
191.1

10 961.04
635.70
201.5

6 797.60
836.50
140.8

3 071.82
869.75
93.8

4 208.11
1 087.50
155.2

9 619.80
1 420.25
334.2

12 992.60
1 531.00
598.7

14 742.99
1 664.00
714.9

14 065.23
1 204.50
638.5

15 385.74
1 199.25
624.4

20 022.75
1 060.00
753.3

10 695.00
1 329.00
402.5

P
Grand Total
587 037.62
633.86
10 418.80


Source: RBZ

The gold development initiative (GDI) i.e the formalisation process of the small
scale gold producers which will be executed according to responsible gold mining
standards will need to be supported by fast-tracking the ease of doing business
policy measures that include the reduction of cost of doing business as follows:

a) Reduction in custom milling fees from the current US$8 000 on the
basis that when the fee was US$2 000 there were 485 millers which
were registered but now at US$8 000 the registered millers are now
around 51. The challenge is that there are many millers who cannot
afford to pay the required fee of US$8 000 but are still operating and
selling their gold on the black market and/or smuggling gold out of the
country.

b) Reduction of licence fee for explosives. At US$100 about 5 000 small
scale gold producers were registered and when the fee was increased
to U$2 000 only 300 registered.

c) Reduction of the Environmental Management Agency (EMA) fees.

The fee for exploiting the environment at 2% of gross revenue is
extremely high. Consideration should be made to scrap this fee in order
to enhance gold production.

d) Rural District Council (Land Development Tax) fees. These charges
should be reviewed downwards based on ability to pay and must be
determined in the context of all the other taxes, fees and charges that
are applied to the mining industry.

e) Environmental Impact Assessment (EIA). The fee at between 0.8%-
1.2% of total cost (with a maximum cap of US$2 million) remains high
and is a huge barrier to investment. Reducing this to a rate of 0.05%
of the project cost with a reasonable upper limit of US$50 000 would
be in line with international best practice.

f) Reduction of Exploration Licenses, Claims and Related charges.
The ground fees currently levied on prospective and mining firms in
Zimbabwe are exorbitant.

v.
US$10 million horticulture and floriculture pre and post shipment facility
Horticulture and floriculture has previously been a fast growing export source
with Zimbabwe having been one of the top exporting country in Africa in the
1990s. In order to increase production and exports of this sub-sector the Bank

has arranged a facility of US$10 million for the pre and post-shipping
requirements for producers of horticulture and floriculture. The facility would
be disbursed through normal banking channels.

vi.
Resuscitation of the credit guarantee scheme. The Reserve Bank is
resuscitating the Credit Guarantee Scheme under the Export Credit Guarantee
Company (ECGC) to support SMEs to increase production with effect from
1st October 2016.

The guarantee scheme, which used to be operational, was discontinued in 2002
as the guarantee limit had become too insignificant to support any meaningful
business due to economic circumstances prevailing at the time. The credit
guarantee scheme will address the challenge of lack of adequate and
acceptable collateral, which is among the major challenges faced by
marginalized groups including SMEs, women, youth, small holder farmers
and rural population in accessing bank credit. The resuscitation of the credit
guarantee scheme will go a long way in stimulating productive lending to the
marginalized groups which will stimulate economic growth and poverty
reduction.

vii. Guidance on interest rates charged by microfinance institutions.
Microfinance has been identified as an important pillar of the National
Financial Inclusion Strategy in Zimbabwe. However, the high costs of
traditional microfinance loans limit the effectiveness of microfinance as a
developmental and poverty-reduction tool. The high cost of microfinance
loans is partly a reflection of the high cost of funds and the high transaction
cost of traditional microfinance operations associated with high volumes of
small, low-value loans.

The Reserve Bank has noted with concern that while banks’ lending rates
have declined to an average of 15% per annum, some microfinance
institutions continue to charge interest rates of over 20% per month. In this
respect, microfinance institutions are expected to reduce their lending rates
in the spirit of building inclusive financial systems and sustainable
economic development. Accordingly, all microfinance institutions are
urged to reduce their effective lending rates to a maximum of 10% per
month effective, 1 October 2016. Future adjustments would need to be in
tandem with the improvement on the tenure of the operating licences of
microfinance institutions which are renewed on an annual basis.

vi.
Establishment of an Offshore Financial Centre. The Bank is proceeding
to putting in place mechanisms to establish an offshore financial centre as a
confidence building measure under the auspices of the Special Economic
Zones. Details of this initiative shall be unveiled in line with developments
on the establishment of the Special Economic Zones in the country.

SECTION 6
POLICY ADVICE
1.
Dealing with fiscal deficit in a sustainable manner that promotes
economic growth requires a combination of the following measures;

a) Leveraging and securitisation of the country’s vast resources
(minerals, non-core assets, residential and commercial land) to obtain
capital for development and to close the fiscal deficit. The country’s
enormous potential for sustained growth and poverty reduction is
achievable through leveraging and securitisation of the country’s
generous endowment of natural resources.

b) Acceleration of the reform and reorganisation of state owned
enterprises (SOEs) including disposal through joint ventures and/or
outright sale of some of the non-core SOEs to raise capital for
development and to close the fiscal deficit. Additionally, production
can be enhanced by granting investors contracts under long lease-back,
build-operate-transfer (BOT) or build-own-operate-transfer (BOOT)
agreements.

c) Putting in place an attractive investment climate to generate
investment-led growth. Investment, like people, likes security.
Security of investment is a good or conducive investment climate.
Security of tenure is the best form of reward or incentive for business.
Putting in place a conducive investment climate, fortunately, costs
almost nothing yet the cost of not having it is horrendous.

d) The clarification of the Indigenisation Policy by His Excellency, the
President, in April 2016 was a critical milestone towards improving

the investment climate but the Act is yet to be aligned to the Policy.
Similarly, regularisation of the 99-year land tenure security to make it a
bankable document is yet to be done. Regularisation of these two policy
documents will cost almost nothing but yet taking action on them would
be tremendous as it would signal that domestic and foreign investment
is welcome in Zimbabwe. We need to Walk the Talk to see this through
in order to create an investor friendly environment.

e)
Work being done by the Office of the President and Cabinet on the
ease of doing business is quite commendable. What is now needed is
to Walk the Talk by fast-tracking the implementation of all the
identified areas of improvement especially as they pertain to the
regulatory environment of doing business in Zimbabwe. Business
license application forms, for example, should be available on-line,
identical to all applicants and processed as a routine procedure.

f)
Putting in place effective performance management systems across
the board to ensure that performance commensurate with rewards
and to inculcate positive work ethics. Special government projects that
include the Brazil’s More Food Programme and the Directed
Agriculture Programme should also be subject to this scrutiny.

2. Dealing with the current account deficit through internal devaluation to
restore competitiveness. The use of the multi-currency exchange system
puts Zimbabwe in a special circumstance that takes away the flexibility of
adjusting the nominal exchange rate to maintain relative competitiveness.
This unique situation is similar to the experience of countries within the Euro
area, for example, which are unable to reverse a loss of competitiveness and

balance of payments imbalance through a nominal devaluation of the
currency.

For countries in this predicament, the loss of competitiveness can only be
reversed internally, through relative gains in the efficiency in production and
or through action to reduce cost of production i.e. internal devaluation –
aimed mainly at reducing wages and other related labour costs.

Historical experiences with internal devaluation have been mixed. Others
have been successful whilst other “successful” internal devaluation have
been accompanied by falling demand and recession. The truth of the matter
is that there are always pros and cons with devaluations, whether it is nominal
or internal devaluation. Management and choice of internal devaluation is
therefore critical.

Whilst there is general acceptance across the board in Zimbabwe about the
need for internal devaluation in the country, there is no consensus on its form
and format. Statistics at the Reserve Bank shows that the country would need
to gradually devalue by up to 45% over a three year period to restore
competitiveness.

Internal devaluation in Zimbabwe can be achieved through two possible
approaches. The first approach would be for reduction in wages and salaries,
accompanied by a similar reduction in the cost of finance and utility charges.
Once this is done, the country would need to find a comparator to benchmark
with to ensure that costs would not increase again without being checked. The
challenge of this approach is that it can lead to further reduction in aggregate
demand and to depression and recession. An equilibrium position would
therefore need to be determined for this approach to produce desirable results.

The second approach, which also takes account of peculiarities in Zimbabwe,
would be to achieve internal devaluation by a combination of improving the
competitiveness of the country’s exports whilst simultaneously levelling the
playing field between importers and domestic producers. This external
rebalancing approach would incentivize foreign exchange earners (including
all depositors) who are the generators of foreign currency whilst at the same
time levying all payments of imports of goods and services (including
withdrawals).

The intention of this approach would be to manage foreign exchange using
market based mechanisms. There would be no charges on the use of plastic
money and other electronic payment means. This approach would be neutral
to net cash depositors. This will, therefore, be a market mechanism to support
increased use of plastic money and for attracting foreign exchange deposits.

The downside risk of this second approach is that it would increase prices
within the economy. The Bank, however, believes that the levy on imports
would have a minimal effect on inflation given that the country is currently in
deflation. Allowing some level of inflationary pressures in the economy
would help to increase company revenues and profitability with positive
multiplier effects on Government revenues, employment and GDP growth.

Most firms in Zimbabwe have already implemented or are in the process of
implementing the first approach of internal devaluation of reducing wages and
salaries. In view of these developments, it would be prudent to buttress the
first approach by the second approach of internal devaluation to deal with the
current account gap.

The Bank shall be accelerating the second approach of internal devaluation
after consultations with business and consumers.


3.
Enforcement of local procurement by Government, in line with existing
local procurement rules, is essential to conserve scarce foreign exchange
and create a multiplier effect to stimulate local suppliers. The increased
local business activity will, in time, boost fiscal space through increased
taxes.

SECTION 7

CONCLUSION AND OUTLOOK
The main message of this Monetary Policy Statement is that the Zimbabwean
economy which is under stress as a result of harsh external conditions, structural
imbalances and legacy policy inconsistencies/contradictions requires urgent and
decisive steps to generate investment-led recovery in order to revamp
production across all the sectors of the economy. Walking the Talk is critical
because the large current account and fiscal gaps generated by these imbalances
have inhibited private investment and restricted economic growth to as low as
1.1% in 2015 and projected at 1.2% in 2016. Enhanced production will increase
employment, fiscal space, exports, economic growth and reduce import
dependence and poverty. This is the panacea to restore trust and confidence.

Prudent fiscal policy is the main lever to deal with the internal imbalances and
create an economic environment conducive to economic transformation.
Accordingly, measures taken by the Bank in May 2016 and those presented in this
Statement would need to be aligned to the fiscal policy measures presented by the
Hon Minister of Finance and Economic Development in the 2016 Mid –Year
Fiscal Policy Review Statement.

The measures would need to be supported by concessional external financing.
Thus, with fresh foreign financing being an integral part of the envisaged
Zimbabwe transformation agenda, completion of the re-engagement process is
critical to improve Zimbabwe’s country risk premium.

The policy measures in this Statement and those announced by the Minister of
Finance and Economic Development in the Mid-Year Fiscal Policy Review
Statement, combined with fast-tracking re-engagement with the rest of the world

will pave way for sustained growth and development. This would lead to an
increase in economic growth from 1.2% this year to high single digits over the
next three years, while inflation would be limited to lower single digits and
international reserves would recover significantly.

Overall, the medium term looks favourable for Zimbabwe. Strong economic
policies would also have an immediate impact in increasing competitiveness and
attracting investment. The financial system which is currently constrained by the
environment would be enabled to allocate scarce resources to the most effective
use, and support production while facilitating the build-up of foreign exchange
reserves.

I THANK YOU.


DR J P MANGUDYA
GOVERNOR

APPENDIX I

The Re engagement Process
Considerable mileage has been made under the re-engagement process to clear
Zimbabwe’s external debt arrears with the multilateral financial institutions. This
process is being done for the purposes of improving Zimbabwe’s country risk
premium through reducing the country’s debt overhang and to improve the
country’s access to foreign finance.

Significant work has been recorded to ensure that the country clears its external
debt arrears by 31 December 2016. It is critical to note that it is Zimbabwe that
owes multilateral and bilateral creditors and not vice versa as shown in the Arrears
Clearance Chart below.

PUBLIC AND PUBLICLY
GUARANTEED DEBT (US$7.1 billion)
Clearance of IFIs Arrears
(US$1.8 billion)
Negotiation after IFIs
Arrears Clearance
Clearance of Paris and
Non Paris Club
(US$4.0 billion )
IMF
(US$110 m)
IBRD
(US$896 m)
IDA
(US$218 m)
AfDB
(US$601 m)
Own (SDR)
Resources
Medium-Longterm Loan
Self-liquidating pre-financing
Benefits
Lower debt & country
risk premium
Private sector financing
from IFC, EIB and AfDB
Possible New
Financing from IFIs
Budget support
BOP support
Investment and other
financing
Clearance of Arrears to
EIB (US$214m) and other
Multilateral (US$61 m)
Clearance of EIB after IFIs.
Own resources for other
multilateral arrears
ZIMBABWE ARREARS CLEARANCE PROCESS

APPENDIX II

RTGS and Nostro Balances under the multi-currency exchange system
A healthy discourse on funds held by the Reserve Bank under the Real Time Gross
Settlement (RTGS) account and Nostro balances has been going on for some time.
It is critical for the Bank to provide clarity on this scholarly debate in order to provide
confidence within the market and advice on monetary aggregates in the context of
dollarisation in Zimbabwe.

Nostro Account
A Nostro account is a bank account held in a foreign bank and is usually denominated
in the currency of that foreign country. These accounts are opened under
correspondent banking relationship, between local banks and foreign banks. Nostro
accounts are used to facilitate receipts (from inflows such as export proceeds, loan
disbursements) and payments (imports, external loan repayments) on behalf of the
bank and its clients. The word Nostro is borrowed from Latin and means “Ours”. The
foreign banks act as domestic banks’ agents abroad through the correspondent
accounts, of which Nostro accounts are a part of.

Local banks also open bank accounts for foreign banks in domestic currency and
such accounts are termed Vostro accounts.

Real Time Gross Settlement (RTGS)
Refers to the continuous processing, settlement of payments, transfer instructions and
other obligations on an individual basis without netting debits with credits, that is, on
a transaction by transaction basis in real time across the books of a central bank. An
RTGS system is a system for large-value, time critical interbank funds transfers. This

system lessens settlement risk since interbank settlement happens throughout the day,
rather than just at the end of the day.

Settlement
Settlement refers to the completion of a payment or the discharge of an obligation in
respect of funds or securities between two or more parties. It is also used to refer to
the payment or discharge of interbank transactions or a series of prior existing
transactions. RTGS operates on a credit push basis, that is sufficient funds are
required in the paying bank’s settlement account held at the Reserve Bank before a
transaction can be processed successfully.

The RTGS System settlement account held at the Central Bank is a prefunded
account by a paying bank(s) to facilitate interbank payments and settlements at any
given time. All local banks in Zimbabwe are currently very liquid with aggregate
RTGS banking industry balance amounting to around US$1 billion.

RTGS Funds are not the same as Nostro Funds.
RTGS funds are not held by banks and/or the Reserve Bank on a one to one basis
with funds in the Nostro accounts. In simply terms, transactions under RTGS and
Nostro accounts are independent to each other, the two accounts do not tally. This is
the practice throughout the world. This stems from the fact that not all RTGS
monetary balances are expended on foreign transactions. A transaction for the
importation of fuel exclusively done by a local bank, for example, would reduce the
Nostro position and that bank’s deposits without affecting its RTGS position at the
Reserve Bank.

What is, however, true is that a certain proportion of funds held under RTGS should
be supported by funds in the Nostro accounts at a level equivalent to the import
dependence ratio. Thus, given that Zimbabwe’s import dependence ratio is around

45%, the Nostro position to support the RTGS position of US$1 billion would need
to be around US$450 million i.e. 45% of RTGS position of US$1 billion.

It is in view of the mismatch between the expected Nostro position of US$450 million
and the current country’s aggregate Nostro position of US$250 million that RBZ had
to arrange for the US$215 million stabilisation facilities, advised in this Statement,
in order to close the gap which is evidenced by delays in the remittances of outgoing
foreign payments by banks. Ideally banks are expected to arrange such facilities for
their clients but because of the country’s limited access to foreign finance due to the
high country risk premium, it has not been easy for the local banks to do so.

It is also essential to note that almost all payments to government, through ZIMRA,
by tax payers are done through RTGS (as showm in the Chart below) and not physical
cash or Nostro transfers but yet Government employees, like all other employees in
Zimbabwe, are paid in physical cash through banks – as is evidenced by queues at
banks on paydays. This mismatch which is not sustainable requires that payments
within the domestic economy are mainly done through electronic transfers and by
use of plastic money. This way, the country would be preserving funds in the Nostro
accounts for making the much needed foreign payments for the importation of fuel,
raw materials, grain, e.t.c.

APPENDIX III

Update on Closed Banks
As part of measures to promote financial sector stability and restore confidence in
the banking sector, the Reserve Bank dealt decisively with weak banks which were
negatively impacting on the overall soundness of the sector. The supervisory actions
instituted culminated in the closure and liquidation proceedings as discussed
hereunder.

Allied Bank
The bank was closed on 8 January 2015 following surrender of the banking licence
by the institution’s board on 6 January 2015. The bank was placed under final
liquidation on 6 March 2015 and the Deposit Protection Corporation (DPC) was
appointed liquidator of the bank.

As at 30 June 2016, $343,966 had been collected from various debtors whilst
$584,596 had been realised from the disposal of government stock and movable
assets against claims amounting to $15.7 million that were accepted by the Master of
the High Court.

AFRASIA Bank Limited
AFRASIA Bank Zimbabwe Limited, whose licence was cancelled on 24 February
2015 after the institution’s board surrendered the licence was placed under final
liquidation on 29 April 2015 and the DPC was appointed liquidator. As at 30 June
2016, DPC distributed a total of $1.35 million to preferred creditors namely,
employees, NSSA and ZIMDEF.

Interfin Bank Limited
The bank was closed on 31 December 2014 after failing to trade out of critical

liquidity and solvency challenges amid futile recapitalization attempts. The bank was
placed under final liquidation on 4 March 2015 and DPC was appointed liquidator of
the bank.

As at 30 June 2016, a total of $6.3 million had been recovered from a total loan book
of $167.3 million of which $90.6 million are related party loans. The first interim
liquidation and distribution account was approved by the Master of High Court on
18 May 2016. Thereafter, $520,875 was paid to preferred creditors namely NSSA,
ZIMRA, ZIMDEF and former employees.

Capital Bank
The Reserve Bank cancelled the operating licence for Capital Bank Corporation
(formerly Renaissance Merchant Bank) on 4 June 2014 after the Board voluntarily
surrendered the licence. In June 2014, National Social Security Authority (NSSA)
petitioned the High Court for voluntary liquidation but the application has been
opposed by the institution’s other shareholders. The parties await allocation of a set
down date for the hearing of the application by the High Court.

Trust Bank Limited
The bank was closed on 6 December 2013 after failing to trade out of liquidity and
solvency challenges. A final liquidation order was granted by the High Court on 19
May 2016. The Deposit Protection Corporation was appointed liquidator and has set
a creditors meeting for 21 July 2016.

To date, a total of $3.5 million had been collected from a gross loan book of $18
million.

Tetrad Investment Bank (Tetrad)
The DPC was appointed the Provisional Judicial Manager (PJM) of Tetrad
Investment Bank with effect from 1 July 2015.

Since DPC came in on 1 July 2015, approximately $13.5 million has been recovered
from the various debtors out of a gross loan book of $56.7 million. At the second
Tetrad Bank creditors’ meeting held on 24 and 25 September 2015 in Harare and
Bulawayo, respectively, the creditors passed a resolution authorising the PJM to
proceed to implement a scheme of arrangement in terms of section 191 of the
Companies Act [Chapter24:03]. The scheme of arrangement involves the conversion
of debt to equity, and that TIB be put in Final Judicial Management for a three month
period to allow the Scheme of Arrangement as proposed above to be consummated.

The High Court extended the return date for provisional judicial management
indefinitely to allow for the finalisation of the scheme of arrangement. As at 30 June
2016, DPC had paid out a total of $3.11 million of insured deposits in closed banks.

The table below gives a summary of the payments made by DPC as at 30 June 2016
in the closed banks.
Deposit insurance payments as at 30 June 2016
Name of
Institution
Total
Depositors
Gross Deposits
Exposure
(Deposits
payable at $500)
No. of
Depositors
paid to date
% of
Depositors
paid to
date
Value of
Deposits
paid ($)
% Paid to
Exposure
Royal Bank

5,453.00

2,566,938.08
472,207.00


Trust Bank

2,958.00

11,482,101.93
328,516.00


Genesis

86.00

1,426,912.56
11,810.00


Allied Bank

9,228.00

14,316,614.12
1,248,307.00


Interfin Bank

13,021.00

137,336,569.70
918,814.00


AfrAsia

24,163.00

18,559,590.79
3,439,276.00


Total

54,909.00

185,688,727.18
6,418,930.00

11,310.00
3,114,088.00