Commentary on the 1 October Monetary and Fiscal Policies


On the 1st of October 2018, the Governor of the Reserve Bank, Dr. John Mangudya and the Minister of Finance and Economic Development, Professor Mthuli Ncube did a first by presenting the monetary and fiscal policies respectively, at the same platform concomitantly. The Monetary Policy Statement presented by the Governor of the Reserve Bank of Zimbabwe was aptly titled “Strengthening the Multi-Currency System for Value Preservation & Price Stability,” reflecting the context of rising inflation on the back of the parallel currency exchange rate premiums, multiple pricing, acute liquidity shortages and rising domestic debt, and hence the urgent need to promote financial and price stability. The objective of the policy statement was therefore to strengthen the multi-currency system given that the economic pre-requisites for currency reforms are not yet in place.

The Governor makes the startling observation that the policy statement comes at a time when the economy is expanding on the back of high consumer demand, increased business confidence and positive expectations in the aftermath of the electoral process and the formation of a lean cabinet. It is also stated rather bizarrely that the economy has shown ‘strong resilience’ in the face of adverse inflationary pressures as well as speculative tendencies during the run-up to the harmonized elections. Furthermore, it is argued that the economy has also been resilient to adverse effects emanating from escalating foreign currency premiums that had become the key driver of inflation. Hence the overly positive prognosis that: “The package of reforms that have been put in place by Government since November last year provides a strong springboard upon which the economy is showing great signs of sustained recovery,” (page 5). The truth of the matter is that the economy is in distress as evidenced by the huge budget deficit, sharp rise in prices (inflation), escalating debt, and especially domestic debt, deteriorating trade balance, worsening parallel exchange rate premium, and deepening liquidity crisis.

It is also interesting that the monetary policy statement attributes the adverse inflationary expectations to the parallel market activities and multiple pricing mechanisms which themselves are “…the result of deep seated disparities within the economy,” (page 4). Yet it is clear that since 2015, a combination of factors, including subdued revenues, severe drought and the slow pace of reforms as well as fiscal indiscipline (including recourse to unbudgeted for expenditures), resulted in unsustainably high expenditure levels and the associated large public financing requirements. The sudden rise in the fiscal deficit in 2016 is related to the Reserve Bank Debt Assumption Act of July 2015, which required government to take liability of an estimated $1.35 billion debts incurred by the RBZ before 31 December 2008. Owing to limited access to foreign inflows, the fiscal deficits had to be financed through domestic borrowing, which put the financial sector under considerable pressure, leading to liquidity shortages. Of the US$2.1 billion Treasury bills and bonds issued in 2016, only US$356.3 million (17%) was to finance the Budget deficit, with US$1.7 billion (81%) for outstanding legacy debt. As a result of the expansionary fiscal stance, government debt to the banking sector increased steeply after 2015, culminating in a prolonged financial crisis that severely limited credit to the economy and resulted in cash shortages, prompting banks to limit cash withdrawals and import payments as they had depleted their US dollar reserves.

As the 2018 Budget Statement noted, “At the heart of the economy’s fundamental economic challenges is an unsustainable Budget deficit, whose financing through issuance of Treasury bills and recourse to the overdraft with the Reserve Bank is untenable. 86. This is also at the core of factors driving the demand for foreign exchange, as well as creation of excess money supply, which is largely in the form of electronic RTGS6 and mobile money balances,” (paragraphs 85-86, page 30). It concludes that: “The room for domestic financing of the large fiscal deficit has now been fully depleted, and additional monetary financing of the deficit can only lead to inflation and further economic deterioration,” (paragraph 96, page 32).

The policy statement projects a better-than-expected growth trajectory of around 5% in 2018, higher than the original forecast of 4.5%, driven by growth in key sectors of the economy, especially agriculture, mining, tourism and manufacturing. Tobacco recorded the best ever output produced in Zimbabwe at 250 million kilograms in 2018. The 6.3% projected growth for 2018 announced in the fiscal policy statement differs from the 5% in the monetary policy statement, leaving observers bewildered as to how the fiscal and monetary authorities can announce such different projections concomitantly at the same platform.

While this rebound in output is welcome, it may not be sustained given the forecast el nino occurrence in the 2018/19 agricultural season, as well as the absence of the needed structural reforms to anchor and sustain the recovery. In this regard, it may be far-fetched to conclude, as the fiscal policy statement proclaims that “…with this projected growth Zimbabwe will join the “6% club” of African countries growing at more than 6% per annum,” (page 2). It is important to remember that ‘one swallow does not make a summer.’ Even in the presence of arrears clearance and the implementation of structural reforms, the response will be lagged (you do not reap in the same period you sow).

Effectively, the Monetary Policy Statement lays the blame for the current economic woes on the unsustainable fiscal position and the funding modalities. In its own words, “…the genesis of money creation and pressure on the currency is fiscal,” (page 13). In its view, “Money creation is not caused by mediums of exchange that include mobile banking platforms (Ecocash, OneMoney, Telecash), internet banking, RTGS or bond notes. Mediums of exchange are used to facilitate trade of goods and services or to withdraw or access money from banks and other banking platforms. Mediums of exchange per se do not increase the quantity or stock of money in an economy,” (page 13). The policy statement therefore (and correctly so), sees commitment by Government to address the fiscal deficit as critical to contain the significant mismatches between the electronic money balances and foreign currency reserves.


The monetary policy statement came up with a raft of policy measures to strengthen the multi-currency system and restore financial and price stability, including the following:

2.1 Introduction of separate FCA accounts for Nostro and RTGS funds

While the Monetary Authorities had introduced a policy that requires banks to ring-fence foreign currency for foreign exchange earners that include international organizations, diaspora remittances, free funds, export retention proceeds and loan proceeds in February 2018, the Central Bank observed that this policy had not been implemented in a transparent manner by some banks. With immediate effect, all banks were directed to operationalize the ring-fencing policy by separating foreign currency accounts (FCAs) into two categories, namely Nostro FCAs and RTGS FCAs.

This policy measure is designed to encourage exports, diaspora remittances, banking of foreign currency into the Nostro FCAs and to eliminate the dilution effect of RTGS balances on Nostro foreign currency accounts Banks were given up to 15 October 2018 to fully comply with the policy measure and also to provide reasonable deposit rates on the Nostro FCAs in line with international best practice. In order to preserve value for money for the banking public and investors during the subsistence of the multi-currency system, it was announced that the relationship between the two FCAs will remain at parity (1:1).

2.2 Credit Lines for Strategic Requirements

The Central Bank is putting in place facilities amounting to US$500 million to cover imports of strategic requirements such as fuel, electricity, cooking oil, wheat, packaging, among others; US$250 million from Gemcorp, US$150 million from Afreximbank and US$100 million from Afrigrain. These facilities are in addition to the US$100 million from CDC/Standard Chartered Bank, US$100 million from Ecobank, US$30 million from IDC of South Africa to Agribank and US$25 million from the African Development Bank (AfDB) to CABS Building Society.

2.3 Purchase of Fuel in Zimbabwe by Foreign Truckers in Foreign Currency

In order to deal with the practice whereby foreign truckers plying the Zimbabwean routes trade in the parallel market of foreign currency and purchase fuel in Zimbabwe at the official rate of exchange, all foreign truckers plying the Zimbabwean routes were ordered to pay for their fuel in Zimbabwe in foreign currency with immediate effect. The same will apply to foreign traders buying goods in Zimbabwe for resale in neighbouring countries.

2.4 Purchase of Gold by Jewellers in Foreign Currency

While the current policy is that where a jeweller purchases gold from Fidelity Printers and Refiners (FPR) using RTGS funds, when they export the jewelry, they retain 35% of the gross export value for own use, with the balance of 65% being transferred to the Reserve Bank Nostro account for national requirements, the Central Bank directed that in order to mitigate against abuse of this facility, all purchases of gold by Jewellers from FPR shall be in foreign currency and that Jewellers shall retain 100% of their export proceeds, with immediate effect.

2.5 Settlement of Capital Gains Tax in Foreign Currency when using Offshore Funds

While in February 2018, the Central Bank introduced a policy allowing individuals to sell their immovable properties to buyers using offshore funds and, in some instances, to retain the sale proceeds offshore provided prior Reserve Bank approval is obtained, the policy statement sought to enhance the efficacy of this policy by ensuring that all sellers of immovable property to buyers with offshore funds pay Capital Gains Tax from offshore sources into a ZIMRA Designated Nostro FCA. As a condition for the issuance of the tax clearance certificate, evidence of payment shall be required during ZIMRA interviews.

2.6 Introduction of Statutory Reserve Requirement to mop up excess liquidity

To mop up excess liquidity from the market arising from the increased creation of money mainly as a result of fiscal imbalances, the Central Bank will introduce statutory reserves at a level of 5% on RTGS FCAs on a weekly compliance basis with effect from 1 November 2018. To cater for financial institutions that require accommodation, the AFTRADES window will remain in place as a lender of last resort facility.

2.7 Issuance of Treasury Bills (TBs) Through an Auction System

To promote transparency in the issuance of TBs, with effect from 1 November 2018, the Central Bank will invite tenders for investors to participate in the auction system of TBs.

2.8 Strengthening the Monetary Policy Committee

The Central Bank is going to strengthen the Monetary Policy Committee (MPC) to provide an effective process for Monetary Policy in line with best practice.


3.1 Fiscal Imprudence at the Heart of the Current Crisis

The accompanying Fiscal Policy Statement presented by the Minister of Finance and Economic Development, Professor Mthuli Ncube agrees that at the centre of the current economic crisis are fiscal imbalances and how they have been funded. As it clearly concedes, “At the centre of the above challenges, is the unsustainable high budget deficit. This challenge has had destabilising implications not only to the financial sector but to the rest of the economy. The financing of the deficit was mainly through domestic borrowing with the use of instruments such as Treasury bills, overdraft with the Central Bank, cash advances from Central Bank, arrears and loans from the private sector. Such financing mechanisms is crowding out the private sector, hence constraining production. This also increased money supply in the economy translating into exchange rate misalignment and inflationary pressures now at 4.9%, as at August 2018,” (paragraphs 5-7).

The Fiscal Policy Statement then goes on to show how fiscal indiscipline since the end of the Government of National Unity (GNU) in 2013 created domestic debt, from as low as US$275.8 million in 2012 to current levels of US$9.5 billion, with an external debt of US$7.4 billion external debt, bringing the total public debt to US$16.9 billion. It outlines how the Government abused its overdraft facility at the Central Bank to finance the deficit such that the overdraft stands at US$2.3 billion as at end of August 2018, three times higher than the statutory limit of US$762.8 million. It also violated the requirement of Section 11(1) of the Reserve Bank Act [Chapter 22:15], which states that borrowing from the Reserve Bank shall not exceed 20% of the previous year’s Government revenues at any given point.

Issuance of Treasury Bills also went over-drive, quadrupling from US$2.1 billion in 2016 to a cumulative US$7.6 billion, by end of August 2018. While the ratio of Treasury Bills to GDP was at 4.4% in 2014, it increased sharply to 36.5% by end of August 2018. As highlighted in the fiscal policy statement, excessive issuance of short-term debt instruments at high-interest rate has had the effect of crowding out the private sector. Worryingly, this pattern will not end soon as the fiscal policy statement concedes that issuance of TBs will continue, albeit in a modified way, “Precisely, any issuance of Treasury Bills, in the future will only be through the auction system, a more market oriented system. This will improve the process of price discovery and better pricing,” (paragraph 23). This is particularly so because, “The duration profile of the current domestic debt will also be lengthened in line with inflationary expectations,” (paragraph 24).

3.2 Two-tier Currency and the Fiction of parity between FCA accounts for Nostro and RTGS funds

By separating FCA Accounts for Nostro and RTGS funds, Government has tacitly accepted the reality of different currencies in operation in the economy, one where the physical multi-currencies applies, and the other relating to electronic transfers not backed by any physical cash.

Interestingly, this creates an elite class made up of international organizations, diaspora remittances, free funds, export retention proceeds and loan proceeds (foreign currency earners) who will use what Gresham’s Law refers to as ‘good money’ (Nostro FCA balances) while the rest of the public is relegated to the use of ‘bad money,’ – RTGS FCA balances. However, the fiction remains that their relationship is one of parity (1:1). Yet it clear to all and sundry, that with the huge shortage of multi-currencies, electronic and RTGS transfers which are not backed by any physical cash have a much lower value as reflected by the premium on physical cash on the thriving parallel market of foreign currency. Those currencies deemed RTGS balances cannot be used for external payments and will continue to lose value due to inflation. In essence therefore, this categorization effectively reinforces the inherited distorted dual and enclave economic structure.

It would appear lessons from the hyperinflation era have not been learnt, where as a result of the erosion, and effective destruction of the Zimbabwe dollar, ordinary citizens and the working people lost value through bank deposits, insurance premiums and pension contributions. This prejudice, which led to the establishment of the (Retired) Justice Smith Commission of Inquiry into the Conversion of Insurance and Pension Values from Zimbabwe Dollars to United States Dollars, is playing out again, this time under the multi-currency system.

The erosion of value through decimating the currency was well noted earlier by John Maynard Keynes in his book on “The Economic Consequences of the Peace,” which was published in 1919, when he observed that: “Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Lenin’s argument was that through a continuous process of inflation, governments can secretly and arbitrarily deprive their citizens of an important part of their wealth and impoverish them, (See Keynes, 1919, pp. 235-248).

3.3 Regressive Intermediated Money Transfer Tax

Through the Finance Act 15 of 2002, Treasury introduced the Intermediated Money Transfer Tax, pegged at 5 cents per transaction, with effect from 1 January 2003. On the basis of the increased informalisation of the economy and sharp rise in electronic and mobile phone based financial transactions and RTGS transactions, the Fiscal Policy Statement expanded the tax collection base to align the tax collection points with electronic mobile payment transactions and the RTGS system. The Fiscal Policy Statement reviewed the Intermediated Money Transfer Tax from 5 cents per transaction to 2 cents per dollar transacted, effective 1 October 2018. In its estimation, in 2018, 1.7 billion transactions went through this mode of payment compared to 50 million four years ago.

This extension of the collection of the Intermediated Money Transfer Tax to all electronic financial transactions is regressive in that it negates the very essence of such platforms that were established to promote financial inclusion. Taxing the formerly financially excluded poor people, especially in rural and urban communities is highly regressive and retrogressive. Moreover, this comes at a time the Central Bank has been promoting the use of plastic money, electronic and mobile money payment systems by the Zimbabwean public. Clearly, therefore, this regressive tax is at odds with the vision of the Monetary Authorities to create a cash-lite society by 2020.

3.4 Macro-economic and Fiscal Stabilisation Programme

In his Fiscal Policy Statement, the Minister of Finance and Economic Development also alluded to the urgent need to undertake macro-economic and fiscal stabilisation, invariably targeting the fiscal deficit. He also pointed out that Treasury was accelerating the process of re-engagement with international partners and creditors in order to clear arrears on external debt amounting to US$2.5 billion owed to the African Development Bank, the World Bank and the European Investment Bank. In addition, Professor Ncube indicated that Treasury was engaging key Paris Club creditors with a view to restructuring US$2.8 billion owed to them and that negotiations will continue at the World Bank /IMF Annual Meeting in Bali, Indonesia from 10 – 14 October 2018.

In the immediate aftermath of the monetary and fiscal policy statements, Cabinet announced on the 2nd of October that it had approved, for immediate implementation, the Transitional Stabilisation Programme presented to it by Finance and Economic Development Minister, Professor Mthuli Ncube. It indicated that implementation process will commence in October 2018 and run up to December 2020. Furthermore, it was revealed that the Transitional Stabilisation Programme would constitute the first phase of the implementation of Vision 2030, paving the way for the implementation of two successive Five Year Development Plans that will run from 2021 to 2030.

On the basis of the above pronouncements, it is clear that the Zimbabwean Authorities are implementing a macroeconomic and fiscal stabilization programme which front-loads arrears clearance and debt resolution. In the absence of fiscal space, it is clear that the prioritization of arrears clearance and debt resolution entails austerity, a point that was made clear in the Monetary Policy Statement when it warned that “Rebalancing the economy requires tough and painful measures to deal with the root causes of the economic challenges facing the Zimbabwean economy,” (page 13).

It should not be lost to Zimbabweans that we have been here before, as Government railroaded the populace into ESAP in 1991. We need to recall the lessons learnt, if any, so that we are the wiser going forward. Addressing the first forum of the Structural Adjustment Participatory Review Initiative (SAPRI), 2-3 September 1999, then World Bank Resident Representative, Tom Allen identified the following as having resulted in the failure of ESAP:

  • “growth needs to be inclusive – “Partial deregulation without a restructuring of the dual economy creates social tensions and not enough jobs”;
  • social sector expenditures need to be protected and targeted measures to deal with poverty should not be seen as ‘add ons’ but as an integral part of the programme;
  • state intervention is necessary – “Getting the prices right and making markets work better are important, but these need to be complemented with measures to ensure that the ‘unequal’ balance of power of those who can readily engage in the market and those who cannot, does not lead to dangerous levels of social tensions”; and
  • national ownership is critical.”

After a long period in denial, the World Bank concedes that after close to two decades of implementing such reforms in developing countries, the results are unsatisfactory. Its detailed analysis of the lessons from reforms is contained in two seminal reports ‘Economic Growth in the 1990s: Learning from a Decade of Reform’ (World Bank, 2005); and ‘The Growth Report: Strategies for Sustained Growth and Inclusive Development’ (World Bank, 2008). As the 2005 report notes; “The principles of … ‘macroeconomic stability, domestic liberalization, and openness’ have been interpreted narrowly to mean ‘minimize fiscal deficits, minimize inflation, minimize tariffs, maximize privatization, maximize liberalization of finance,’ with the assumption that the more of these changes the better, at all times and in all places – overlooking the fact that these expedients are just some of the ways in which these principles can be implemented,” (World Bank, 2005: 11).

The World Bank reports argue that by focusing on macroeconomic stability, deregulation and privatization, conventional macroeconomic policies typically confuse means for ends. The 2005 report criticizes the narrow focus of conventional policies with achieving static efficiency gains – ignoring dynamic efficiencies -, mistakenly equating policy reforms with growth strategies. In this respect, the report argues that: “In retrospect, it is clear that in the 1990s we often mistook efficiency gains for growth … Expectations that gains in growth would be won entirely through policy improvements were unrealistic. Means were often mistaken for goals – that is, improvements in policies were mistaken for growth strategies, as if improvements in policies were an end in themselves. Going forward, the pursuit of policy reforms’ sake should be replaced by a more comprehensive understanding of the forces underlying growth. Removing obstacles that make growth impossible may not be enough: growth-oriented action, for example on technological catch up, or encouragement of risk taking for faster accumulation, may be needed,” (World Bank, 2005: 11).

In the same vein, the OECD Paris Declaration on Aid Effectiveness of 2005 set out five principles that can help encourage better ways of working together to the benefit of all as including: national ownership of programmes, alignment, harmonization, managing for results and mutual accountability. In terms of national ownership, Governments are exhorted to lead and coordinate policy formulation, with effective stakeholder participation to engender national ownership. The key lesson from experience is that in the absence of national ownership, the chances of programme success are severely limited.

If therefore national ownership engendered through stakeholder participation is a critical success factor and key lesson from past experience, then what is unfolding in Zimbabwe under the new dispensation is most worrying. How do we expect to succeed when programmes are being rolled out without stakeholder participation? How Cabinet approve a ‘Macro-economic and Fiscal Stabilisation Programme’ without stakeholder participation and ownership? As ZCTU, we urge Government to institute comprehensive stakeholder consultations as the basis for moving forward and addressing the myriad of challenges bedevilling the economy, and negotiate a Social Contract as the basis for recovery and inclusive, broad-based growth and human development. An institutional framework to promote such stakeholder consultations, the Tripartite Negotiating Forum (TNF) is already in place.

Source: Zimbabwe Congress of Trade Unions (ZCTU)