COLLEGE OF BUSINESS, PEACE, LEADERSHIP AND GOVERNACE

MAC 207

ASSIGNMENT: REVIEW OF THE MONETARY POLICY STATEMENT 2018

MUZAMBI MUNASHE

160813

LECTURER: MR MUZAH G
Monetary policy

The monetary policy provides a statement of the principles that the bank proposes to follow in
the implementation of the monetary policy and evaluation of the monetary policy and its
implementation for the last preceding six months. The monetary policy statement comes at a
time when the economy is experiencing renewed hope confidence ushered in by the new
economic dispensation. The monetary policy statement seeks to buttress business confidence in
the country in order to attract foreign investment, addressing the current macro-economic
imbalance, alleviate foreign currency liquidity shortages as well as cash shortages in the country.
The monetary policy statement also presents new measures to enhance financial stability and
confidence within the economy

The intervention by the bank in the foreign exchange market through drawdowns from the nostro
stabilization facilities assisted to stabilize the forex market and to sustain financing of critical
imports such as medicines, fertilizers and cash imports etc. a good number of firms in the
manufacturing sector benefited from Nostro stabilization and the Statutory Instrument 64 of 2016
put in place by the government to support local production. Since its inception in 2016 the export
incentive scheme has enhanced competiveness of Zimbabwe’s exports and this significantly
contributed to the growth of exports from 2016 to 2017.

The Bank introduced 7% tax free savings bonds in September to mop up excess liquidity within
the market, the Bank has also continued to Aftrades as its lender of last resort window and for
promoting interbank finance facility. The Bank’s plastic money policy thrust has been a
resounding success in the economy exhibited by the unprecedented increases in values, volumes,
devices and access points. Utilization of the credit and collateral registry also continued to
increase.

The global upswing in economic activity which started in the second half of 2016 is
strengthening, supported by robust growth in emerging economies, international commodity
prices continued their recovery from the rock-bottom prices levels registered at the beginning of
2016. Gold prices rallied in 2017, mainly on account of their safe haven status amid geopolitical
tensions and the weakening of the US dollar. Base metals prices firmed in 2017, underpinned by
strong demand from China on account of positive economic growth outlook for the Asian’s giant
economy, the world’s largest consumer base metals.

The country’s external sector 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. Total merchandise (exports and imports) increased from 2016 to 2017, the country’s
trade deficit narrowed from 2016 to 2017, the increase in the year on year merchandise was
mainly on account of increase in exports of nickel, gold, ferrochrome and black tea. Inward
interaction remittances increased by 11% and also consistent with improvement in export
generation, global foreign currency receipts on cash basis increased by 4% from 2016 to 2017

Despite the increase in foreign currency receipts, the benefits of such receipts continue to be
outweighed by the country’s huge import bill, global foreign payments declined by 6% from
2016 to 2017. The financial account balance continued to narrow down in 2017, on account of
declining inflows of short and long term debt, subdued foreign direct and portfolio investment
inflows.

Monetary conditions have generally remained accommodative and supportive of real economic
activity. Broad money recorded an annual growth of 47.97% from 2016 to 2017; bank lending to
local economic agents grew by 44.31% from 2016 to 2017. The Bank continues to ensure that
the level of money supply is supportive of the desired inflation target of between 3-7% consistent
with the SADC macroeconomic convergence target for inflation, food inflation surged in 2017
and it was driven by prices of meat, vegetables and fish, however a decrease in the prices of
bread and cereals, responding to the 2016/17 bumper harvest partially offset the price increase in
other categories. Increases in nonfood inflation prices were largely induced by the parallel
market premiums on foreign exchange. Zimbabwe’s inflation rate, hitherto the lowest in SADC
is now comparable with low inflation countries such as Botswana and Tanzania.

Nineteen banking institutions were operating as at 31 December 2017, the performance of the
banking sector has improved satisfactorily during the year 2017 as reflected by the performance
indicators, banking deposits also increased by 26.47% during the year partly as a result of
increased exports receipts, expansionary impact of government expenditure and the multiplier
effect of new deposits. The banking sector loans and advances also increased during the year.
Banking institutions have continued to support the productive sectors of the economy.

A solution to the challenge of a tight foreign currency is to increase production, exports, foreign
direct investment, diaspora remittances, and loans and putting in place measures to protect
investor’s funds, the following measures are being put in place to gradually liberalize the foreign
currency market and promote business confidence in the country.

The bank is enhancing Nostrum stabilization facilities to support foreign payments, the bank
wants to meet foreign payments of essential imports which include fuel, medications, electricity
and industrial raw materials for the manufacture of cooking oil etc., the bank is also providing
investment guarantees to protect investor’s funds as it is necessary to protect investor’s funds
from country risk, and in doing so enhancing investor confidence. The bank is providing 7% tax
free savings bonds on nontransferable funds in order to assure investors of returns on their idle
funds seated banks, the bank is also enhancing export incentive scheme for increased foreign
currency inflows and promote export competitiveness. The bank is increasing tobacco and
support facilities to enhance foreign currency inflows from tobacco and gold production

Tobacco and gold exports contribute significantly to the country’s export receipts; therefore the
bank is issuing diaspora tobacco and gold production financing bonds in order to fund this sector.
In order to facilitate inward investments by Zimbabweans in the diaspora, going forward, the
central bank is providing incentives for diaspora investments accounts in Zimbabwe. The bank is
also further promoting the use of plastic money towards the cash lite society

The bank is also assessing the possibility of re-introducing open market operations (OMO) tools
during the course of the year in order to deal with excess liquidity in the market to strengthen
liquidity management systems. The bank is also strengthening financial credibility in order to
ensure that the lending limits to the government does not exceed the regulated 20% of the
previous year to avoid consequences of excess government spending on the economy, the
government is putting in place measures to curb the multi price system and refusal of plastic
money because it is counterproductive to the successful and unpanelled efforts achieved so far in
the promotion and usage of plastic money in Zimbabwe.
Other policy measures to enhance financial stability and to promote business confidence in the
economy are the establishment of offshore financial service center, purchase of gold for value
addition, enhancing the ease of access to productive sector facilities, upward review of threshold
for exports by individuals, upward review of foreign currency retention, thresholds and
downwards review of cost of export documents and establishment of an investment desk to cater
for the diasporians.

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