Zimbabwe: RBZ Slashes Lending Rates, Increases Forex Retention

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The Reserve Bank of Zimbabwe (RBZ) has trimmed its bank policy rate to 150 percent from 200 percent per annum and increased foreign currency retention thresholds for exporters on domestic sales while maintaining a tight monetary policy stance to consolidate and sustain the prevailing price stability and domestic economy resilience.

Reduced lending rates and widening of forex retention levels are expected to bring cheer to the productive sector, as well as ease borrowing costs to individuals and small businesses keen to access cheaper lines of credit or personal loans.

In his 2023 Monetary Policy Statement issued yesterday, which also highlights key economic progress indicators, RBZ Governor Dr John Mangudya said the adjustment to policy rates was aligned to positive inflation developments.

He said this is critical in consolidating the transformative development gains achieved so far.

The adjustment comes at a time Zimbabwe’s economic activity continues to exhibit strong resilience to global shocks, supported by strong foreign currency receipts, which clocked a record US$11,6 billion in 2022, and diaspora remittances that jumped by 14 percent to hit US$1,66 billion.

With annual inflation expected to continue declining, underpinned by tight monetary conditions, the Governor said the monetary policy will continue being anchored on the use of interest rates to regulate the cost of money and aggregate demand conditions to achieve the inflation objectives.

Based on these principles, Dr Mangudya said the bank policy rate has been reduced from 200 percent to 150 percent per annum to align with the inflation outlook, which is expected to average below 1,5 this year, with annual inflation rate seen dropping to between 30 and 60 percent from about 230 percent.

“The lending rate on the Medium-term Bank Accommodation (MBA) Facility for the productive sectors, including individuals and MSMEs, be reduced from 100 percent per annum to 75 percent per annum,” said Dr Mangudya.

“The prevailing bank policy rate should be maintained as the minimum lending rate for all banks.”

The Governor said minimum deposit rates on savings and time deposits have also been adjusted to 30 percent and 50 percent per annum, respectively while deposit interest rate on FCA savings and time deposits have been maintained at minimum one percent and 2,5 percent per annum, respectively.

“Export retentions have been increased and standardised at 75 percent across all sectors, including firms listed on the Victoria Falls Stock Exchange (VFEX),” said Dr Mangudya.

“Foreign currency retention on domestic sales in foreign currency has been increased to 85 percent.”

Analysts view this as good news to businesses, which have in the past complained that higher export surrender requirements curtail their access to forex for capital expenditure and critical operations financing.

Citing the need to align monetary policy with the dual currency structure of the economy, Dr Mangudya said it was high time domestic inflation reflected the significant foreign currency inflows in the economy through adopting the blended rates as the country’s reference inflation.

“Total forex receipts at US$11,6 billion in 2022 were the highest FX inflows ever received in the country. About 70 percent of domestic expenditure is in US dollars while foreign currency deposits and loans constitute about 65 percent of total banking sector deposits,” he said.

While the economy continues to exhibit resilience to global shocks

such as the Russia-Ukraine war and projected weaker demand for major commodities, among others, Dr Mangudya said the country was not entirely immune to adverse impacts, which has seen positive growth projection being reviewed downwards from the initial 4,0 percent in 2022 to 3,8 percent in 2023.

In addition to policy support interventions, he said the Government continues to increase its support for the productive sectors through allotments of forex resources through the Auction System, whose cumulative total, since its introduction on June 2021, stood at US$3,7 billion as at December 31 2022, which the bank has settled in full.

Dr Mangudya said the RBZ was determined to further liberalisation of the foreign exchange market as this has helped anchor positive expectations, and proposed adjustments. As such, he said the Willing-Buyer Willing-Seller platform will continue to complement the Auction System.

While it continues to act as the interbank exchange rate, he said the WBWS will be strengthened with further liberalisation through forex sales to banks and bureaux de change outlets through auction on a wholesale basis.

Dr Mangudya said the limit for the WBWS will remain US$100 000 per entity in line with the Foreign Exchange Auction System limits for secondary users.

He announced the upward review of export of foreign currency cash and gold coins from US$5 000 to US$10 000 with a maximum amount of local currency notes and coins that may be taken out of the country capped at an equivalent of US$1 000 at the prevailing interbank exchange rate.

Dr Mangudya said exporters with overdue export receipts are now entitled to retain 50 percent of their export receipts and liquidate the balance into local currency at the prevailing WBWS exchange rate.

To further buttress prevailing stability, Dr Mangudya said continued use of gold coins and the auction system as part of open market operations will be mainstreamed to keep the exchange rate volatility, and its impact on pricing under check.

These measures will be reinforced by regular interventions in the foreign exchange market through forex sales to banks and auction on a wholesale basis from the surrender portion of foreign exchange receipts to smoothen exchange rate shocks, said the Governor.

Meanwhile, Dr Mangudya said the minimum capital requirements for all categories of banking institutions and microfinance institutions have been maintained.

“The monetary policy remains restrictive to sustain the current stability with interest rates aligned to inflation developments in order to sustain and strengthen economic resilience,” he said.

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