Enhancing financial stability to promote business confidence

Presented by Dr. J P. Mangudya, Governor of the Reserve Bank of Zimbabwe

The Statement comes at a time when the economy is experiencing renewed hope and confidence ushered in by the new economic dispensation, following the formation of a new leaner cabinet by His Excellency, the President, in November 2017. This renewed hope and confidence would need to be supported by going back to basics to restore business confidence and to foster discipline within the national economy. Accordingly, this Monetary Policy Statement seeks to buttress this confidence trajectory by putting in place measures that gradually liberalise the foreign currency market in order to indicate that the country is ‘open for business’.

The Bank has continued to make concerted efforts to address cash shortages, which are a direct reflection of the tight foreign currency macro-economic environment that is exacerbated by the transmission impact of the persistent fiscal deficit on the financial sector. Addressing this current macro-economic imbalance requires a sharp rise in foreign exchange reserves and an improvement in the fiscal balance. It is against this backdrop that the interventions by the Bank in the foreign exchange market through nostro stabilisation facilities have greatly assisted the economy to meet the ever growing demand for foreign exchange and, in doing so, stabilising parallel market activities and sustaining the financing of critical imports such as fuel, electricity, cash, medicines and essential consumer goods. In addition, policy interventions to promote exports continue to bear fruit as evidenced by the continued narrowing of the current account deficit. In this regard, Zimbabwe’s current account balance is now within the international best practice range and also consistent with macroeconomic convergence targets under the SADC and COMESA guidelines.

This, notwithstanding, the country’s high import dependency continues to exert pressure on foreign exchange earnings, thus fueling parallel market activities for foreign exchange. This economic situation is compounded by the growing fiscal deficit which remains the major driver of increased deposits or money supply in the banking sector, creating foreign currency liquidity shortages in the economy and causing inflationary pressures through domestic monetary emission on the RTGS platform.

Opening up of the economy to business is therefore the most sustainable cure for the major challenges the country is facing. Opening Zimbabwe for business means attracting investment, foreign and domestic, that is required to increase production, jobs, fiscal space, exports and eventually the happiness index for Zimbabweans. It moves the economy beyond stabilisation. Opening up the economy also calls for local business to improve on their efficiencies and competitiveness in order to brace for competition from foreign investors.

The Bank is convinced that by opening up the economy for business, the country has struck the right chord for the sustainable transformation of the economy. It is in this optimistic context that the Bank is coming up with measures to gradually open the foreign currency market in order to restore investor confidence within the economy under the new narrative to open Zimbabwe for business. Specifically the measures presented in this Statement are meant to address the following:

1. Further promoting the use of mobile and electronic payment systems (plastic money);

2. Enhancing the use of the local generated RTGS funds to generate exports;

3. Improving the foreign currency market;

4. Enhancing rewards to exporters and reducing cost of doing export business;

5. Providing generators of forex assurances of ease of access to foreign currency;

6. Enhancing foreign currency retention threshold;

7. Enhancing nostro stabilisation facilities to provide assurances to foreign exchange earners of forex availability and to meet the import requirements of essential commodities;

8. Improving ease of access to productive facilities;

9. Addressing the needs of the diasporans;

10. Reinforcing the arrears clearance and re-engagement programme;

11. Providing guidance on the continuation of the multi-currency system;

12. Providing guidance on the Presidential Amnesty on externalised assets and funds; and

13. Providing update on the acceptability of the 99-year land leases as collateral at banks.

Conclusion

The narrative “open for business” means that Zimbabwe is ready and willing to embrace a paradigm shift to attract investors, both local and foreign, for the total transformation of the economy in respect of increased production, jobs, exports, fiscal space, access to capital and foreign finance. Improvement in these economic variables will greatly benefit the monetary environment and, in doing so, enhancing financial stability and confidence within the national economy. A healthy foreign exchange buffer will strengthen the value of RTGS funds and gradually reduce cash shortages.

“Open for business” is not just a narrative. It calls for a dramatic change in the conduct of business from the business as usual approach. We need to walk the talk to re-balance the economy through a tight rein on fiscal deficit – increasing revenue collections and holding expenditures constant – whilst at the same time enhancing Zimbabwe’s access to foreign finance and increasing foreign inflows from exports and international remittances. These measures will be buttressed by accelerating the arrears clearance and re-engagement programme under the Lima, Peru, principles of engagement with the International Financial Institutions and Development Partners.

The policy measures enunciated in this Statement should therefore be seen as the initial move to gradually open the foreign currency market to show that Zimbabwe is open for business. 2018 should therefore be a defining year for Zimbabwe. The future of Zimbabwe is in our hands.

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Global and regional economic developments

The global upswing in economic activity, which started in the second half of 2016 is strengthening, supported by robust growth in emerging economies. As a result, global economic activity is projected to improve from a growth of 3.2% registered in 2016 to 3.7% in 2017 and 3.9% in 2018.

Despite this development, growth remains weak in some countries, with inflation below target in most advanced economies. Growth in China, India and other parts of emerging Asia remains strong, while several commodity dependent economies in Latin America and sub-Saharan Africa show some signs of improvement.

In sub-Saharan Africa, growth is estimated at an average of 2.7 percent in 2017, up from 1.4 percent recorded in 2016. Growth is expected to further increase to 3.3 percent in 2018, with sizable differences across countries. This growth remains below the previous growth rates of above 5% recorded in 2014. There are, however, mounting vulnerabilities in the region, notably, rising public debt, financial sector strains and low external buffers. Public debt is high not only in oil exporting countries but in many fast-growing economies as well.

The improved global economic performance in 2018 has spill over effects on demand for Zimbabwean commodities and hence increased economic activity in the domestic economy.

Commodity Price Developments

International commodity prices continued their recovery from the rock-bottom levels registered at the beginning of 2016, although they remained depressed compared to the levels that were attained in 2012. More specifically, energy, base metals, precious metals and agricultural commodity prices showed some resilience in 2017 due to strong demand, particularly from China’s property, infrastructure, and manufacturing sectors and amid various supply bottlenecks globally.

Balance of payments developments

Consistent with developments in the sub-Saharan African economies, the country’s external sector position is showing signs of improvement, on account of policy measures being taken by Government and the Reserve Bank to boost exports and contain the import demand.

Merchandise Trade Developments

Over the period January to November 2017, total merchandise trade (exports and imports) stood at US$8,408.5 million, representing a 15.8% increase from US$7,262.5 million recorded over the corresponding period in 2016. The increase was on account of increases in merchandise exports and imports of 36.8% and 4.5%, respectively. Consequently, for the period under review, the country’s trade deficit narrowed from US$2,181.6 million in 2016 to US$1,456.7 million in 2017. A narrowed trade deficit reduces pressure on foreign exchange reserves.

Merchandise exports for the period January to November 2017 increased by 36.8%, from US$2,540.4 million realized in 2016 to US$3,475.9 million in 2017. The increase in the year on year merchandise exports was mainly on account of increases in exports of nickel (mattes, ores & concentrates), gold, ferrochrome and black tea. Exports composition remained unchanged showing Zimbabwe’s dependence on the export of commodities.

Gold, flue-cured tobacco, nickel (mattes, ores & concentrates) ferrochrome and diamonds dominated the country’s exports, contributing about 80% of total export earnings. The country’s exports were mainly destined for the SADC region with South Africa and Mozambique absorbing 62.8% and 10.5%, respectively. The country’s major exports to South Africa include platinum group of metals (PGMs), gold and nickel. These commodities are further exported to their final destination by South Africa.

Total merchandise imports for the period January to November 2017 amounted to US$4,932.6 million, a 4.5% increase from US$4,722.0 million realized over the corresponding period in 2016. The increase in merchandise imports was mainly attributable to increases in importation of energy (fuel and electricity), maize seed, machinery, fertilizers and medicines. The country sourced its imports mainly from South Africa (40.5%), Singapore (22.4%), China (8.8%), Zambia (2.5%) and Japan (2.5%).

Reflecting the combined effects of positive developments on merchandise trade in 2017 and the need to boost domestic production for both export and local consumption through importation of raw materials and intermediate goods, the current account deficit is estimated to have slightly increased from US$591.3 million in 2016 to US$618.1 million in 2017.

International Money Transfers

For the year 2017, inward international remittances amounted to US$1.4 billion compared to US$1.6 billion received in 2016 representing an 11% decrease. Of the US$1.4 billion, Diaspora remittances amounted to US$698.9 million. The Bank is encouraged by the trend where Authorised Dealers are investing in enabling technologies that broaden financial inclusion, reduce remittances cost and increase remittance access points for the convenience of senders and recipients. These efforts towards formalization of remittances is key in building sufficient capacity for leveraging on the developmental impact of remittances.