Monetary Policy

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Monetary Policy

Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy. It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment.

These policies are implemented through different tools, including the adjustment of the interest rates, purchase or sale of government securities, and changing the amount of cash circulating in the economy. The central bank or a similar regulatory organization is responsible for formulating these policies. In Zimbabwe the Reserve Bank of Zimbabwe (RBZ) is responsible for these policies through its Governor John Mangudya.

The primary objectives of monetary policies are the management of inflation or unemployment, and maintenance of currency exchange rates.

Zimbabwe's monetary policy

During his presentation of the 2020 monetary policy the central bank chief left the lending rate unchanged at 35%, reiterated the expectation that year-on-year inflation will be 50% by December 2020 with month-on-month inflation being less than 5% during the same period.

With effect from 1 May 2020 the central bank lowered its policy rate by another 10 percentage points to 15% and had now cut it by 20 percentage points in 2020 following a similar cut in March 2020. Since November 2019, when RBZ halved its policy rate to 35.0 percent from 70.0 percent, the rate has now been cut by 55 percentage points in three steps.

During the 2020 Mid Term Monetary Policy Review on 21 August 2020 the RBZ reviewed the Bank Policy rate upwards from 15% to 35% in order to curb speculative borrowing and manage foreign exchange pressures. This was to reduce excess liquidity on the market which could be channeled towards purchasing of foreign currency thus putting pressure on the exchange rate.

He maintained the foreign currency thresholds for various sectors despite exporters and companies pointing out that the forex limit was woefully inadequate and hampering their ability to meet production targets. It has contributed to capacity utilisation tumbling to 36,4%.

Mangudya said the central bank will continue with the gradual introduction of bank notes and coins, with ZW$150 million disbursed in the last quarter of 2019 to bring the total amount in circulation to ZW$1,1 billion, which represents 3,2% of total bank deposits as at December 31 2019. However, this was far from sufficient which means the long, winding queues for cash will remain, with the desperate cash-seeking public still having to buy money at punitive rates of up to 50%. Mangudya's revelation that only 200 entities are in possession of half the country's total deposits paints a gloomy picture of the central bank's ability to control the circulation of money in the market.

On the currency side, Mangudya claimed that de-dollarisation was well on track at a time the local unit has lost massive value to other currencies and when most goods and services, including rentals, are being priced in United States dollars. "The bank believes that the macro-economic signals that include fiscal and monetary discipline, prospects of positive economic growth and lower inflation are improving to support a gradual de-dollarisation process within a timeframe of 5 years. This is in line with other countries' experiences on de-dollarisation," Mangudya said in his Monetary Policy Statement.

He said the reduction of foreign currency deposits as a proportion of money supply went down to 37% by December 31 2019 with foreign currency-denominated loans in the banking sector standing at 22% of banks' total loans and advances by the same period.[1]

Measures Pronounced by the Governor

Liquidity Management

The liquidity or stock of money is the key focus area that the Bank is mandated to manage to ensure that it does not cause inflation and/or bring volatility to the exchange rate. 50% of liquidity is concentrated on only 200 entities whilst the majority of the Zimbabwean population is struggling to make ends meet in an economy with a huge output gap.

Enhancing the Reuters Forex Interbank Market Tracker System

The main aim of the Reuters foreign exchange market tracker system that the Bank put in place was to improve the operation and efficiency of the foreign exchange market through a more transparent foreign exchange trading platform. The electronic deal tracker system under the Reuters platform went live on a trial basis on 2 December 2019 before it was full operationalised on 23 June 2020. The next step was for banks to become market makers in the user-test environment to make sure that the new trading platform can handle the tasks in the live environment. RBZ committed to set aside appropriate foreign exchange resources to intervene and stabilize the market, as may be required once the enhanced interbank foreign exchange market becomes operational.

In his 2020 Mid-Term Monetary Policy Review the RBZ Governor said the foreign exchange auction system has managed to minimise the volatility in the exchange rate which was the principal driver of price instability in the economy. Accordingly, the auction or market exchange rate has continued to be below the parallel exchange rates of between ZW$95 -120 : US$ that the market was using before the introduction of the auction system on 23 June 2020. This positive development on the exchange rate has thus significantly stabilised prices in the national economy and should be sustained.

In order to continue fostering price stability through increasing availability of foreign currency on the auction, the Bank is putting in place the following measures that take account of the fact that participation on the auction is open to all entities irrespective of whether or not they are exporters and, as such, any shortfalls to meet entities’ foreign exchange requirements will be met through the auction:

  • Standardisation of Export Retention

Given the positive impact of the auction system in price stability and the need to sustain the auction, all export retention thresholds for all exporters will be at a standard level of 70% with immediate effect.

In addition to this equity principle on export retention thresholds, the 30 day liquidation period of unused funds has been reviewed upwards to 60 days from the day of receipt of funds. This is essential to enable exporters to better manage and plan their cashflows.

  • Supporting the Auction from Domestic Forex Resources

Following the decision to allow the use of free funds in the pricing of goods and services in the economy, the Bank is encouraged by the growth of the foreign exchange balances in the domestic foreign currency accounts, from US$352.4 million in January 2020 to US$404.8 million as at end of July 2020.

In order to ensure that some of the domestic-generated foreign currency is utilised to sustain the auction, with immediate effect and going forward, 20% of the foreign currency receipts of providers of goods and services shall be liquidated at the point of depositing in the Domestic FCAs.

For the avoidance of doubt, all existing balances in the Domestic FCAs will not be affected by this policy. This policy measure shall also not apply to recipients of free funds including individuals, embassies, non-governmental organisations, tobacco and cotton producers and Domestic FCAs for fuel companies.

  • Foreign Currency Trading by Bureaux de Change

The Bank is further liberalising the activities of bureaux de change to enable them to enhance their business by increasing the exchange rate spread from the current 3.5% to up to 5.0% above the auction rate. The bureaux de change will be required to sell at the auction at their reserve price, 80% of their balances held every Monday.

  • Compliance with Auction Rates

The Bank has noted with concern malpractices by certain business entities that are charging for goods and services at rates way above the rate obtaining on the auction to the detriment of the consumers. Such malpractices are counter-productive and negate the objective of price stability.

In order to curb such delinquent behaviour and to enforce compliance, the Bank is proceeding to establish a toll free line through which the public/consumers will report to the Bank such malpractices and other foreign currency related transgressions.

Credit Enhancing Measures

The MPC operationalised credit enhancing measures through the creation of a Medium-term Bank Accommodation (MBA) window to support banks with productive sector funding requirements. In this regard, banking institutions were encouraged to re-orient their lending portfolios to the productive sectors of the economy. Banking institutions were further encouraged to partner with the private sector players across the value chains, as part of the strategy to increase productivity and export earnings in the national economy.

Financial institutions are also expected to increase their support to the micro, small and medium enterprises (MSMEs) in order to deepen financial inclusion. Support to the MSME sector has the potential to promote value addition to the key sectors of the economy through diversification, export earnings and import substitution, which are all critical for increased economic output.

Implementation of the Collateral Registry by June 2020 will enable the MSMEs to leverage on their movable assets to access funding from formal financial institutions. In this regard, banking institutions and microfinance institutions are required to submit to the Bank detailed strategies to support the productive sector during the period 2020-2021. The strategy document should be submitted to the Bank by 30 June 2020

During the 2020 Mid-Term Monetary Policy Review the Governor pointed out that the Bank continued to support the productive sectors through its Medium term Lending Facility to support banks with productive sector funding requirements. A total of ZW$2.6 billion had been disbursed to banks as at 30th June 2020. Whilst this Facility is necessary to enhance productivity, it needs to be continuously reviewed to manage the risk of increasing reserve money in the economy.

Bank Policy Rates

Following MPC deliberations, the Bank reduced its Policy Rate on overnight accommodation from 70% to 35%, effective 20th November 2019, in order to promote confidence in the economy and minimise non-performing loans. RBZ through the MPC will continue to proactively guide the market on the expected path of interest rates as part of its efforts to build on policy transparency and confidence.

With effect from 1 May 2020 the central bank lowered its policy rate by another 10 percentage points to 15% and had now cut it by 20 percentage points in 2020 following a similar cut in March 2020. Since November 2019, when RBZ halved its policy rate to 35.0 percent from 70.0 percent, the rate has now been cut by 55 percentage points in three steps.

During the 2020 Mid Term Monetary Policy Review on 21 August 2020 the RBZ reviewed the Bank Policy rate upwards from 15% to 35% in order to curb speculative borrowing and manage foreign exchange pressures. This was to reduce excess liquidity on the market which could be channeled towards purchasing of foreign currency thus putting pressure on the exchange rate.

February 2021

  • The Bank Rate in Zimbabwe for overnight accommodation was adjusted from 35% to 40% and lending rate for the productive sector increased from 25% to 30% during the 2021 Monetary policy presentation by the central bank.

Availability of Cash for Transactional Activities

The Bank will continue to gradually increase the notes and coins to the desired optimal proportion of bank notes and coins in circulation of up to 10 percent of deposits agreed by the MPC to meet cash demand. Moreover, the Bank will gradually introduce notes in larger denominations to improve efficiency and convenience to the public.

Review of Minimum Capital Requirements

The effective date of compliance with the new minimum capital requirements is 31 December 2020. For new applications for bank or microfinance licenses, the new minimum capital requirements are applicable with immediate effect. Banking institutions are therefore required to submit capital plans to the Bank by 30 June 2020, clearly indicating their chosen strategic group as well as proposed strategies for compliance with the set capital thresholds.

Cognisant of the prevailing challenging environment exacerbated by the negative impact of the COVID-19 pandemic, the Bank is extending the deadline for compliance with the requirement for meeting the minimum capital levels, as indicated in the Table below, by one year from 31 December 2020 to 31 December 2021. In this regard, banking institutions are required to submit to the Bank updates of capitalisation plans by 31 December 2020 and 30 June 2021.

Minimum Capital Requirements

Type of Institution Minimum Capital Requirements in ZWL$ Equivalent to:
TIER 1 - Large Indigenous Commercial Banks & all Foreign Banks USD30 million
TIER II - Commercial Banks, Merchant Banks, Building Societies,
Development Banks, Finance & Discount Houses
USD20 million
TIER III - Deposit-Taking Microfinance Banks USD5 million
Credit Only Microfinance Institutions USD25,000

Banking institutions are also required to continue to assess the adequacy of their economic capital levels against their risk profiles. Particular attention should be given to credit risk, operational risk and business risk, which have been significantly increased by the COVID-19 (Coronavirus) pandemic.

De-dollarisation Framework

RBZ believes that the macroeconomic signals that include fiscal and monetary discipline, prospects of positive economic growth and lower inflation are improving to support a gradual de-dollarisation process within a timeframe of 5 years. This is in line with other countries’ experiences on de-dollarisation. The Bank shall therefore continue to provide incentives to promote and defend the use of the local currency within the economy in order to support the de-dollarisation process.

De-dollarization will not be successful until the following is in place:

  • A budget deficit of not more than 3% of GDP
  • Debt to GDP ratio (Ideally less than 70%)
  • Stable Inflation (typically 3 – 5%)
  • Narrow trade deficit, ideally less than 3% of GDP
  • A reasonable foreign currency reserve base (at least 6 months import cover)
  • Domestic production levels targeting industrial capacity utilization of at least 70%
  • Sustained economic growth

Use of Free Funds

The Bank reassured all holders of free funds that their funds are very safe and secure in Zimbabwe. The same is true for all other foreign currency accounts and that the current export retentions are being maintained at their current levels. The Bank has therefore no appetite at all to temper with the legal status of the public’s foreign currency accounts. Allowing the use of free funds within the national economy for the payment of customs duties on selected products, paying for emergency passports, procurement of basic commodities such as food items and fuel, under the direct fuel (DFI) scheme, should not be misconstrued as going back to dollarization, but rather, as common good for the country to promote the inflow of free funds from the diaspora and necessary to buttress the confidence that is needed under the de-dollarisation process

Blocked Funds (or Foreign Currency Legacy Debt)

To date, Exchange Control has processed and validated blocked funds in an amount of US$1.2 billion from 730 applications out of 1080 requests. Of those processed, 299 transactions with a value of US$861 million were rejected for various reasons ranging from double-dipping to lack of supporting documentation. The balance of 350 transactions with a value of US$457 million are being processed for finalisation by 29 February 2020.

Sustainable Financing & Climate Related Risks

Globally, sustainable finance has become one of the emerging issues in the financial services sector, calling for integration of environmental, social and governance standards into the process of providing financial services. Banking institutions are required review their risk management systems and ensure that they appropriately identify, measure, monitor and control climate related risks. The Bank shall provide guidance in terms of disclosure requirements in this regard to ensure clear, comparable, and consistent information about the risks and opportunities presented by climate change.

Financial Technology

Technology and innovations have significantly altered the financial landscape and the way financial institutions offer services and products. In this regard, banking institutions are required to upgrade their ICT systems consistent with the developments in the Fourth Industrial Revolution. In addition, banking institutions should explore new technologies and business models to enable the institutions to compete in the digital age and come up with innovative banking products

Cyber –Security

As financial systems increasingly become more reliant on information technology for delivery of products and services, there is heightened probability of cyber-attacks. Given the highly dynamic cyber threat, banking institutions are required on an ongoing basis to ensure that they have robust ICT systems and sufficient safeguards to deal with cyber risks.[2]

The COVID-19 pandemic has made a compelling case for digital banking. Accelerated digitisation by banking institutions in the wake of COVID-19 and the remote working arrangements have expanded the attack surface of banks’ information technology networks. Critical business functions are more exposed to opportunistic and targeted cyber-attacks by criminals and thus increasing consumer protection risks.

Cyber and anti-fraud controls are critical for banking institutions during and post COVID-19. Banking institutions are called upon to remain alert to such threats and activate appropriate risk management responses and to conduct ongoing consumer education campaigns.

Banking institutions should review the adequacy of their ICT systems. Accordingly, banking institutions are required to submit to the Bank updated cyber risk management policies by 30 October 2020, taking into account COVID-19 experiences to date.

Zimbabwe Inflation Rates

The Zimbabwe National Statistics Agency (ZIMSTAT) reported the following rates as from May 2020:

May 2020 Inflation rate

  • The month on month inflation rate in May 2020 was 15.13% shedding 2.51 percentage points on the April rate of 17.64%.
  • The year on year inflation rate (annual percentage change) for the month of May 2020 as measured by all items #CPI stood at 785.55%
  • The #CPI for the month ending May 2020 stood at 1,097.65 compared to 953.36 in April 2020 and 123.95 in May 2019[3]

June 2020 Inflation rate

  • Zimbabwe’s annual inflation rate for June slowed down from 785.55% in May to 737.26% while month-on-month, the inflation rate in June was 31.66%, up 16.53 percentage points on May‘s rate of 15.23%.
  • In a statement posted on its Twitter account, the Zimbabwe National Statistics Agency (Zimstat) also indicated that the Consumer Price Index (CPI) for the month ending June 2020 stood at 1,445.21, up from 1,097.65 in May 2020.[4]

July 2020 Inflation rate

  • The month on month inflation rate in July 2020 was 35.53% gaining 3.87 percentage points on the June 2020 rate of 31.66%
  • The year on year inflation rate (annual percentage change) for the month of July as measured by all items #CPI stood at 837.53%
  • The #CPI for the month ending July 2020 stood at 1,958.72 compared to 1,445.21 in June 2020 and 208.92 in July 2019[5]

References

  1. Kudzai Kuwaza, [1], Zimbabwe Independent, Published: 20 February, 2020, Accessed: 12 August, 2020
  2. [2], Bankers Association of Zimbabwe, Published: 4 March, 2020, Accessed: 12 August, 2020
  3. [3], Zimstat, Published: 16 June, 2020, Accessed: 17 June, 2020
  4. [4], Zimbabwe National Statistics Agency (ZIMSTAT), Published: 14 July, 2020, Accessed: 14 July, 2020
  5. [5], Zimbabwe National Statistics Agency, Published: 15 August, 2020, Accessed: 16 August, 2020