MAY  2019





                                                                    ZIMBABWE’S MONETARY POLICY REGIME AND THE CASH CRISIS








Executive Summary

The cash crisis in Zimbabwe is a symptom of a multifaceted economic problem that is rooted in the entire macro economy from production, investment, all the way to consumption. The multi-currency system of 2009 was introduced in an economy that was already reeling under a deep seated economic recession that required broader reforms beyond the currency issue to resolve.

This policy brief discusses the factors that caused the liquidity crisis, its effects on various segments of society and measures undertaken by government to avert it. It therefore recommends that Government tackles the crisis holistically by addressing productivity challenges, revising the currency regime as well as making tight fiscal controls.



1.0       Introduction

The Zimbabwean economy has not been performing well since 2000. The country experienced a fall in production in the manufacturing and mining sectors as well as in Foreign Direct Investment (FDI). In February 2009, Zimbabwe adopted a multicurrency regime wherein the United States Dollar was the dominant currency and this helped to quash hyperinflation, restore stability, increase budgetary discipline, and reestablish monetary credibility. Apart from the notable gains in economic stabilization between 2009 and 2012, the economy remains fragile, with GDP growth collapsing from peaks of 10.6% in 2010 to low levels of 4% in 2018. The ratio of deposits that can be accessed immediately as cash withdrawal moved from a peak of 13% in 2009 to 3% in 2016[1].


Since 2016, various measures to address the liquidity crisis have been employed, ranging from tightening the regulatory environment in the financial sector, to the introduction of Bond notes in November 2016. Despite these various interventions, the cash crunch has not abated, compromising normal business and consumer welfare. Bank queues have continued to exist, and the economy remains hamstrung with very low signs of recovery.


2.0       Causes of the Liquidity Crisis

An interplay of various actors and factors are responsible for the cash crisis and liquidity challenges afflicting the economy;


2.1    Public Sector Budget

The public-sector budget, its structure and financing is partly to blame for the liquidity and cash crisis. The country experienced poor revenue generation against unrelenting expenditure demands, poor export performance and the central bank’s quasi-fiscal operations characterized by deficit monetization. For instance, government had, as at September 2018 borrowed $9.6 billion[2] from the domestic banking system through Treasury bills, thus sucking out a substantial amount of liquidity that could have been available for private sector development.

  2.2     The Financial Sector

The banking sector has allowed the quality of their loan books to deteriorate overtime, hence diverting a substantial proportion of liquidity from the financial sector. The level of Non-performing loans (NPLs) rose from around 1.09% as at December 2009 to a peak of 20.14% in 2014[3], resulting in a negative knock-on effect on the volume of available liquidity in the market. As at 30 September 2018, the Zimbabwe Asset Management Company (ZAMCO) had US$1.13 billion worth of NPLs[4]. Thus, the deterioration in the loan portfolio of banks worsened the financial crisis, limiting the availability of funds for on-lending to corporates.


2.3    Illicit financial flows

Illicit financial flows have also worsened the crisis resulting with an estimated loss of  US$2.83 billion between 2009 and 2013, translating into an annual average cash leakage equivalent to US$570.75 million[5]. The mining sector accounted for the bulk of the leakages, constituting 97.9% of the illicit outflows from the country[6]. The RBZ has estimated a leakage of US$1.8 billion through this valve in 2015, with US$1.2 billion of this accounted for by corporates whilst outward bound remittances accounted for the balance.


2.4    International Trade linkages

Zimbabwe has been running a current account deficit since dollarization, with the import bill being dominated by consumer goods at the expense of capital.  A negative trade balance has persisted since 2009, recording US$2.4 billion in 2016. The country’s current account deficit averaged about 8.5% between 2000 and 2008, and 14.1% during the multiple currency era[7]. The annual deficit is estimated to have widened to $1. 03 billion in 2018[8]. These deficits, alongside weak capital inflows have led to a steady drain of dollars out of the economy[9].  The worsening trade imbalances and inclination towards holding or externalizing physical cash have continued to drain cash balances from circulation in the economy, and the adverse effects are being transmitted to the banking sector, manifesting in cash shortages at banking institutions.


2.5    Low Banking Sector Confidence

The Zimbabwean public has lost trust and confidence in the banking institutions to the extent that the major dealings with them involve withdrawals of funds to safety, and if it were not for controls on withdrawals like those imposed during the hyperinflation of 2008, the banking sector would have collapsed[10]. Lack of confidence in the financial sector, coupled with punitive charges and uninspiring interest rates on deposits have seen domestic savings declining to an estimated -11% of GDP[11], imply a huge savings investment gap. On the other hand, gross fixed capital formation declined by 8%, reflecting high consumption and dissaving behaviour in the economy


3.0       Overall Effects of the Crisis

Despite government attempts to contain the crisis, the challenges instead worsened in the first half of 2017. Overall effects of the crisis can be summed up as:

·         Between $20 million and $40 million is being lost monthly by employers through payment of wages and salaries to workers who are not productive as they will be queuing for cash at banks country-wide, resulting in a cumulative annual loss of nearly US$500 million[12];

·         Industry is struggling and the RBZ foreign exchange rationing system is failing to fully address market needs, hence threatening economic revival. The backlog was estimated at US$600 million in May 2017 (12 months) and has even worsened and the RBZ cannot assure importers of timely disbursements of hard currency upon request to facilitate external payments;

·         Shortages in the market continue to be experienced, and fuel procurement has become erratic threatening economic recovery. Since the introduction of Bond Notes, there has been a resurgence of a flourishing ‘black market’, that is now anchoring economic transactions; 

·         A multiple pricing regime has emerged in the goods market threatening consumer welfare and poverty. Multiple pricing is attributed to the scarcity of forex in the formal market and importers source it from the parallel market;

·          Exchange rate mismatch and distortions which promoted the parallel market to thrive leading to run away exchange rate premiums of as high as US$1:7 bond note and even higher in some cases, which in turn pushed up prices beyond the reach of the majority

·         Inflation, at 75.9% in April 2019 is on an upward trend, confirming that Zimbabwe is fast creeping out of the deflation mode since 2014.

·         The Bond notes are now spilling into neighboring economies triggering a biting shortage of liquidity in the domestic market.

·         Coupled with measures to reduce the outflow of United States Dollars from the economy through limiting withdrawals from highs of US$10 000 in 2009, to current levels of around $80 bond per week, the banking sector has struggled to meet the market needs, whilst also denting sector confidence.

·         As the economy is slipping deeper into the informal sector, government revenues will be affected, threatening public service delivery capacity. A 2018 study by the IMF has shown that Zimbabwe has the second largest informal sector in the world, after Bolivia.

4.0       Adequacy of Government Measures to Address the Crisis

The following government efforts since 2016 to address the liquidity crisis have not yet yielded satisfactory results.

These measures included tightening the regulatory environment in the financial sector, through controls and directives issued by the RBZ.  May 2016, witnessed the introduction of Bonds Notes valued at US$200 million as part of an Export Incentive Scheme (backed by the Afreximbank) which negatively changed the Zimbabwean financial sector landscape.

RBZ directives issued in 2014 sanctioning banks to reduce their Nostro Accounts from 30% to 5% to improve the availability of cash in the economy weakened the country’s liquidity position. This was a far cry from the 30% international benchmark. Authorized dealers were also directed to maintain limits of 15% of cash held in respect of local deposits and surrender 85% to the RBZ towards RTGS stock.  This measure, coupled with the sanctions on Nostro balances accumulation were responsible for draining cash from the domestic banking system during 2014 and 2016.

Government and the RBZ have been promoting use of plastic money to ease the liquidity challenges. The promotion of digital finance by the Reserve Bank saw 32 629 point of sale (POS) swipe machines and 40 590 mobile money agents deployed across the country by December 2016, with a target to deploy about 200 000 POS machines and 90 000 mobile money agents by the year 2020[13].

Government also introduced some import compression measures through Statutory Instrument 64 of June 2016. Though noble, protectionist policies result in inefficiencies in production, and punish the consumers.

Furthermore, Government implemented tight exchange control measures in relation to the Bond Note to United States Dollar value. In addition, the 2019 Budget Statement, maintained that the US Dollar trades at 1 to 1 with the Bond note. This resulted in market inefficiencies, shortages of commodities, as well as the thriving of a ‘black market’. The informal market rate shot up to 7:1 in a few weeks, forcing up import prices and giving rise to hyperinflation. Government then granted individuals and companies the right to hold hard currency balances in a special foreign currency account at their banks and this resulted in people and companies slowly beginning to bank their foreign currency earnings and receipts in such accounts. By February 2019, there was about US$700 million in these FCA Nostro accounts.

Government also introduced the Intermediated Money Transfer Tax, commonly known as 2 cents tax, through Statutory Instrument 205 of 2018, to expand Government’s capacity for capital funding and retooling of the manufacturing sector. The revenue generated through the tax, will be channeled towards the funding of social services and devolution. By December 2018, $572,4 was raised surpassing the monthly target by $129,1 million. However, the introduction of the intermediated financial transactions tax has the impact of reversing all the Government’s efforts pushing for a cashless economy and financial inclusion, as traders will try to be paid in cash in order to avoid paying the 2% tax. Furthermore, this tax has an effect of increasing the cost of production and the prices of goods resulting in Zimbabwean products failing to compete on the international market.

The February 2019, Monetary Policy Statement, paved way for market forces to determine the value of the currency in circulation. This allowed the floating of the currencies, and the Banks to pay 2,5:1 for the Bond, reducing the massive destruction of value that the old system prescribed.

The results of these controls have been mixed and more of short-term windfall gains on production, but unsustainable, in the absence of capital for industrial re-tooling and revival. Introduction of a foreign exchange rationing mechanism by the RBZ during the last quarter of 2016, meant to prioritize utilization of the scarce resource has had some mixed impacts, as the volume of foreign exchange available had been restrained by the weak position on Nostro Accounts. All these measures have had minimal impact on the cash crisis.


5.0 Conclusion

The multi-currency policy should have been short-term, meant to afford policy makers some breathing space whilst proffering more durable solutions to the country’s problems. Government’s Monetary Policy has continued to focus on short-term policy interventions, yet the challenges require a much broader and holistic approach that casts a medium- to- long-term outlook, for a durable resolution to these challenges. Government policies should be directed at stimulating production in the primary, secondary and tertiary sectors.



6.0       Policy Recommendations

There is therefore, need for an immediate reform agenda that focuses on the challenging structural problems afflicting the nation from production, investment, savings, and consumption in order to restore economic stability and position the country for sustainable economic recovery and growth. The multi-currency regime has steamed out, and now requires closer consideration. The following policy recommendations are proposed:


6.1       Relook at the Currency Regime


The government needs to open the debate on the appropriate currency regime to all stakeholders, for an inclusive and durable resolve on this controversial subject. A starting point would be the appointment of a technical Currency Commission to explore the possible options on the currency issue. Several options to deal with the currency crisis include, redollarisation, reintroduction of the local currency, Rand adoption, liberalization of the RTGS and bond note as well as ring-fencing deposits to mop up excess liquidity to lower the premium rates on the US dollar.


6.2       Fiscal Adjustment


There is need for Fiscal policy rationalisation to focus on changing the structure of the budget from consumption to development orientation. This will reduce government’s reliance on the banking sector to fund its expenses, and thus ease the current mounting pressure on domestic banking sector liquidity. Government needs to realign its public finance management to available revenue generation capacity, as well as rationalise its public expenditure through the following fiscal measures;


6.2.1     Amend the Public Finance Management Act (PFMA) to set expenditure thresholds as well as provide a cap for public wages and salaries and development expenditure to entrench fiscal responsibility.

6.2.2     Implement a Biometric[14] payroll administration system in the public service should be accelerated to improve transparency and accountability.

6.2.3     Implement a major programme to privatise public utilities to improve efficiency and viability.

6.2.4     Government investment contracts should be brought before Parliament for scrutiny, to ensure Executive accountability in their implementation.

6.2.5     Address investment climate related policies and deepen the current work on Ease of Doing Business Reforms to entrench a business-friendly environment.

6.2.6     Broaden the export capacity by promoting high value manufactures as well as explore the export capacity of the services sector which now accounts for a huge global premium.

6.2.7     Restore infrastructure capacity by opening space for private sector investment to strengthen road, rail, capacity as well as energy generation in Zimbabwe.

6.2.8     Curb illicit financial flows by strengthening existing institutional capacity such as the Financial Intelligence Unit (FIU), under the RBZ, the Zimbabwe Anti-Corruption Commission, as well as tightening Anti-Money Laundering legislation.

6.2.9     Resuscitate the Zimbabwe Mining Revenue Transparency Initiative (ZIMRTI), an initiative mooted during the GNU, as a way of improving accountability and transparency by players in the mining industry.

6.2.10  Scrap exchange rate control and let the local currencies in circulation find their own level. Allow exporters to retain 100 per cent of their earnings.

6.2.11  The Ministry of Labour should work towards resuscitation of the National Productivity Institute (NPI) that will promote productivity related rewards in industry as well as measurement, with the objective of strengthening the performance and competitiveness of the economy as well as of improving the working conditions and quality of life.

6.2.12  Dealing with corruption and indiscipline is an important step in cleaning up the image of the country and reducing the cost of business.



[1] Source: Sibanda. D, (2016), “Economic Update: The Economics of Populist Policy Making”, November – December 2016, Harare. 

[2] Source: Government of Zimbabwe. The 2019 Budget Statement

[3] Source: Reserve Bank of Zimbabwe ZAMCO Report to the Public Accounts Committee, March 2019

[4] ibid

[5] Source: Afrodad, 2014

[6] ibid

[7] Source: Sibanda. D, (2016), “Economic Update: The Economics of Populist Policy Making”, November – December 2016, Harare. 

[8] Source: February 2019 Monetary Policy Statement

[9] Source: Sibanda. D, (2016), “Economic Update: The Economics of Populist Policy Making”, November – December 2016, Harare. 

[10] Source: Makina. D, 2016, “Study on Zimbabwe’s Macroeconomic stability and Policy Options”, USAID-SERA, August 2016

[11] Source: RBZ

[12] Source: Industrial Psychology Consultants, 2017, “Productivity loses as a result of Bank Queues Survey Report”, Industrial Psychology Consultants, (IPC), Harare, April 2017; page 7.


[13] Source: Ministry of Finance and Economic Development, 2017, “Annual Budget Review for 2016 and the 2017 Outlook”, Statement presented by the Minister of Finance, Hon. P. Chinamasa to Parliament on 20-7-17; page 126.

[14] Biometrics refers to metrics related to human characteristics, this could include fingerprints, hand geometry, ear features, retina, DNA, and voice waves ( Thus, a biometric system would be built around capturing data on unique biological traits of people (employees) and using that to run a payroll system, leaving no room for manipulation (e.g. creation ghost employees).   



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