2006 year-end monetary policyy statement

1.2 The policy priorities and implementation programs that are spelt out in this Policy Statement are largely drawn from the collectivity of consultations held with various stakeholders who include members of the country’s Presidium, Cabinet and Resident Ministers, representatives of Labour, Civic Society, Captains of Industry and Commerce, Church Leaders, Academia, some Legislators and Members of the Judiciary, various Government Departments and Arms of the State, Consumer Council of Zimbabwe and the ordinary people in urban and rural areas.

1.3 The Statement also draws from other broad priorities outlined in national budget statements made by the Hon Minister of Finance Dr. H. M. Murerwa over the past three years, as well as developmental strategy documents mapped out by the Ministry of Economic Development as well as deliberations of the National Economic Development Priority Program (NEDPP) and the National Economic Consultative Forum (NECF).

1.4 Our recent Article IV Consultative discussions with the International Monetary Fund (IMF), the World Bank (WB), UNDP and the EU resident representative once again demonstrated the country’s continued readiness to engage with the international community and to seek their assistance, technical and otherwise, in our efforts to deal with the challenges facing us as a country.

1.5 This is in line with the theme of “building of bridges” announced by H. E. the President, Cde R. G. Mugabe last year.

1.6 I thank all who contributed to the thought process that gave rise to this Statement. I will always cherish and treasure the moments of our interaction over the last three weeks and beyond.

2. OVERCOMING OUR FEAR TO FACE REALITY…

2.1. Hon. Ministers and fellow Zimbabweans, it is not denied by the majority of our people that the country is at a critical crossroads, politically, socially and economically.

2.2. It is not denied that we have suffered set-backs to our initial inflation targets due to a variety of factors both internal and external but this is no reason to condemn ourselves as perpetual failures.

2.3. In strategy, they say “set-backs are the mother of success” provided we take immediate self-corrective measures soon after those setbacks.

2.4. Against this background therefore, there is a crying need for those of us charged with the responsibility to craft turnaround strategies to face the realities of our situation and to propose a new course of action designed to improve our fortunes and reverse the current set-backs before it becomes too late.

2.5. Thus, the year 2007 has to be the turning point in our quest to come to full grips with reality on the ground and the starting point in this direction is to take the bull by the horns so to speak and confront head-on all those economic impediments to our turnaround todate.

2.6. The year 2007 has also got to be a year for reclaiming our self confidence as a people, for renewed investment drive, renewed efforts towards greater unity of purpose and a year for HEALING efforts between and amongst us as a people than has been the case since our economic decline started ten years ago.

2.7. We currently observe latent political tensions in as much as there are economic and social tensions arising from the economic hardships people are experiencing across the board. Such disunity and distrust between us does not auger well for an economy seeking to turnaround and take-off, as take-off we must, this year, provided we implement without delay or fear, the program proposed herein in its totality or with enlightened modifications.

2.8. No Government can hope to fulfill the aspirations of its people if it is at variance with its business, labour and civil constituencies; neither can the business community hope to fulfill their shareholders’ mandate in an environment of antagonism with its Government, and the same applies to labour and civil society in relation to all other constituencies and their particular interests.

3. CURRENT CHALLENGES…

3.1 The challenges facing our economy today are many and known to us all. We live with and experience them daily, be it in urban or rural areas. A lot has been written and spoken about them to a point where I don’t need to repeat them here.

3.2 As we have stated before, our current challenges have their roots from several factors.

3.3 Whatever and whichever is the actual or perceived cause of our situation, right now our people do not seem to care.

3.4 Instead, there is a unanimous call that something be done about it to arrest the situation, especially the rate at which prices of our goods and services are rising everyday.

3.5 Our people today are crying for a package holistic solutions and not half-hearted efforts or piece meal programs;

3.6 They are crying for action and not just talk or endless meetings that produce nothing at the end of the day.

3.7 They are crying for policy clarity, consistency and credibility, and the doing away with any ad-hocs which are neither sustainable in the medium to long term nor desirable for a country of 13 million people with a multiplicity of sectors, each crying for attention.

3.8 With our gold, diamonds, and platinum plenty, land reform completed and good rains, favourable commodity prices internationally, falling oil prices at the international level and a lot more other natural endowments, our neighbours and international partners wonder why we have to import food, why our inflation is so high and why we should cry for or need any foreign currency support from anybody, when in fact God has been so kind to us.

3.9 It is against these realities and cry for action, now reaching crisis levels, that as Monetary Authorities we are calling on all Zimbabweans to set-aside any sectoral, institutional, regional or personal differences and take on the challenges, head-on, inorder to begin to transform the fortunes of our country for the better.

3.10 At this point, it is pertinent that I quickly point out that, no single individual, no single Ministry, single economic or social sector or no single political grouping can, will or should be expected to single-handedly drive our economic turnaround agenda and successfully achieve desired results in terms of growth, equity, price stability and prosperity for all.

3.11 Sincerely, no single policy prescription can or should be expected to resolve all the economic challenges confronting us as a Nation, certainly not this Monetary Policy alone.

3.12 Instead, what is required and is proposed here, with the support of inputs and literature from all stakeholders is a package of holistic and complementary policies, accompanied by a credible sequence of program of implementation, backed up by undivided social, business, labour and political commitment to achieve results within the shortest possible time frame agreed by us all.

FRAGMENTED…

3.13 The current fragmented and seemingly knee-jerk, half-hearted commitment from various social, political and economic partners in our reconstruction journey is undesirable and has so far produced sub-optimal results.

3.14 In a number of cases and situations which required decisive action over the last couple of years, it has been observed that that we have at times overplayed the political card at the expense of the economy and thus allowed political expediency to override economic considerations and common sense, resulting in temporary gratifications at the expense of sustainable medium to long-term imperatives.

3.15 We have at times allowed political, individual, sectoral and/or regional interests or differences to get the better of us and pursued policies and actions designed to fulfill those individualistic and patronizing goals at the expense of national goodness.

3.16 There is and should be no door or window left open for that luxury or opportunism anymore by the middle of this year, if we get your endorsement to move with the proposals to be unveiled in this Policy Statement.

3.17 The consequences of maintaining the status-quo are too ghastly to contemplate and as advisors to Government and the Nation at large, this Monetary Policy Statement seeks to alert the Nation to these dangers and propose a way forward.

THE REAL MILL-STONE ARROUND OUR ECONOMY: DISTORTIONS

3.18 Whilst traditionally it has become fashionable, as stated earlier on, to blame successive droughts, illegal sanctions against us, quasi-fiscal operations of the Central Bank, the fixed exchange rate regime or high interest rates as the main culprits for the country’s current hardships, the reality on the ground, does however reveal startling contradictions and distortions currently prevailing in the economy as the major mill-stone around our necks requiring head-on attention.

3.19 To amplify this reality, I give below just but a few examples of the reality that we need to deal with as a nation to arrest the current economic crisis that have nothing to do with the Reserve Bank but whose negative effects on the turnaround program are severe.

The Staggering Distortions…

MAIZE PRICING…

3.20 As a nation, we have to put our heads together and accept the fact that the current situation where the GMB is buying maize from farmers at $52 500/tonne, whilst selling the same to millers at a mere $600/tonne price is not sustainable by any standard.

3.21 The debilitating effects of this state of affairs are multidimensional.

3.22 Firstly, the wide price differential imposes a phenomenal burden on the fiscus, which in turn looks to Central Bank to bail out GMB on a daily basis, a situation which in turn causes surging inflationary money supply growth.

3.23 Secondly, these differentials create a fertile haven for corruption and rent-seeking behaviour, as some millers are simply round-tripping by re-selling, at $52 500/tonnes back to the GMB, in the afternoon, the same maize they would have gotten from the GMB itself at $600/tonne in the morning.

3.24 This legal innovation is mostly prevalent among us the so called “chefs” who have resorted to having several grinding mills throughout the country and use our connections at various GMB depots to get access to the maize.

3.25 Thirdly, because through the wide price differentials non-farmers can easily make mountains of wealth without shading a drop of sweat by re-trading the same maize sold to the GMB by hardworking farmers, the price differential has the significant risk of discouraging honest farmers from tilling their land and growing maize which they know they can obtain at the cost of a phone call.

3.26 Time, therefore, has come that something be done about this, in a manner that does not take away Government’s inner objective of ensuring that food is affordable to the vulnerable groups of society.

3.27 Politicians need to go out and explain to the people that this irrationality cannot be sustained for ever. We have proposed a time table for this subsidy to be reviewed and eliminated.

FUEL ALLOCATIONS AND PRICING

3.28 As Monetary Authorities, we fully support Government’s policy on subsidies to agriculture, as this is a universal strategy employed by virtually all contemporary economies in the world to guarantee their food security.

3.29 This notwithstanding, however, the current mode of support where fuel is being allocated to farmers at $330 per litre for diesel, is discouraging our farmers from engaging in agriculture itself, as many are now finding it more profitable and less problematic, to simply trade the fuel on the parallel markets instead of production.

3.30 The misalignments in fuel prices have also seen the reality on the ground being divorced from the intended Government objective of providing affordable transportation systems to both the rural and urban populations of the country.

3.31 As has now become repeatedly observable, that the subsidized fuel is rarely benefiting the intended low income urban populations and the rural folk, as transporters are hiking their fares in tandem with actual procurement costs of fuel, among other considerations.

3.32 These anomalies can not be allowed to persist if the economy is to ride out of the current crisis. This is besides the fact that we cannot continue to expect a litre of water from Manyame river to cost more than a litre of petrol or diesel imported all the way from the Middle East.

3.33 We have proposed a timetable for our political leaders to take this message to the people before that anomaly is removed as it is a source of inflationary pressure and unjust enrichment of a few with access to NOCZIM.

UTILITY TARIFFS

3.34 The nation recently woke up to media headlines that ZESA was broke, and that Zimbabweans had to brace up for more sustained power-cuts.

3.35 When one observes that in most residential areas, a full month’s electricity bill comes to a mere $20 000, which amount translates to the price of a small bundle of firewood to last for two hours; or equally startling, that such monthly bill is equivalent to no more than 2 packets of candles then, it should come as no surprise that ZESA can not pay its way.

3.36 Recurrent power cuts to industry, to mines, to irrigation infrastructures and tobacco barns and in our hotels and hospitals, among many other centers of socio-economic production, directly militate and aggravate the inflation spiral.

3.37 Equally, lower-than cost of service delivery pricing in our municipalities and other public utilities is crippling the economy in our wake.

3.38 As one stakeholder advised: “Our parastatals and local authorities are not creatures that exist in isolation of the prevailing economic realities in the country. They must, therefore, be allowed to operate within parameters that make economic sense”.

3.39 We have proposed a timetable within which our political leaders in Parliament, Senate and Cabinet ought to take this message to the people so that we can see the removal of these anomalous distortions for the sake of containing Government expenditure and money supply growth

FERTILIZER PRICES…

3.40 The current and past agricultural seasons have witnessed the dichotomy of fertilizer shortages on the formal market, whilst the same product is readily available in parallel markets.

3.41 The main cause of this dichotomy is again not too difficult to trace, given that at around $8 000 per bag, the official price of fertilizer falls far short of the indicative cost of production, currently estimated at around $20 000 per 50kg bag.

3.42 The main victims of this misalignment are, unfortunately the small-scale and communal farmers who are either not connected enough to secure the subsidized fertilizers or simply do not have enough financial muscle to afford the parallel market prices well in excess of $30 000 per 50kg bag.

3.43 Again fellow Zimbabweans, there is need for a re-assessment of our interventions in agriculture, if we are to deliver a Zimbabwe that has food security, low inflation and a vibrant foreign exchange market.

3.44 There is too much finger-pointing and blame apportionment in agriculture at the expense of hard work, innovation and self-sustenance. We have created too much dependence on Government out of some of our farmers especially the A2 category to a point that is threatening to bankrupt the same Government.

3.45 Time is now ripe to stop any policies of appeasement as appeasement has never led to any meaningful guarantee that one will not come back for or demand more of same.

3.46 We fully support Government giving assistance and subsidized help to A1, Resettlement and Communal Farmers, but that is where such support should end.

3.47 A great deal of baby-crying is coming from those who are supposed to stand on their own. If it is not complaints about lack of mechanization on Monday, it is about fertilizers, seeds and chemicals on Tuesday; followed by cries about lack of rain and inadequate irrigation facilities on Wednesday.

3.48 If it is not about failure to get ASPEF loans or working capital from their banks on Thursday, it is lack of labour or combine harvesters on Friday, lack of transport on Saturday and compliments about the exchange rate on Sunday…

3.49 It is time to rethink our mode of intervention in agriculture and treat it as any other business, decontrol it and let the farmers get on with it on their own, encouraging them to form syndicates for bulk procurements and pooling of resources, as long as at the end of the season, Government allows them to obtain market prices against their output and not subsidy after subsidy.

3.50 Government should not mind paying its farmers huge bonuses at delivery time but no subsidies for fuel, seed, fertilizers prior to production as these are being abused.

TELECOMS INTERNATIONAL CALL CHARGES

3.51 Notwithstanding the numerous calls for the realignment of the country’s pricing on international call termination charges, the telecommunications sector, particularly Tel-One and Net-One, continue to incur net debts in foreign exchange, which situation is threatening the stability and availability of the country’s connectivity with the rest of the world.

3.52 Because of the mis-alignments in our pricing, it has become awfully cheaper for foreign telephone recipients to ask their Zimbabwean friends, family members or business partners to be the ones initiating the international calls, against which less than US$3 would be sent from abroad (for conversion at parallel market rates) to cover as long as 100 minutes of a Tel-One or Net-One bill in local currency.

3.53 The country is suffering double tragedy: one it is missing on the opportunity to earn foreign currency from this investment and secondly, Tel-one comes to the Central Bank looking for forex to pay for the outgoing call which was in essence supposed to be incoming.

LIMITED FOCUS ON CAPACITY DEVELOPMENT…

3.54 A devastating distortion that is ravaging the operational efficiencies in the country’s key institutions and agencies, but tragically without getting much attention, is the adversities of the brain-drain that is taking place in virtually all sectors of the economy.

3.55 Because of this, most of our key economic parastatals, Ministries and specialized private sector entities are now in virtual auto-pilot mode, as key deliberations and implementation programs are left either half-baked or totally unattended due to the inevitable learning curve effects in professional growth.

3.56 It is in this regard that we applaud the current initiatives by the UNDP and the World Bank, among other willing donor agencies, meant to put in motion a comprehensive framework to uplift capacity in some of the country’s institutions.

RAMPANT INDISCIPLINE AND DAYLIGHT SMUGGLING…

3.57 As Zimbabweans, we are increasingly folding our hands in near exasperation whilst smuggling barons are almost becoming “role models” for our children, and are also creating evil cults of naked indiscipline and smuggling in broad daylight.

3.58 The same barons hire small air-crafts to transport their loot out of the country while others use elaborate cross border arrangements.

3.59 Day in day out, in bars, at combi stations, at growth points, at shopping malls, and other rendezvous such as farm braai locations, shoddy deals are taking place, and in some cases, right under the noses of those who should know better, and yet, very limited thrust is seen to collectively contain these vices.

3.60 Until and unless we realize that such illegal, intimidatory and mafia-style dealings are a destructive distortion that blunts the effectiveness of fiscal and monetary policy transmission in the economy, and therefore our recovery, then we might as well kiss goodbye to any hopes of recovery over the foreseeable future.

3.61 We all have an obligation to future generations to leave a legacy of development and a springboard for others to succeed and prosper.

FINES ON ECONOMIC CRIMES…

3.62 Another glaring anomaly that is encouraging and deepening the continued diversion of precious minerals and foreign exchange into the wasteful hands of parallel markets is the total insignificance of and inconsistencies in some of the penalties against economic crimes.

3.63 Whereas stealing a goat from a new farmer or cattle can attract a 9 or 10 year jail term, some of the more devastating economic crimes attract meager fines of under $250.000 or 1USD at the current official rate and considerably less than a USdollar on the parallel market.

3.64 Until and unless a deterrent framework is put in place and is consistent across the board, the country risks continuing to engage in disruptive and unwieldy “cat-and-mouse” game with perpetrators of economic crimes to no avail or benefit to the country.

DETERIORATION OF THE JUDICIAL FRAMEWORK…

3.65 The recent public revelations on the sorry state of affairs in the resourcing of our Judiciary system also stand out as a fundamental distortion that is weighing heavily against current efforts to turnaround the economy.

3.66 The social and economic value of a well-resourced Judicial system cannot be over-emphasised as the Nation’s subscription to the Rule of Law is predicated on a well functioning Judiciary System in so far as the timeous and efficient discharge of justice is concerned.

3.67 To this end, therefore, the current rising recurrence of economic crimes can, to a large extent, be attributed to this under-funding and this needs to be attended to urgently if, as a country, we are to realize economic benefits from the centrality of our Judiciary as an enabling pillar to progressive socio-economic turnaround, stabilization and development.

PRICING OUR TOURISM OUT OF THE MARKET…

3.68 The Tourism sector stands as one area where the country has potential to earn significant foreign exchange to support the turnaround efforts.

3.69 Meaningful upturn in this sector is, however, seriously being constrained by pricing distortions that are making the country highly expensive to tourists.

3.70 Using an example of a 750 ml bottle of mineral water, costing Z$2800 (two thousand eight hundred Zimbabwe dollars), conversion of this at the official exchange rate of Z$250/US$ yields an effective hard currency price of US$11.2, which is way too expensive, compared to the regional and international price of the same product at around US$2.

3.71 The same extremity of the distortion in tourism is reflected in the fact that at a price of Z$25 000, a plate of sadza and stew in a hotel translates to a hard currency price of US$100 per that same plate.

3.72 As a country, therefore, we are overpricing ourselves out of the tourism market through our internal price distortions and encouraging the use of the alternative markets for tourism transactions.

SALARY AND WAGE MIS-ALIGNMENTS…

3.73 Effective turnaround of the economy requires vibrancy in the labour market, where workers get salaries and wages that are in line with productivity levels and the cost of living.

3.74 A major distortion that is deepening is, however, that most wage and salary levels can barely cover the basic essentials, leaving a significant portion of necessary expenditures uncovered.

3.75 To illustrate the severity of this distortion, say a medical doctor earns the reported salary of $56 000 gross per month. With the price of a standard bed pegged say, at $800 000, the medical doctor will have to put aside his or her total take-home salary for one year two months to afford the bed, without provision for anything else.

3.76 Removal of these distortions is, therefore an imperative step in uplifting the standards of living for the country’s hard-working workforce.

3.77 Going on strikes, labour stay-aways or any form of disruptive work stoppage in protest over this state of affairs is however not the answer.

3.78 We thus call upon our Labour Union leaders to find better ways and means of addressing this anomaly as a day’s output lost in the factory due to these stoppages can never be recovered, especially when we are now crafting a credible way forward for dealing with our economic situation.

FOREIGN EXCHANGE PARALLEL MARKET INDEXING OF RENTALS FOR PROPERTIES…

3.79 Time has also come that as a country, we take the bull by the horns and tackle the growing distortions in the Real Estate sector, where now most rentals are being indexed to parallel market exchange rates, leading to relentless monthly escalations.

3.80 Tenants are, therefore, being left at the mercy of land lords/ladies who hike their rentals at will, without any reference to fundamental economic developments.

3.81 If we are to make Zimbabwe a country worthy of living by everyone - house owners and tenants; then time has come for sanity to be restored in the Real Estate sector without any further delay. We call upon the industry to begin putting its “house” in order as a matter of top priority.

HIGH FISCAL RECURRENT EXPENDITURE

3.82 Indeed, the Private Sector was apt in their contributions to this Monetary Policy Statement when they advised that:

3.83 Quote: “Without a primary budget surplus, inflation simply will not be beaten. All stakeholders must work together to come up with plans to meet the budget surplus within the next 30 days…”end of quote.

3.84 As Governor, I propose that we start by prioritizing our expenditures, live within our means and for starters, work towards a balanced budget in 2007.

3.85 Lean structures across the board, in Government and parastatals alike and the elimination of subsidized support to the parastatal community, some of whom have turned into real parasites needs to form the first steps in that direction towards a balanced budget.

3.86 Continued fiscal budget overruns, particularly when induced by recurrent expenditure, are a fundamental distortion in the economy, with adverse tentacles that infringe on monetary targets and, hence weaken the inflation fighting momentum.

LEGISLATIVE GREY AREAS…

3.87 A key requirement for the recovery of the economy, as well as increased generation of foreign exchange inflows is the growth in foreign direct investment inflows into the country.

3.88 As Monetary Authorities, doubling up as the Chair of the NEDPP Taskforce on Foreign Exchange Mobilization, we have come to appreciate the devastating effects of the current grey areas and uncertainties in the legal frameworks governing some of our key sectors of the economy.

3.89 As a country, we cannot continue to hope to meaningfully attract foreign investors, if we, ourselves are not decisive in concluding that which is in our control and management.

3.90 It is, therefore, high time that stakeholders face the reality of intricacies that are silently but effectively blocking away potential investors from our highly potent economy. Such grey areas are contributing to the shortage of foreign exchange, inflation spiral and the continued suffering of our people.

3.91 In some cases, the fear to make decisions, fear to make mistakes or to be criticized tomorrow if the outcome is not as earlier expected is resulting in many initiatives being frustrated in some line Ministries.

3.92 This is especially so when it comes to the absolutely necessary parastatal privatization or partnership proposals which have potential to help ameliorate our foreign currency situations.

3.93 In some cases however, exaggerated nationalism, petty suspicious and jostling for frontline position in the parastatal privatization proposals is hampering progress towards joint ventures with those parastatals.

AGAINST THIS BACKGROUND, THEREFORE, TRADITIONAL TOOLS ALONE WILL NOT DO…

3.94 It is against this background, fellow Zimbabweans, that I say we cannot continue to deny the reality that the above multiple distortions are weighing heavily on the economy in dimensions that have now become more hazardous than any other exogenous factors, individually or collectively; droughts or sanctions put together.

3.95 It is for this reason that as Monetary Authorities, we have come to the conclusion that for as long as these distortions remain in place in our economy, any spirited attempts by the Governor and his team to deploy the traditional tools of Monetary Policy via interest rates or the exchange rate adjustments in isolation, will NOT stabilize our inflation, let alone enable us to defend the value of our currency in the midst of such a maze of such contradictions.

3.96 Later in this Monetary Policy Statement, I will develop further this inescapable reality and advocate for the adoption of a holistic SOCIAL CONTRACT, under which concerted, well sequenced, and simultaneous bold measures ought to be taken as preconditions for the deployment and full functionality of Monetary Policy instruments.

3.97 Todate, too much reliance has been placed on the Central Bank to solve each and every conceivable challenge from droughts to personal fights at the farms, from stock thefts to ensuring that employees at ZISCO produce steel and getting the blame if ZIFA fails to secure forex to go and fulfil its continental fixtures because of their poor planning.

3.98 This time round, we want to concentrate on chasing the “zheros” that are knocking on the Governor’s bedroom at night everyday saying “tadyoka zhachese”. (the three zeroes are threatening to come back). We want to exorcise those ghosts once and for all.

3.99 With your permission, I will now turn briefly to my core Banking sector issues, as is expected of such reviews as this Statement before returning with a Roadmap and proposed way forward.

4. FINANCIAL SECTOR DEVELOPMENTS

STATUS OF THE BANKING SECTOR

Overview…

4.1 The banking sector has remained generally safe and sound and continues to be resilient, despite the challenging macroeconomic environment.

4.2 The demonstrable safety and soundness of the banking sector is attributable to the enhanced minimum capital requirements, implementation of the risk focused supervision methodology and enforcement of sound risk management and corporate governance practices in the industry.

Banking Institutions…

4.3 As at 31 December 2006, there were thirty one (31) banking institutions, made up of fourteen (14) commercial banks, five (5) merchant banks, five (5) discount houses, three (3) finance houses and four (4) building societies under the supervision of the Reserve Bank.

Asset Management Companies…

4.4 There were seventeen (17) operational asset management companies as at 31 December 2006, down from thirty one (31) originally registered in 2004. As reported previously, 14 Asset management Companies fell by the wayside as they failed to make the grade for continued existence.

Microfinance/Moneylending Institutions…

4.5 As at 31 December, 2006, there were 244 registered microfinance and money-lending institutions. A total of 5 surrendered or did not renew their licenses citing viability challenges.

Capitalization…

4.6 As stakeholders are aware, new capital levels were announced in the January 2006 Monetary Policy Statement, and banking institutions were required to have complied with these minimum capital levels by 30 September 2006. We are happy that all financial institutions complied.

4.7 As Monetary Authorities, in pursuance of our mandate to promote financial stability, we urge all banking institutions to be proactive and ensure, at all times, that capital levels are commensurate with their risk profiles and remain above regulatory thresholds.

4.8 We also remind players in the banking sector not to regard capital alone as the panacea to their success. Managing the total portfolio of risks under a bank is key to sustained success.

FINANCIAL INCLUSION: RURAL BANKING

4.9 During the currency reform exercise, dubbed Sunrise 1 Project, conducted in August 2006, it was evident that the majority of Zimbabweans, particularly in the rural areas have no access to financial services.

4.10 The extent of rural and peri-urban outreach by commercial banks and building societies also remains largely limited, and this has perpetuated financial exclusion of the majority of Zimbabweans.

4.11 In view of this observed setback, the Reserve Bank has, in consultation with the banking industry and other stakeholders, put in place a comprehensive Framework for Financial Inclusion, full details of which are contained in a separate Supplement to this Statement.

AMENDMENTS TO BANKING LAWS

4.12 The dynamic operating environment, characterised by increased competition, and developments in the international arena, require that laws governing the financial sector be constantly reviewed to ensure relevance and consistency with policy objectives and realities on the ground.

4.13 It is against this background that the Reserve Bank will be seeking amendments to the Banking Act so as to effectively respond to a variety of ever-changing international environment.

5. MONETARY DEVELOPMENTS

Money Supply

5.1 Broad money supply (M3) growth has continued on an upward trend, increasing from 669.9% in May 2006 to 1 438.3 % in November 2006.

5.2 Annual domestic credit grew by 1 278.4% to $526.5 billion in November 2006. The expansion in domestic credit was driven by

(i) Credit to Government, which grew by 1 013.5%;

(ii) Credit to the private sector, 1 545.6%; and

(iii) Claims on public enterprises, 1 132.9%.

Money Supply Growth Trend

5.3 The drying up of balance of payments support has led the Government to rely on domestic bank sources to finance its operations. The borrowing has been mainly through costly Treasury bills, which were largely short term.

5.4 Year on year growth in lending to the private sector has been growing, increasing from 455% in May 2006 to 1 545.6% in November 2006. The major drivers for the nominal increase in loans and advances are concessional facilities and overdraft loans for working capital.

5.5 The agricultural sector commands the largest share of loans from the banking system. As at November 2006, agriculture accounted for 38.2% of the total loans, largely made up of ASPEF.

5.6 However, lending to the agricultural sector (excluding ASPEF) by the banking sector remained low due to limited availability of collateral and the high cost of money.

5.7 The graph below shows the distribution of loans and advances on a sectoral basis.

Sectoral Distribution of Loans As at November 2006

5.8 Lending to public enterprises has also been through the Parastatal Reorientation Program (PARP) and the Local Authorities Reorientation Program (LARP) initiatives.

5.9 These support facilities are to be stopped with effect from tomorrow 1 February, 2007. Parastatals please take note and direct your requests to the Ministry of Finance henceforth.

Annual Government, Public Enterprises and Private Sector Credit Growth.

CURRENCY IN CIRCULATION DEVELOPMENTS

5.10 The spate of price increases for goods and services, coupled with resurging adverse inflation expectations have continued to give impetus to growth in currency in circulation, which increased by 175.6% from $53.5 billion in August 2006 to $147.4 billion in November 2006.

Currency Held by Banks and the Public

5.11 The widening gap between currency held by banks and currency outside banks reflects the pool of resources supporting cash transactions in the economy, including informal and parallel market activities.

6. INFLATION

6.1 As was amplified by the Hon. Minister of Finance in his 2007 Budget Statement, radical measures are required to tame the inflation dragon.

6.2 For most of 2006, the inflation dragon has maintained an upward trend, gaining 667.9 percentage points from 613.2% in January 2006 to 1 281.1% in December 2006.

6.3 The annual inflation rate, has been driven by increases in prices of both food and non-food items.

6.4 The Figure below shows the annual inflation profile from January 2004 to December 2006.

ANNUAL INFLATION PROFILE (Jan.04-Dec ’06)

Reflecting the underlying pressures on the supply side, combined with demand-pull effects in the economy, month-on-month inflation remained high since the beginning of 2006 averaging 24.6% per month during the year.

MONTH ON MONTH INFLATION PROFILE

6.5 Against this unfavorable background, both the 2007 Budget and this Monetary Policy Statement seek to arrest high inflation through closer coordination and implementation of utmost restraint on fiscal outlays and monetary emission.

6.6 The removal of distortions, supported by closer policy coordination and implementation is expected to significantly thaw negative expectations, which to this point had become an inflammatory explanatory variable for the high inflationary spiral.

UNDERSTANDING THE MAJOR INFLATION DRIVERS

6.7 As the Nation confronts the set-back of high inflation, it is important to appreciate the core drivers of this imbalance, so as to underline what it takes to successfully reduce inflation to low and stable single-digit levels.

6.8 Understanding the anatomy of inflation drivers, also enables those stakeholders in various portfolios of the economy whose sectors account for greater sources of this scourge to be nudged into action in support of the anti-inflation drive.

6.9 Such an appreciation of the structural dimensions of price increases also helps in bringing to the fore the reality that successful reduction of inflation will take more than one institution or one set of policy interventions.

6.10 There is need therefore, for fiscal, monetary and structural adjustments that are rooted at individual Government Ministries, Departments and Private Sector shop-floor levels.

MAJOR INFLATION SUB CATEGORIES

	CPI SUB-CATEGORY	WEIGHT IN CPI BASKET (%)	COMMENT
1.	Food and Non-Alcoholic Beverage	31.93	v There is need for food security.
2.	Alcoholic Beverage and Tobacco	4.91	v Need for vibrant supply. v Need for scrupulous pricing.
3.	Clothing and Footwear	5.71	v Need more production through capacity utilization.
4.	Housing, Water, Electricity and Gas	16.23	v Need flourishing housing programs. v ZINWA to put house in order. v ZESA to be an efficient operator.
5.	Furniture, Household & Equipment Maintenance	15.11	v Need more production.
6.	Health	1.31	v Develop internal capacities for production of essential drugs.
7.	Transport	9.77	v NRZ to expand services. v Road transport development. v Air Zimbabwe to be efficient.
8.	Communication	0.99	v Need investments. v Increase competition.
9.	Recreation and Culture	5.75	v Diversify production and service delivery.
10.	Education	2.85	v Schools to run efficiently. v Build transparent costing structures.
11.	Restaurants and Hotels	1.52	v Need transparent costing structures.
12.	Miscellaneous Goods & Services	3.94	v More production. v Scrupulous pricing frameworks needed.
	TOTAL	100

NB: CPI= Consumer Price Index, which is used to calculate inflation

MONETARY ANCHOR AND INFLATION TARGETS

6.11 The urgency of the need to reduce inflation impels that 2007 be the year for unprecedented fiscal and monetary policy restraint, supported by close coordination of efforts.

6.12 To this end, the Reserve Bank will reduce annual broad money supply (M3) growth from the current levels of over 1000% to 415-500% by December, 2007, and subsequently to under 65% by December, 2008.

6.13 There have been numerous calls from various stakeholders, requesting the Central Bank to make explicit monthly projections on inflation.

6.14 Whilst there is merit in such calls, the position of the Reserve Bank is that over the outlook period, if no action is taken, and taken soon, in line with the bold steps contained and recommended in this Monetary Policy Statement, the outlook period would see inflation rising up significantly, particularly in the near-term.

6.15 The Nation must therefore, be forewarned that without bold steps and commonality of purpose, the inflation dragon will swallow our economy to levels not dreamt of before and this we can not allow to materialize.

6.16 It is for this reason that as Monetary Authorities, we are imploring on all stakeholders to take part in the SOCIAL CONTRACT as advocated in this Statement.

6.17 This, coupled with the tight monetary position being implemented, is expected to yield rapid dis-inflation over the outlook period.

6.18 This road will however not come easily. We need to act now and together.

7. INTEREST RATE POLICY

7.1 The Bank’s interest rate policy will continue to be guided by inflation developments and outlook.

7.2 However, as was amply highlighted earlier, our experience over the past 3 years has amply demonstrated that singular application of traditional monetary policy tools, such as interest rates, in the absence of concreted, holistic, well sequenced policy packages will only serve to throw the productive sectors deeper into stagflation – low capacity utilization co-existing with high inflation while a low interest rate policy not only discourages savings and severely punishes our pensioners, but also fuels parallel market for foreign currency as well as promoting other forms of indiscipline.