Monetary Policy Statement

BY DR. G. GONO GOVERNOR RESERVE BANK OF

January 2011 2011 MonJaenutaray2r0y11 :: Policy Statement

ISSUED

IN TERMS OF THE RESERVE BANK OF ZIMBABWE ACT CHAPTER 22:15, SECTION 46

By DR. G. GONO GOVERNOR RESERVE BANK OF ZIMBABWE JANUARY 2011 tableof Contents INTRODUCTION AND BACKGROUND 5 GLOBAL REAL SECTOR DEVELOPMENTS 6 GLOBAL OUTLOOK 8 GLOBAL INFLATION DEVELOPMENTS 9 INTERNATIONAL COMMODITY PRICE DEVELOPMENTS 10 CAPITAL FLOWS 13 ZIMBABWE: REAL SECTOR OVERVIEW 15 AGRICULTURE 15 TOBACCO 16 SUGAR 17 MINING 17 PLATINUM 19 CHROME 19 NICKEL 19 COAL 19 MANUFACTURING 20 TOURISM 20 INFLATION 21 YEAR-ON-YEAR INFLATION 22 MONTH-ON-MONTH INFLATION 23 SOUTH AFRICAN RAND VERSUS UNITED STATES DOLLAR 24 OIL PRICE DEVELOPMENTS 25 MONETARY DEVELOPMENTS 25 DISTRIBUTIONS OF CREDIT TO THE PRIVATE SECTOR 26 MULTINATIONAL BANKS 27 TO DEPOSITS RATIOS AS AT 31 DECEMBER 2010 27 FINANCIAL SECTOR DEVELOPMENTS 28 ARCHITECTURE OF THE BANKING SECTOR 29 tableof Contents STATUS OF BANKING SECTOR CAPITALISATION 30 CAPITALISATION LEVELS OF BANKING INSTITUTIONS 30 LEVEL OF CAPITALISATION OF ASSET MANAGEMENT COMPANIES (AMCS) 31 STATUS OF MICROFINANCE INSTITUTIONS 31 BANK CHARGES AND DEPOSIT RATES 31 BASE II IMPLEMENTATION 32 FINANCIAL INCLUSION 32 MERGER AND ACQUISITIONS 33 KINGDOM BANK LIMITED 33 INTERFIN BANKING CORPORATION LIMITED 33 PREMIER BANKING CORPORATION 33 EXTERNAL SECTOR DEVELOPMENTS 34 EXTERNAL DEBT DEVELOPMENTS 35 SHORT-TERM TRADE FINANCE FACILITIES 35 EXCHANGE CONTROL 37 EXPORT PERFORMANCE FOR THE YEAR 2010 38 EXPORT PERFORMANCE BY SECTOR 38 MINING 39 AGRICULTURE 41 HORTICULTURE 42 MANUFACTURING 43 CROSS-BORDER ROAD FREIGHT 44 FOREIGN PAYMENTS FOR THE YEAR 2010 46 GLOBAL FOREIGN PAYMENTS 46 FOREIGN PAYMENTS BY SECTOR 47 SOURCES OF FUNDING FOR FOREIGN PAYMENTS 48 GLOBAL FOREIGN PAYMENTS BY SOURCE OF FUNDS 50 FOREIGN PAYMENTS BY CATEGORY 50 GLOBAL FOREIGN CURRENCY TRANSACTIONS 50 tableof Contents COMPARISON OF GLOBAL FOREIGN CURRENCY RECEIPTS FOR THE YEARS 2009 AND 2010 50 EXPORTERS AND NON-EXPORTERS PAYMENTS AS FROM 01 JANUARY 2010 TO 31 DEC 2010 51 FOREIGN CURRENCY REMITTANCES 51 POLICY MEASURES TO CURB EXTERNALISATION OF FOREIGN CURRENCY 53 LIBERALISED EXCHANGE CONTROL FRAMEWORK 53 ISSUANCE OF EXPORTER’S REGISTRATION CERTIFICATES 54 EXTENSION OF CREDIT TERM PERIOD FOR EXPORTED GOODS 54 RE-DESIGNATION OF FOREIGN CURRENCY ACCOUNTS (FCAS) 55 NATIONAL PAYMENT SYSYTEMS OVERVIEW 57 LARGE VALUE PAYMENT SYTEMS 57 REAL TIME GROSS SETTLEMENT SYSTEM 57 RETAIL PAYMENTS 58 INTER-BANK SYSTEM 58 CARD PAYMENT SYSTEM 59 POS AND ATMS VALUES AND VOLUMES FROM JANURY TO NOVEMBER 2010 60 MOBILE AND INTERNET PAYMENT SYSTEMS 61 SECURITIES SETTLEMENT 62 REGIONAL AND INTERNATIONAL DEVELOPMENTS 62 POLICY ADVICE 63 SANCTIONS 64 CONCLUSION 64 MonJaenutaray2r0y11 :: Policy Statement

1. INTRODUCTION AND BACKGROUND

1.1 This Monetary Policy Statement is issued in terms of Section 46 of the Reserve Bank of Zimbabwe Act (Chapter 22:15) to set the country’s Monetary Policy for the next 6 months.

1.2 The Policy Statement comes against the background of renewed inflationary upside risks, underpinned by several factors which include fuel price increases, wage costs increases that are higher than real productivity growth, particularly in manufacturing, agriculture and services sectors; and the rising imported inflation index through cross exchange rate effects of a stronger South African rand.

1.3 These real inflationary pressures, if not swiftly kept in check through measures that sustain increased capacity utilization and overall economic productivity can work to seriously undermine and negate the macroeconomic gains the country registered over the past two years.

1.4 Under the multiple currency system, the efficiency of the instrument of monetary aggregates as a tool to fend off inflationary pressures is highly limited, as money supply in the economy has become exogenous to Monetary Authorities’ discretionary policy framework.

1.5 This neutrality of monetary aggregates magnifies the need for the country to fight inflation predominantly through the supply side of the economy, supported by circumspect fiscal management.

1.6 Coming from the painful background of strenuously dry internal liquidity conditions in the domestic financial market, another strategic area that ought to guide overall macroeconomic policies over the outlook period is foreign investment promotion and retention. January2011 5 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

1.7 It is for this reason that the newly created One Stop Shop for investors comes as a bold step in the right direction.

1.8 Investment promotion and retention, however, requires that the country remains steadfastly consistent in creating the necessary conditions for Zimbabwe to compete favourably with regional economies in attracting international capital.

2. GLOBAL REAL SECTOR DEVELOPMENTS

2.1 Global economic activity rebounded in 2010, following pronounced declines experienced in 2009 in the wake of the global financial crisis. The World economy is estimated to have grown by 4.8% in 2010, well above the 3.6% average growth rate of the previous decade.

2.2 Post global economic crisis opportunities in trade, investment, infrastructure development and energy generation provided substantial growth impetus to economic activity the world over.

2.3 Emerging and developing economies recorded stronger growth of 7.1%, compared to a growth of 2.7% in advanced economies. Growth in emerging market economies was spurred by expansion in domestic demand in China, India and Indonesia.

2.4 The US economy is estimated to have grown modestly by 2.6% in 2010 and is forecast to grow further by 2.3% in 2011, supported by rising private consumption, increased investment in business equipment and software, rebounding profits, and normalizing financial conditions.

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2.5 China is estimated to have grown by 10.5% in 2010, driven by domestic demand emanating from major fiscal stimulus, a large expansion of credit, and a number of specific measures to boost household incomes and consumption. In 2011, China is projected to grow by 9.6%. The slight moderation is due to tight monetary policy and the planned unwinding of fiscal stimulus in 2011.

2.6 In India, the economy is estimated to have grown by 9.7% in 2010 and is projected to grow further by 8.4% in 2011, driven by strong domestic demand. Robust corporate profits and favourable external financing encouraged investment. This notwithstanding, the contribution from net exports is projected to turn negative in 2011, as the strength in investment further boosts imports.

2.7 In the Latin American Countries, economic activity grew by 5.7% in 2010. Solid macroeconomic policy fundamentals, coupled with favourable external financing conditions and strong commodity revenues spurred economic activity in this region. Latin American economies benefited immensely from accommodative macroeconomic policy environments in Brazil, Chile, Colombia and Peru.

2.8 The Euro-area experienced a sluggish economic recovery in 2010, reflecting the downside risks of the sovereign debt crisis that engulfed the Euro-area's peripheral nations and its associated contagion effects on other countries in the Euro-area. As concerns about fiscal sustainability and financial stability intensified, European Authorities and the International Monetary Fund (IMF), intervened by providing large support packages alongside a programme of fiscal consolidation.

2.9 Real GDP in Japan is estimated to have grown by 2.8% in 2010, underpinned by recovery in exports emanating from stronger-than- January2011 7 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

anticipated recovery in the Western advanced economies and rising demand for capital goods from China. Economic growth in the Japanese economy is, however, projected to marginally slow down to 1.5% in 2011 due to the unwinding of fiscal stimulus and a sluggish labor market.

2.10 In Sub-Saharan Africa, real economic activity is estimated to have grown by 5% in 2010. Growth in the region was spurred by rebound in global incomes and high export demand from Europe and the US. In particular, firming commodity prices enhanced the viability of extractive industries in the Sub-Saharan region. The pickup in global demand and the strengthening of oil prices also supported growth in Africa’s oil-exporting economies.

2.11 South Africa, which contracted by almost 2% in 2009 is estimated to have grown by 3% in 2010, driven by strong demand for commodities from emerging markets. In addition, growth was also supported by strong domestic demand underpinned by the reduction in interest rates in 2010. South Africa’s output is expected to grow by 3.5 % in 2011.

GLOBAL OUTLOOK

2.12 Global economic growth prospects remain bright, with global economic growth forecast at 4.2% in 2011. The rapid economic growth momentum in emerging and developing countries, coupled with growth in advanced economies is envisaged to continue in 2011.

2.13 With the impact of the 2008/09 crisis receding, unprecedented post-crisis recovery plans crafted in 2010 will be implemented, tested, and assessed in 2011, culminating in a new model for global economic and financial governance.

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2.14 In the outlook period, substantial trade surpluses, high unemployment, weakened household balance sheets, sluggish income gains, rising oil prices, and a fragile financial sector will, however, continue to retard the pace of growth in the global economy.

GLOBAL INFLATION DEVELOPMENTS

2.15 Global inflation remained relatively low amid continued excess capacity and high unemployment. In advanced economies, headline inflation averaged 1.8% in 2010, before marginally slowing down to below 1.5% by year end. The US inflation averaged 0.9% in 2010 and is forecast to rise marginally to 1.1% in 2011.

2.16 In emerging economies, headline inflation average 5.8%, driven mainly by capacity constraints. Brazil, for example experienced gradual increases in inflation pressure, while India has seen a sharp rise in inflation.

2.17 Although the recovery of commodity prices has raised the level of consumer prices, headline inflationary is forecast to remain low in advanced economies at 1.25% in 2011, and 5% in emerging market economies due to sound macroeconomic policies and downward pressures on wages.

2.18 In the sub-Saharan Africa, firming crude oil and food prices and the weakening of the US dollar are, however, envisaged to generate adverse inflationary pressures in the outlook period, despite relative price stability experienced in 2010.

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INTERNATIONAL COMMODITY PRICE DEVELOPMENTS

2.19 Following the recovery in global economic activity, international commodity prices notably for gold, nickel, platinum, copper and crude oil recovered significantly in 2010.

2.20 Firming commodity prices were buoyed by rising demand in the world’s largest consumers, notably China and India, whose economies are expanding at a fast pace.

2.21 The price of gold firmed by 24% from US$1 118.8/oz in January to US$1 392.3/oz in December 2010. The weakening of the US dollar enhanced gold’s appeal as a safe hedging instrument. Investments in the gold sub- sector are expected to respond to the favourable prices.

Gold Price US$/OZ

2.22 Nickel prices firmed by 30% from US$18 470.13 per tonne in January 2010 to US$24 045 per tonne in December 2010.

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2.23 Growing demand for nickel in the stainless steel industry in China and India continue to spur nickel prices.

Nickel Price (US$/tonne)

2.24 Reflecting enhanced viability, Bindura Nickel Corporation is expected to come back on stream during the course of the year 2011, subject to availability of capital to restart operations.

2.25 The demand for platinum is estimated to have grown by about 3% in 2010, mainly driven by the recovery in the global automotive and jewellery industries especially in China and the US.

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Platinum Price (US$/Ounce)

2.26 In response, platinum prices firmed significantly by 9% from US$1 564 per ounce in January 2010 to US$1 711.17 per ounce by December 2010.

2.27 Copper prices rallied in 2010 despite signs of a slowdown in demand. Copper prices rose by 33% from US$8 853.50/tonne in January to US$9 135.29/tonne in December 2010.

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Copper Prices (US$/tonne)

2.28 Oil prices, firmed against the background of a weaker US dollar and speculation that the U.S. economic recovery will accelerate in 2011 which increased oil consumption. Reflecting the Crude oil prices increased by 28% from US$71.68/barrel in January to US$91.75/barrel in December 2010.

CAPITAL FLOWS

2.29 There are signs of renewed foreign investor interest in sub-Saharan Africa. Access to international capital markets has broadened. Notably, South Africa returned to the international bond market in mid-2009, Senegal issued its first international bond in December 2009, and Seychelles concluded a successful debt exchange operation in February 2010. 2.30 Countries such as Angola, Kenya, Mozambique, Nigeria, and Tanzania

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have also indicated their intention to borrow in international capital markets, through sovereign debt instruments.

2.31 Private capital flows from official and private sources continued to increase in 2010 due to a combination of both pull and push factors.

2.32 The driving push factors encompassed global determinants such as interest rates and market growth. The pull factors included among other things, the quality of institutions, economic stability, and deep and open financial markets. Fiscal discipline and abundant natural resources have combined to significantly attract FDI into sub-Saharan Africa.

Sub-Saharan Africa: Private Financing Flows

Source: World Economic Outlook, October 2010

2.33 Most of the region’s low income countries have not benefited from the recent surge in private capital flows. About, two-thirds of inflows over the last economic cycle went to South Africa and Nigeria.

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2.34 Competition for external private financing has also intensified, given budget constraints faced by donors. This underscores the need for reforms in some sub-Saharan countries to liberate productive potential, promoting trade and financial sector development, encouraging domestic savings and investment, raising standards of governance, and building up institutions. These reforms will assist countries to attract sustained private capital inflows.

3. ZIMBABWE: REAL SECTOR OVERVIEW

3.1 The Zimbabwean economy is estimated to have grown by 8.1% in 2010, buoyed by improvements in all the sectors of the economy. Significant growths were recorded in mining (47%) and agriculture (34%).

3.2 The positive growth reflects the general economic stability and sound macroeconomic policies implemented by Government. The economy has also immensely benefited from the normal agriculture season and the firming up of international mineral prices.

3.3 Economic performance is, however, still constrained by challenges that include power outages, liquidity shortages, obsolete infrastructure, external debt overhang, low aggregate demand, skills gap and high unemployment.

AGRICULTURE

3.4 Agriculture output is estimated to have grown by 34% in 2010 and is expected to continue on a recovery path in 2011.

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MAIZE

3.5 As at the end of December 2010, a total of 660 000 hectares of maize had been planted, compared to 530 000 hectares planted in 2009. If the crop is not severely affected by intra-dry spells, the country is likely to realise a better crop. 3.6 Maize output may, however, be lower than expected due to an outbreak of armyworm which has hit the major maize growing areas. Measures have, however, been put in place to monitor and control the situation and farmers have been assured of the availability of adequate chemicals for the purpose.

TOBACCO

3.7 Tobacco output increased from 58 million kgs in 2009 to 123 million kgs in 2010. A total of 65 000 hectares were put under tobacco, with 65% grown under contract. The tobacco was sold at an average price of US$2.88 per kg.

3.8 In 2011, tobacco output is expected to increase to between 170 and 200 million kgs on the back of increased hectarage. It is estimated that above 100 000 hectares of tobacco will be planted in 2011.

3.9 Average tobacco prices are expected to remain firm, reflecting global supply and demand conditions.

3.10 The coming back on board of renowned international buyers such as Japan Tobacco Industries (JTI) and Premier Tobacco, is likely to boost tobacco prices.

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COTTON

3.11 Cotton output increased from 211 000 tonnes in 2009 to 260 000 tonnes in 2010. The sub-sector is benefiting from the availability of financing and marketing arrangements under Statutory Instrument 142 of 2010, which protects both cotton farmers and cotton buyers, prohibiting side marketing. This has boosted confidence in the sector. 3.12 Cotton output is expected to rise to 300 000 tonnes, against the background of favourable prices. International lint prices, which rose to US$1.7 per kg during the last quarter of 2010 are currently trading firm at US$1.5 per kg.

SUGAR

3.13 Sugar output for 2010 was estimated at 350 000 tonnes up from 259 000 tonnes in 2009 due to significant support from the European Union (EU). 3.14 In 2011, sugar output is projected to increase to 450 000 tonnes, driven by expected higher production levels by Triangle and Hippo valley. Rehabilitation of infrastructure in existing cane production areas is also expected to boost sugar output.

MINING

3.15 Mining output is estimated to have grown by 47% in 2010, underpinned by improvements in the production of all minerals. Notably, chrome increased by 148%; gold, 61%; nickel, 26%; coal, 25%; and platinum, 24%, largely driven by buoyant international commodity prices.

3.16 Mining output also benefited from investment in expansion programmes and recapitalisation of mining operations.

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3.17 Erratic power supply and the unavailability of affordable credit, however, continued to weigh down production.

3.18 In 2011, mining output is projected to increase by a further 44%, following the resumption of operations by Bindura Nickel Corporation and Zimalloys. The opening of Unki Mine is also expected to significantly boost Platinum output. 3.19 Cumulative gold output to October 2010 amounted to 7 610kgs, which is significantly higher than levels attained in 2009.

Monthly Gold Production (January-October 2010)

3.20 In 2011, gold output is projected to increase to 13 000kgs, underpinned by firming international prices, and re-opening and recapitalisation of existing mines in response to the stable macroeconomic environment.

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PLATINUM

3.21 Cumulative platinum output to October 2010 was 7 252kgs, compared to 6 848kgs in 2009. Production is expected to increase to 12 500kgs in 2011programmes, mostly at Unki and Mimosa mines.

CHROME

3.22 Chrome production is estimated to have increased significantly by 148%, from 201 000 tonnes in 2009, to 500 000 tonnes in 2010, driven by increased processing at ZIMASCO and Zimbabwe Alloys.

3.23 In 2011, chrome output is projected to increase further to 700 000 tonnes as a result of planned expansion programmes by the mining houses. NICKEL

3.24 Nickel production remains subdued owing to non-resumption of production at Bindura Nickel Corporation, which has remained under care and maintenance since 2008.

3.25 Output is, therefore, estimated at 6 120 tonnes in 2010, from 4 857 tonnes in 2009, in line with increased activities in PGMs.

3.26 If Bindura Nickel Mine resumed operations in the first quarter of 2011, output is expected to increase to 7 600 tonnes.

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COAL 3.27 Coal output is estimated at 2 million tonnes in 2010, up from 1.6 million tons in 2009, following investments by Hwange Colliery on the dragline and the coal screening machine, complemented by viable coal pricing. In 2011, coal output is projected to further increase to 3 million tons.

MANUFACTURING 3.28 The manufacturing sector is estimated to have grown by 2.7% in 2010 and is projected to register a higher growth of 5.7% in 2011.

3.29 Manufacturing sector capacity utilisation improved to 43.7% in the first half of 2010 compared to 32.3% for the same period in 2009. Improvements in the agriculture sector are also expected to stimulate manufacturing activity.

3.30 Manufacturing sector activity, however, continues to be constrained by shortages of working capital, obsolete equipment, inadequate power supply, unsustainable wage demands, competition from imports, and low domestic demand.

TOURISM 3.31 The tourism sector continued on a recovery path, anchored by improvements in global demand and stability in the economy. Cumulative tourist arrivals up to the third quarter of 2010 increased to 781 177, from 532 971 recorded during the same period in 2009.

3.32 Reflecting this, hotel and lodge room occupancy levels increased from 31% and 26% recorded in 2009 to 39% and 31% recorded in 2010, respectively.

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3.33 Consequently, total tourism receipts increased from US$52.7 million in 2009 to US$65.1 million in 2010, representing an increase of 23.5%.

3.34 Hunting sector receipts, however, remained stagnant at US$16 million in 2009 and 2010.

3.35 Tourism growth in 2011 will be underpinned by expected improvements in the performance of both domestic and regional source markets.

INFLATION

3.36 In 2010, the economy continued to experience low and stable inflation, against the background of sound macroeconomic policies and general improvement in the supply side of the economy.

3.37 Zimbabwe’s inflation remains well below levels prevailing in other countries in the region, reflecting macroeconomic stability.

3.38 The Table below shows inflation profiles for selected countries in the SADC region as well as for the USA.

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Annual Inflation for SADC Countries and USA (%)

Zimbabwe SA Botswana Mozambique Tanzania Zambia Malawi USA Jan 2010 -4.8 6.2 6.1 5.1 10.9 9.6 7.8 2.6 Feb 2010 -0.7 5.7 6.1 6.8 9.6 9.8 8.2 2.1 Mar 2010 3.6 5.1 6 7.1 9.0 10.2 8.3 2.3 Apr 2010 4.6 4.8 7.1 9.1 9.4 9.2 8.1 2.2 May 2010 6.0 4.6 7.8 12.7 7.9 9.1 7.8 2.0 June 2010 5.3 6.9 7.7 14.5 7.2 7.8 7.5 1.1 July 2010 4.1 6.7 7.0 16.0 6.3 8.4 7.3 1.2 Aug 2010 3.6 3.5 6.7 17.1 6.6 8.2 7.2 1.1 Sept 2010 4.2 3.2 7.0 15.3 4.5 7.7 7.0 1.1 Oct 2010 3.6 3.4 7.2 15.3 4.2 7.3 6.7 1.2 Nov 2010 4.2 3.6 7.2 n/a 5.5 7.1 6.4 1.1

YEAR-ON-YEAR INFLATION

3.39 In 2010, annual inflation remained within the single digit range, peaking at 6.1% in May before declining to 4.2% in November.

Annual Inflation Profile (%)

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MONTH-ON-MONTH INFLATION

3.40 Monthly inflation decelerated from a peak of 1.1% in March to 0.4% in November 2010.

Month on Month Inflation (%)

3.41 Inflation developments in 2010 have been to a larger extent been determined by the movements of the rand/US dollar exchange rate dynamics.

3.42 The firming of the rand against the US dollar will continue to induce inflation pressures in the economy.

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South African Rand versus United States Dollar

3.43 The continued increase in international oil prices is expected to have a knock on effect on inflation. Reflecting increases in international oil prices, domestic fuel prices increased in December 2010 by more than 20%, translating to a first round effect on prices of between 0.15% and 0.20%.

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Oil Price Developments

3.44 The second round effects of the rise in fuel prices would be more pronounced as it is expected to cascade down to the other sectors of the economy.

3.45 Rising food prices on the world market have also stoked inflationary pressures in the economy.

MONETARY DEVELOPMENTS

3.46 In 2010, financial intermediation improved, as reflected by growth in deposits and lending to the productive sectors.

3.47 Total deposits in the banking system increased from US$1.4 billion in January to US$2.1 billion in November 2010.

3.48 Major sources of deposits were from the service industry (27.5%) and households (16.9%). Volatile short term deposits, however, accounted for more than 90% of total.

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3.49 Credit to the private sector grew from US$759.6 million in January to US$1 485.4 million in November 2010. The major beneficiaries were agriculture (22.3%), manufacturing (20.3%), distribution (20%), households (7.6%) and mining (6.7%).

Distributions of Credit to the Private Sector

Agriculture 22% Other 23%

Households 8%

Mining 7% Distribution 20%

Manufacturing 20%

3.50 The loans to deposit ratio rose to 76.2% in October, before declining to 68.8% in November, 2010. These levels are close to the international benchmark of 70-90%.

3.51 Lending rates remained prohibitive to the productive sectors. Lending rates ranged between 12% and 18% annualy, relatively much higher than the prime lending rate of 9% prevailing in South Africa.

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3.52 The money market remained generally inactive, largely due to low liquidity levels. In the absence of Treasury bills, only instruments which dominated the money market were short-term bankers acceptances.

3.53 Activity in the inter-bank market was also, severely curtailed by the unavailability of Treasury bills, which are regarded as a risk-free instrument for collateral purposes.

3.54 The resumption of the Lender of Last Resort function of the Central Bank will instil confidence in the money and credit markets. As liquidity improves, banks are expected to increase long-term lending to the productive sectors of the economy. Such long-term financing is critical to the revival of domestic industries which need to re-equip, refurbish as well as replace obsolete machinery.

4. MULTINATIONAL BANKS

4.1 The Reserve Bank has noted with serious concern the continued aloof attitude by some multinational banks towards the need to actively support the domestic economy.

4.2 In some cases, this aloof attitude has been explicitly exhibited through the extension of the illegal international sanctions on Zimbabwe by these banks, taking instructions from their international parentages.

4.3 Under these misguided practices, some internationally owned domestic banks are deliberately declining loans to Zimbabwean companies and individuals appearing on the illegal EU/USA sanctions lists.

4.4 Equally retrogressive, the internationally owned banks are paralysing the money and capital markets by sterilizing huge domestic deposits which January2011 27 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

funds they are not passing on to the productive sectors of the economy through lending.

4.5 The low levels of overall loans to deposit ratios at these banks are a development which is constraining the economy’s recovery.

Loans to Deposits Ratios as at 31 December 2010 Name of Institution Total Loans & Overdrafts Total Deposits Loans to Deposits Ratio Commercial Banks Agribank 30,279,740.11 24,740,194.02 122.39% BancABC 129,014,875.21 211,426,832.43 61.02% Barclays 43,638,980.00 172,995,527.00 25.23% CBZ 431,699,789.87 572,900,927.41 75.35% CFX 0.00 0.00 0.00% FBC 73,482,046.22 134,941,093.16 54.45% IBC - - - Kingdom 101,681,713.56 111,297,344.35 91.36% MBCA 86,619,505.57 68,356,458.94 126.72% Metropolitan 29,101,310.04 43,968,427.86 66.19% NMB 62,008,242.49 87,898,364.10 70.55% Stanbic 100,532,619.03 296,587,046.17 33.90% Stanchart 110,536,931.82 217,953,691.01 50.72% TN 36,691,180.54 53,844,841.22 68.14% ZABG 1,516,545.45 14,271,448.61 10.63% ZB Bank 72,694,258.63 102,092,912.68 71.20% TOTAL 1,309,497,738.54 2,113,275,108.95 AVERAGE 87,299,849.24 140,885,007.26 61.97% Merchant Banks Genesis 1,629,969.12 1,491,060.70 109.32% Interfin 131,960,326.71 126,497,771.70 104.32% NDH - - - Premier 17,077,494.04 44,725,894.06 38.18% ReNaissance 64,934,549.83 62,396,359.16 104.07% Tetrad 33,288,840.45 37,306,260.88 89.23% TOTAL 248,891,180.15 272,417,346.50 AVERAGE 41,481,863.36 45,402,891.08 91.36% Building Societies CABS 58,174,444.02 118,786,723.49 48.97% CBZ Building Society 18,876,373.79 10,414,617.69 181.25% FBC Building Society 7,236,454.89 7,023,587.87 103.03%

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Name of Institution Total Loans & Overdrafts Total Deposits Loans to Deposits Ratio ZB Building Society 3,424,444.72 7,818,608.93 43.80% TOTAL 87,711,717.42 144,043,537.98 AVERAGE 21,927,929.36 36,010,884.49 60.89% Savings Banks POSB 23,177,189.19 37,869,754.95 61.20% TOTAL 23,177,189.19 37,869,754.95 GRAND TOTAL 1,669,277,825.30 2,567,605,748.38 65.01%

4.6 Over the outlook period, the Reserve Bank will ensure that these retrogressive attitudes and practices are decisively dealt with in the interest of laying a solid foundation for sustainable financial intermediation in the economy.

5. FINANCIAL SECTOR DEVELOPMENTS

5.1 The Zimbabwean banking sector has experienced a gradual improvement in its intermediation role since the introduction of the multi currency regime.

5.2 The banking sector has generally remained in a safe and sound financial condition, notwithstanding the challenging macro-economic environment characterised mainly by market illiquidity, low savings, volatile deposits and short term loans.

ARCHITECTURE OF THE BANKING SECTOR

5.3 As at 31 December 2010, the country’s banking sector remained well diversified, comprising 25 operational banking institutions; 16 licensed Asset Management Companies; and 114 operating microfinance institutions under the supervision of the Reserve Bank.

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Structure of the Banking Sector

Type of Institution Number Commercial Banks* 15 Merchant Banks 5 Finance Houses 0 Discount Houses 0 Building Societies 4 Savings Bank 1 Total 25 Asset Management Companies 16 Microfinance institutions 114

* Excludes Royal Bank and Barbican Bank which were re-licensed but are not yet operational

STATUS OF BANKING SECTOR CAPITALISATION

5.4 Cognisant of the recapitalisation challenges at some banking institutions, the Reserve Bank extended the deadline for compliance with the minimum capital requirements to 31 December 2010.

Capitalisation Levels of Banking Institutions

5.5 As at 31 December 2010, nineteen (19) out of 24 banking institutions (excluding POSB, Intermarket Banking Corporation and the defunct NDH Merchant Bank) were in compliance with the prescribed minimum paid-up capital requirements.

5.6 In order to consolidate the current improving stability in the financial sector, it has become necessary that the deadline for paid up capital thresholds be further extended to 30th of June, 2011. January2011 30 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

5.7 The Reserve Bank is very satisfied with the various recapitalisation initiatives that are being implemented by individual banks.

Level of Capitalisation of Asset Management Companies (AMCs)

5.8 As at 31 December 2010, all asset management companies had met the minimum paid-up equity capital requirement of $500 000.

5.9 Efforts should continue to be made by Shareholders, Boards and Management Teams to go beyond the set minimum capital levels in order to further strengthen the operations of asset management companies.

Status of Microfinance institutions

5.10 As at 31 December 2010, there were 114 operational microfinance institutions under the supervision of the Reserve Bank. The licensing process for microfinance institutions has been revamped in order to reduce the turnaround time for licensing to a period less than one week provided all the required documentation is available. Bank charges and deposit rates

5.11 The Reserve Bank continues to promote market determined charges and interest rates for bank products and services, albeit cognisant of the need to balance viability of the banking sector and accessibility to affordable banking services by the Public and Corporate Sectors.

5.12 The Bank, however, notes with concern the large disparities between lending rates and deposit rates at some banking institutions, underscoring the need to improve their pricing structures.

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BASE II IMPLEMENTATION

5.13 During the second quarter of 2010, the Reserve Bank issued to the market a consultative Basel II framework entitled “Guideline No. 1- 2010/BSD: Technical Guidance on Basel II Implementation in Zimbabwe”. 5.14 The framework sets new criteria for calculating banking institutions’ regulatory capital, the supervisory review process as well as the minimum disclosure requirements. The sector has since provided valuable comments that have now been incorporated into the final document.

5.15 Following this comprehensive consultative process, the Reserve Bank has now finalised the Basel II framework, which framework is being issued electronically with immediate effect.

5.16 The Basel II framework is accompanied by a detailed implementation road map that provides more specific tasks such as development of specific implemention plans, data requirements and submission of revised statutory returns.

FINANCIAL INCLUSION

5.17 The Reserve Bank continues to encourage financial institutions to extend provision of to the marginalised poor and rural communities who are currently unbanked to enable them to make a meaningful contribution to the economy.

5.18 In this regard, banking institutions have partnered with mobile operators to provide various mobile banking and other electronic based products to the previously unbanked and marginalised communities.

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5.19 Banking institutions such as Kingdom, FBC, NMB, TN Bank, CABS, Barclays Bank and Tetrad have entered into strategic alliances with mobile phone operators to develop new financial services delivery channels. These efforts are highly complemented.

5.20 Since the amendment of the Banking Act [Chapter 24:20] to allow for the registration and supervision of Microfinance Banks, the Reserve Bank has received a number of applications to venture into this sector. As at 31 December 2010 six (6) Microfinance Bank applications had been received and are under evaluation.

MERGER AND ACQUISITIONS

Kingdom Bank Limited

5.21 Following an extraordinary general meeting held on 13 October 2010, Kingdom Financial Holdings Limited (KFHL) was demerged from Meikles Limited (ML). Kingdom Financial Holdings has ceased to be a wholly owned subsidiary of ML.

Interfin Banking Corporation Limited

5.22 Interfin Banking Corporation Limited merged operations with CFX Bank, following its acquisition of significant shareholding in CFX Bank.

Premier Banking Corporation

5.23 Premier Finance Group’s shareholding structure changed significantly following the acquisition of 70% stake by Ecobank. The acquisition was

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approved by the Central Bank, Competition and Tariff Commission, the Ministry of Youth Development, Indigenisation and Empowerment as well as Ecobank regulators.

LENDER OF LAST RESORT WINDOW

5.24 Following the setting aside of funds by the Ministry of Finance for purposes of kick-starting the Reserve Bank’s lender of last resort facility, the pertinent guidelines for this framework have now been put in place.

5.25 Accordingly, therefore, the banking sector is hereby advised that the Central Bank’s lender of last resort window is now open, effective 1 February, 2011.

5.26 It should be noted, however, that due to the limited nature of the resources earmarked for this purpose, support will be rendered primarily to smoothen intraday credit-push requirements.

5.27 Equally important, banks are further advised that this window should not be abused as a first resort facility, as it is expected that banks lend each other bilaterally in the normal course of their money market trading activities.

5.28 The operational modalities, as well as the requisite collateral arrangements will be availed to the market in due course.

EXTERNAL SECTOR DEVELOPMENTS

External Debt Developments

5.29 The country’s total external debt stock amounted to US$6 929 million as at

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31 December 2010, representing 103% of GDP, a level which is above the international debt sustainability benchmark of 60%.

5.30 The bulk of the country’s external debt is owed to multilateral creditors, which account for 36% of the country’s total debt. Bilateral and commercial creditors are owed 33% and 31%, respectively. Central Government remains the largest debtor at 57% while parastatals and the private sector owe 35% and 8%, respectively.

External Debt and Payment Arrears (US$m): 31 December 2010

DOD Total Arrears Principal Arrears Interest Arrears TOTAL Debt 6 929.2 4 769.2 3 999.3 726.5 Public And Publicly Guaranteed 6 413.9 4 729.3 3 966.3 725.1 Government Long Term 4 043.6 2 442.7 1 864.6 574.3 Bilateral creditors 1 866.2 1 256.7 1 007.8 247.6 Paris Club 1 597.2 1 189.6 946.4 242.1 Non-Paris Club 269.0 67.0 61.5 5.5 Multilateral creditors 2177.3 1186.1 856.7 326.7 Parastatal Sector Long Term 1 070.3 986.6 801.8 150.8 Bilateral creditors 497.5 458.0 368.6 74.6 Paris Club 405.2 385.7 306.0 65.2 Non-Paris Club 92.3 72.3 62.6 9.5 Multilateral creditors 327.3 283.0 187.5 76.2 Private Sector Long Term 112.0 39.9 33.0 1.4 Short Term Debt 1 703.3 1 300.0 1 300.0 0.0 Supplier's Credits 245.6 245.6 245.6 0.0 Reserve Bank 1 300.0 1 300.0 1 300.0 0.0 Private sector 403.3 0.0 0.0 0.0

Source: Ministry of Finance and Reserve Bank of Zimbabwe

SHORT-TERM TRADE FINANCE FACILITIES

5.31 In 2010 short-term trade finance facilities amounting to US$1.5 billion were approved compared to a total of US$850.2 million approved in 2009. January2011 35 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

Summary of Approved Short-term Facilities Jan ñ Dec 2010

Sector Number of ELCC Approved Utilized Amount Percentage

Comapnies Approved Amount in (USD Million) Amount (USD Million) Utilization (%) Agriculture 26 613.2 370 60.3% Financial 20 344.5 90.5 26.3% Mining 11 193.7 58.3 30.1% Telecommunications 5 174.2 30.0 17.2% Manufacturing 11 118.4 30.7 25.9% Tourism 3 28.6 11 38.5% Distribution 2 5.2 5.2 100.0% Energy 1 10.0 0 0.0% Total 79 1 487.8 595.7 40.0%

Summary of Approved Short-term Facilities Jan – Dec 2009

Sector Number of ELCC Approved Utilized Amount Percentage

Comapnies Approved Amount in (USD Million) Amount (USD Million) Utilization (%) Financial 13 285.4 125.5 44.0% Agriculture 13 279.7 155.6 55.6% Mining 3 150.9 82.6 54.7% Manufacturing 10 87 22.4 25.7% Energy 3 44 34 77.3% Tourism 1 3.2 3.2 100.0% Total 43 850.2 423.3 49.8%

5.32 Approvals of short-term Trade Finance Facilities were spread across eight economic sectors with the agriculture sector, accounting for US$613.2 million.

5.33 Approvals in the agricultural sector largely reflected funding requirements by tobacco and cotton merchants for the purchase of tobacco and cotton during the marketing seasons.

5.34 The financial sector, accounted for US$344.5 million, largely in respect of global facilities for on-lending by the banking sector to their exporting and importing clients. January2011 36 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

5.35 The telecommunications and manufacturing sectors accounted for US$174.2 million and US$118.4 million, respectively. Sectoral Approvals January- December 2010

5.36 Regional trade finance banks such as the PTA Bank, Afreximbank, South African and Chinese financial institutions continued to be the major lenders to Zimbabwe.

6. EXCHANGE CONTROL EXPORT PERFORMANCE FOR THE YEAR 2010

Global Export Performance in 2010

6.1 In 2010, total export shipments (declared on Forms CD1) amounted to US$2 221.6 million, compared to US$1 366.2 million declared during the same period in 2009, representing an increase of 62.6%.

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6.2 The positive export performance recorded during the year 2010 was largely attributable to a significant increase in mineral export shipments.

6.3 On a sectoral basis, mineral export shipments accounted for 64.5% followed by tobacco exports (17.2%), agriculture (8.4%), manufacturing (7.6%), horticulture (0.7%) and hunting safari (0.4%).

Total Monthly Export Shipments (USD)

Month 2010 2009 Variance % variance January 178,272,800 68,971,954 109,300,847 158.5 February 154,802,532 94,463,517 60,339,015 63.9 March 173,711,833 72,760,607 100,951,226 138.7 April 121,234,945 83,056,414 38,178,531 46.0 May 110,370,101 71,934,933 38,435,168 53.4 June 133,474,102 76,573,309 56,900,793 74.3 July 241,485,772 125,126,159 116,359,612 93.0 August 254,385,904 137,865,622 116,520,282 84.5 September 281,017,399 163,836,589 117,180,810 71.5 October 105,733,343 128,496,231 (22,762,888) (17.7) November 174,197,057 124,948,263 49,248,795 39.4 December 292,942,176 218,211,760 74,730,416 34.3 Total 2,221,627,965 1,366,245,358 855,382,607 62.6

Source: Computerised Export Payments Exchange Control System (CEPECS)

EXPORT PERFORMANCE BY SECTOR

Mining

6.4 Mineral export shipments (including Gold and Diamonds) amounted to US$1 719 million in 2010 compared to US$708 million worth of exports in 2009. This represents a significant growth of 143%.

6.5 The surge in mineral export shipments was a result of increased gold

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export shipments following the liberalisation of gold trading and the firming up of international metal prices. There was also a substantial increase in ferrochrome exports. Furthermore, there were increased diamonds exports as a result of the certification of Zimbabwe’s diamonds by the Kimberly Process Certification Scheme.

Monthly Mineral Export Shipments (USD) Month 2010 2009 Variance % Variance January 89,470,846 24,119,082 65,351,764 270 February 110,355,783 22,576,810 87,778,973 389 March 132,002,961 34,223,237 97,779,724 286 April 88,409,648 44,560,869 43,848,779 98 May 86,758,751 38,053,126 48,705,625 128 June 91,960,348 44,033,819 47,926,529 109 July 145,116,663 67,734,875 77,381,788 114 August 167,662,144 60,931,254 106,730,890 175 September 159,479,602 79,604,472 79,875,130 100 October 111,477,808 60,864,130 50,613,678 83 November 201,349,239 72,413,085 128,936,154 178 December 335,452,525 158,846,727 176,605,798 111 Total 1,719,498,328 707,961,486 1,011,536,842.00 143

Source: Computerised Export Payments Exchange Control System (CEPECS)

Mineral Export Shipments (USD) Mineral 2010 2009 Variance (%)Variance Platinum 741,108,712 396,765,378.83 344,343,333 87 Diamond 361,130,353 37,387,973 323,742,381 866 Gold 334,214,180 131,866,046 202,348,134 153 Ferrochrome 272,521,305 60,798,346 211,722,959 348 Other 10,523,777 81,143,742 (70,619,965) (87) Total 1,719,498,338 707,961,486 1,011,536,842 143

Source: Computerised Export Payments Exchange Control System (CEPECS)

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DIAMOND

6.6 In 2010, diamond export shipments amounted to US$361.1 million compared to US$37.4 million worth of exports in 2009. This represents a significant increase of 866%.

Rough Diamond Export Shipments (USD)

Month 2010 2009 Variance % Variance Jan 3,755,236 585,395 3,169,840 541 Feb 2,833,968 0 2,833,968 100 Mar 1,370,000 5,429,750 (4,059,750) (74.8) Apr 16,827,413 1,421,548 15,405,864 1,083 May 0 1,570,441 (1,570,441) (100) Jun 0 4,217,122 (4,217,122) (100) Jul 0 1,580,910 (1,580,910) (100) Aug 66,524,837 1,773,977 64,750,860 3,650 Sep 30,571,923 3,707,076 26,864,847 724.6 Oct 0 12,745,221 (12,745,221) (100) Nov 50,298,069 3,158,709 47,139,359 1,492 Dec 188,948,907 1,197,823 187,751,084 15,674 Total 361,130,353 37,387,973 323,742,380 866

GOLD

6.7 In 2010, Gold export shipments amounted to US$334.2 million compared to US$131.9 million worth of exports in 2009.

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Gold Export Shipments (USD)

Month 2010 2009 Variance % Variance Jan 17,204,830 - 17,204,830 100 Feb 17,768,332 - 17,768,332 100 Mar 20,446,643 6,235,018 14,211,625 228 Apr 21,799,069 5,012,217 16,786,852 335 May 22,089,198 7,069,755 15,019,443 213 Jun 25,761,974 8,054,483 17,707,490 220 Jul 29,480,251 14,092,470 15,387,781 109 Aug 27,706,843 14,486,975 13,219,869 91 Sep 33,892,275 17,180,080 16,712,195 97 Oct 38,101,736 20,305,872 17,795,864 88 Nov 36,451,725 20,847,950 15,603,775 75 Dec 43,511,304 18,581,226 24,930,079 134 Total 334,214,180 131,866,046 202,348,134 153

Agriculture

6.8 Total agricultural export shipments (i.e. General Agriculture, Horticulture and Tobacco) amounted to US$582.6 million compared to US$467.7 million in 2009, an increase of 24.6%.

6.9 In 2010, export shipments under the General Agriculture sub-sector increased from USD170.6 million recorded in 2009 to USD185.9 million in 2010, representing an 9% increase.

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General Agriculture Export Shipments (USD)

Month 2010 2009 Variance % Variance January 7,795,392 9,822,563 (2,027,171) (20.64) February 7,576,235 11,989,971 (4,413,735) (36.81) March 6,901,200 9,615,814 (2,714,613) (28.23) April 4,738,424 6,098,234 (1,359,810) (22.30) May 3,766,100 8,916,200 (5,150,101) (57.76) June 10,416,178 12,532,637 (2,116,459) (16.89) July 33,775,187 22,105,839 11,669,348 52.79 August 28,808,009 19,385,728 9,422,282 48.60 September 30,418,846 23,563,744 6,855,103 29.09 October 17,453,128 17,307,127 146,002 0.84 November 20,355,271 14,326,125 6,029,146 42.08 December 13,905,440 14,971,849 (1,066,409) (7.12) Total 185,909,410 170,635,830 15,273,580 8.95 Source: Computerized Export Payments Exchange Control System (CEPECS)

HORTICULTURE

6.10 Total horticultural export shipments amounted to US$14.58 million in 2010, compared to US$14.57 million in 2009, reflecting a marginal rise of 0.1%.

6.11 The horticulture Sector was not spared from natural, as well as man made challenges. The fresh cut flowers sub-sector incurred major losses due to grounding of many flights as a result of the volcanic ash in many European countries.

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Horticulture Export Shipments (USD)

Month 2010 2009 Variance % Variance January 941,094 779,064 162,030 20.8 February 1,471,550 913,607 557,943 61.1 March 1,789,594 1,087,328 702,266 64.9 April 1,610,890 1,099,396 511,495 46.5 May 1,049,616 1,438,640 (389,025) (27.0) June 1,268,369 1,293,154 (24,785) (1.9) July 1,760,078 1,562,273 197,805 12.7 August 1,146,547 891,111 255,436 28.7 September 1,299,907 1,043,160 256,747 24.6 October 832,765 1,542,979 (710,215) (46.0) November 570,816 1,255,685 (684,869) (54.5) December 844,974 1,666,179 (821,205) (49.3) Total 14,586,199 14,572,576 13,623 0.1

Source: Computerized Export Payments Exchange Control System (CEPECS)

Manufacturing

6.12 Export shipments of manufactured goods amounted to US$170.6 million in 2010, compared to US$160.7 million for the same period in 2009. This represents a rise of 6.1%.

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Manufacturing Export Shipments (USD)

Month 2010 2009 Variance % Variance January 7,537,759 6,154,428 1,383,331 22.5 February 11,932,353 10,381,714 1,550,639 14.9 March 18,366,743 12,253,725 6,113,018 49.9 April 13,713,044 10,334,780 3,378,264 32.7 May 12,461,653 13,561,101 (1,099,448) (8.1) June 13,172,620 12,988,151 184,469 1.4 July 19,644,515 16,330,424 3,314,091 20.3 August 16,128,698 14,249,590 1,879,107 13.2 September 18,136,988 18,215,103 (78,115) (0.4) October 12,830,113 16,435,532 (3,605,419) (21.9) November 12,749,706 15,251,454 (2,501,748) (16.4) December 13,882,691 14,588,509 (705,817) (4.8) Total 170,556,884 160,744,511 9,812,373 6.1

Source: Computerized Export Payments Exchange Control System (CEPECS)

Cross-Border Road Freight

6.13 During the year 2010, some cross border transport operators successfully revived their old trucks while others managed to import new trucks. Despite the same efforts, the local transporters still lack in reliable equipment for cross border business. The country lacks tankers to handle liquid cargo, as well as suffers from general shortage of trailers.

6.14 Though the country has an advantage of being central in the SADC region, the competition from the region, particularly from South African transporters has somewhat outweighed the comparative advantage of Zimbabwe’s centrality in the region.

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6.15 Some noticeable green-field investments were realised in the cross border transport sector particularly by Zimbabweans in the Diaspora as evidenced by quite a number of small operators owned by individuals and small-to-medium enterprises (SMEs) who started registering for cross border business during 2010.

6.16 Within the prevailing economic framework, the value of freight services generated in foreign currency from transit, export and import cargo declined by 3.3% in 2010, as depicted in the table below.

Cross Border Road Freight Earnings (USD)

Month 2010 2009 Variance % Variance January 3,017,582 2,679,137 338,444 11.2 February 2,827,470 5,393,475 (2,566,005) (90.8) March 3,076,141 4,234,411 (1,158,270) (37.7) April 3,802,222 3,894,333 (92,111) (2.4) May 3,947,318 5,647,641 (1,700,323) (43.1) June 3,862,232 3,827,329 34,902 0.9 July 3,732,356 4,209,696 (477,339) (12.8) August 4,404,561 4,143,786 260,774 5.9 September 4,895,013 3,892,249 1,002,763 20.5 October 3,699,469 3,043,776 655,693 17.7 November 4,894,216 3,393,084 1,501,132 30.7 December 3,998,535 3,313,273 685,262 17.1 Total 46,159,129 47,672,197 (1,513,067) (3.3)

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FOREIGN PAYMENTS FOR THE YEAR 2010

Global Foreign Payments

6.17 In 2010, Authorized Dealers (commercial and merchant banks) processed foreign exchange payments amounting to approximately US$2.5 billion. This represented a 69% increase compared to the figure of about US$1.5 billion recorded over the same period in 2009.

Monthly Foreign Payments (USD)

Month 2010 2009 Variance % variance January 128,260,170 119,146,589 9,113,580 8% February 185,174,656 136,030,489 9,144,167 36% March 175,334,183 76,592,289 98,741,895 129% April 157,544,095 75,018,475 82,525,620 110% May 186,418,378 110,721,306 75,697,072 68% June 114,192,713 128,362,305 (14,169,592) (11%) July 182,656,370 150,351,314 32,305,056 21% August 144,018,113 130,859,408 13,158,705 10% September 273,771,324 154,776,830 118,994,494 77% October 305,068,733 186,683,289 118,385,445 63% November 341,931,972 101,436,659 240,495,314 237% December 301,340,780 109,438,121 191,902,659 175% TOTAL 2,495,711,488 1,479,417,074 1,016,294,414 69%

Source: Computerised Exchange Control Batch Application System (CEBAS)

6.18 The significant increase in foreign payments in the year 2010 can be attributed to current account convertibility introduced in the year 2009.

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Monthly Foreign Payments n a J

Source: Computerised Exchange Control Batch Application System (CEBAS)

6.19 Whilst 2010 experienced increases in foreign payments, the monthly trends were the same as those of 2009. There was modest activity in the first quarter of the year, increased activity from the second quarter to the last quarter of the year.

Foreign Payments by Sector

6.20 Generally, all sectors of the economy experienced increases in the level of foreign payments in the year 2010, with the exception of the agriculture sector which recorded a decline of 4% in 2010.

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Foreign Payments by Sector (USD)

Sector 2010 2009 Variance % variance Contribution Contribution (2010) (2009) Agriculture 189,155,356 197,956,065 (8,800,709) -4% 8% 13% Retail &Distribution 551,777,413 141,822,123 409,955,290 289% 22% 10% Manufacturing 311,560,470 150,765,977 160,794,493 107% 12% 10% Mining 767,184,997 466,329,627 300,855,370 65% 31% 32% Services 676,033,252 522,543,281 153,489,971 29% 27% 35% TOTAL 2,495,711,488 1,479,417,073 1,016,294,415 69% 100% 100%

Source: Computerised Exchange Control Batch Application System (CEBAS)

6.21 The services and mining sectors remain the dominant sectors, accounting for more than 50% of the foreign payments. The mining sector has increased production to capitalize on the firming metal prices, whilst import demand in the services sector is being driven by expansion in the telecommunications sector.

SOURCES OF FUNDING FOR FOREIGN PAYMENTS

6.22 Export proceeds remain the major source of funding for foreign payments, accounting for more than 65% of total funding. Global Foreign Payments by Source of Funds

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Source 2010 2009 Change % Change Contribution (2010) Contribution (2009) FCAs 1,569,281,815 1,051,814,571 517,467,244 49% 64% 71% Local Sources (Interbank, Local Sales) 455,362,906 48,906,277 406,456,629 831% 19% 3% Offshore Lines of Credit 418,404,049 378,696,226 39,707,823 10% 17% 26% TOTAL 2,443,048,769 1,479,417,074 963,631,696 65% 100% 100%

Source: Computerised Exchange Control Batch Application System (CEBAS)

6.23 Offshore lines of credit also remain a significant component of funding for foreign payments. With the improved operating environment and viability of local enterprises, more external lines of credit are expected.

6.24 The Liberalised Exchange Control Framework will continue to encourage the inflow of private capital into Zimbabwe to boost domestic liquidity.

FOREIGN PAYMENTS BY CATEGORY

Foreign Payments by Category of Goods/Services

Category 2010 2009 Change % Change Contribution (2010) Contribution (2009) Capital Goods 440,506,786 247,488,985 193,017,801 78% 18% 17% Raw Materials 190,689,635 142,065,768 48,623,866 34% 8% 10% Consumables 639,648,777 330,967,245 308,681,532 93% 26% 22% Service Fees & Capital Repayments 1,224,866,291 758,895,076 465,971,215 61% 49% 51% TOTAL 2,495,711,488 1,479,417,074 1,016,294,414 69% 100% 100%

Source: Computerised Exchange Control Batch Application System (CEBAS)

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GLOBAL FOREIGN CURRENCY TRANSACTIONS

Global Foreign Currency Receipts

6.25 Global Foreign Currency receipts amounted to US$2.9 billion in 2010. A total of US$1.7 billion was received during the same period in 2009 representing a 74% increase. Export proceeds amounted to US$2.2 billion and for the same period in 2010 amounted to US$1.1 billion.

Global Foreign Currency Receipts (USD)

TYPE OF RECEIPT YEAR 2010 % CONTR YEAR 2009 % CONTR % CHANGE Export Proceeds 2 210 186 658 75 1 094 368 189 65 102 Loan Proceeds 50 277 770 2 30 581 230 2 64 Free funds 574 675 957 19 457 083 533 27 26 Income receipts 105 163 498 4 88 537 887 5 19 Capital investments 0 0 18 507 642 1 (100) Total 2 940 303 883 100 1 689 078 481 100 74

Comparison of Global Foreign Currency Receipts for the Years 2009 and 2010

Foreign Currency Payments by Authorized Dealers

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6.26 In 2010, Authorized Dealers made foreign currency payments amounting to US$432.2 million and US$1.7 billion being exporters and non exporters’ payments, respectively.

Exporters and Non-exporters Payments as from 01 January 2010 to 31 Dec 2010

FOREIGN CURRENCY REMITTANCES

Foreign Currency Receipts from the Diaspora

6.27 Receipts from the Diaspora amounted to US$263.3 million in 2010 as compared to US$198.2 million in 2009, representing a 32.9% increase. 6.28 The growth rates primarily reflected the market’s confidence in the formal channel of remitting free funds.

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Foreign Currency Receipts form the Diaspora (USD million)

2007 2008 2009 2010 January 0,09 5,7 10,6 19,9 February 0,5 9,5 13,2 20,6 March 2,5 7,1 11,4 18,3 April 2,6 7,6 15,2 23,2 May 1,8 6,8 15,5 20,7 June 3,9 4,9 14,9 17,2 July 4,8 7,2 19,7 23,5 Aug 5,1 4,8 16,9 19,6 Sept 4,8 6,0 18,5 21,4 Oct 5,8 7,1 22,0 28,5 Nov 7,3 5,1 17,5 20,8 Dec 4,7 6,8 22,7 29,5 Total 43,9 78,5 198, 2 263,3 Monthly Average 3,7 6,5 16,5 21,9 Year to year growth rate 79% 152% 33%

Source: Bank Application System

6.29 In the outlook, the sector is poised to grow in 2011 due to the broadening of the Bureau De Change operating framework. In addition to being receiver agencies, effective 1 January 2011, Bureau De Change are now able to transmit free funds outside the country.

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7. POLICY MEASURES TO CURB EXTERNALISATION OF FOREIGN CURRENCY

Liberalised Exchange Control Framework

7.1 In line with the SADC Protocol on Liberalisation of Trade and Exchange Controls and complemented by the introduction of the Multiple Currency System beginning the last quarter of 2008, the Liberalized Exchange Control Framework has come in the form of full Current Account convertibility and free movement of foreign currency within the economy.

7.2 In order to cushion the economy from external shocks and guard against capital flight, the Capital Account has not been fully liberalized. However, investment income from inward investments is freely remittable.

7.3 The remaining restrictions on the Capital Account are being managed in a manner that promotes investor confidence and facilitates and allows free movement of capital.

7.4 As highlighted in the previous monetary policy statements, whilst the Liberalized Exchange Control Framework has made significant progress in boosting viability of local enterprises and investor confidence, it is disheartening to note that, it has on the other hand, resulted in externalisation of foreign exchange through various conduits.

7.5 In addition to policy measures announced in the previous Monetary Policy, this Monetary Policy also seeks to review the existing administrative and monitoring mechanisms with the objective of curbing the externalisation of foreign exchange.

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Issuance of Exporter’s Registration Certificates

7.6 Under the Liberalised Exchange Control Framework, the Reserve Bank retains the role of ensuring that the country realises true and fair value of its exports, as well as full accounting and ensuring timeous repatriation of all the export proceeds.

7.7 In order to efficiently and effectively carry out this national duty, all exporters of goods and services, who are registered with the Reserve Bank, shall be issued with Registration Certificates.

7.8 The Exporter’s Registration Certificates shall be issued to all bona fide exporters in the country and shall also be part of the selection criteria requirement for the Exporter of Year Awards by the National Business Associations.

Extension of Credit Term Period for Exported Goods

7.9 As Monetary Authorities, we have noted with concern a trend where some business entities and individuals have engaged in externalisation of export proceeds by illegally keeping export earnings offshore and falsely declaring that they have not been paid by their consignees.

7.10 ln order to curb this malcontent behavior, with immediate effect, applications for Exchange Control Authority to extend credit term period for exported goods must be accompanied by an authenticated agreed payment plan between the exporter and the consignee.

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RE-DESIGNATION OF FOREIGN CURRENCY ACCOUNTS (FCAS)

7.11 In order to ensure consistency with the liberalized framework, the Reserve Bank allowed for the designation of different types of FCAs held by corporates and individuals to facilitate the holding and transacting of their foreign currency balances.

7.12 The designated FCAs included:-

i) Corporate FCA (Exports) – for holding foreign currency proceeds from export of goods and services.

ii) Corporate FCA (General) – for depositing foreign currency proceeds emanating from commercial activities within Zimbabwe.

iii) Corporate FCAs (Transitory) - accounts used for purposes of holding funds in transit and whose destination is not yet known or billing is yet to be done.

iv) Corporate FCAs (Banks) - These are FCAs opened by financial institutions licenced under the Limited Dealership Authority, with their Managing Banks. Such FCAs are also used for handling the institution’s foreign exchange transactions.

V) Individual FCAs - Include all FCAs held by individuals, such as employees of Government, NGOs, Embassies, International Organisations, private sector or any other individual holding ‘free funds’. Funds deposited in these accounts are ‘free funds’.

vi) Non-Resident Transferable FCAs (NRTAs) - Accounts opened by January2011 55 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

Authorised Dealers on behalf of individuals who visit or come to Zimbabwe on temporary visits or to settle and work in Zimbabwe during a period less than 12 months. Authorised Dealers may also open such accounts on behalf of non-resident corporates, under advice to Exchange Control.

7.13 The designation of these FCAs was meant to create transacting flexibility and ease of Balance of Payments reporting. However, the Reserve Bank has noted with concern the abuse, of mainly, the FCAs General, which has been used to hold large foreign currency balances, some of which have been the subject of externalization ostensibly because such funds were wrongly deemed “free funds”.

7.14 In order to ensure full accountability of all funds held by corporates, with immediate effect, such funds emanating from commercial activities within Zimbabwe and held by corporates are not to be deemed as ‘free funds’.

7.15 Although the funds will continue to be deposited into the FCAs (General) for accounting purposes, they shall be treated in the same manner as the FCAs (Exports) and utilization of such funds for foreign payments must be reported through the CEBAS system. Authorised Dealers are mandated to ensure full compliance.

TRANSFER OF FUNDS FROM FCA (GENERAL) TO FCA (EXPORTS)

7.16 In terms of the designation of foreign currency accounts, FCA (Exports) are only funded from proceeds from the export of goods and services. There is, however, a tendency to transfer funds from the FCA (General) to acquit export documentation (Forms January2011 56 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

CD1/CD3/TR1/TR2/GSD/PTS1).

7.17 In order to curb such malpractice, with immediate effect, the transfer of funds from FCA (General) into FCA (Exports) shall not be allowed. Again Authorised Dealers are obliged to ensure 100% compliance.

8. NATIONAL PAYMENT SYSYTEMS OVERVIEW

8.1 The maintenance of an efficient and robust national payments system remains one of the major objectives of any Central Bank. The National Payment Systems broadly remained stable and efficient during the year 2010. To this end, the Reserve Bank intensified its oversight function through offsite analysis and onsite inspections of all payment streams.

LARGE VALUE PAYMENT SYTEMS

Real Time Gross Settlement System

8.2 RTGS system performed remarkably well since re-alignment to the multicurrency regime. Increases in both volumes and values have been experienced over the period. A cumulative total of 1,6 million transactions valued at US$21.7 billion were processed through the RTGS system during 2010, as compared to 678 thousand transactions valued at US$6.7 billion in 2009.

8.3 There was a monthly average increase of 11 % and 19% from 2009 to 2010 transaction volumes and values respectively. This is not withstanding the fact that RTGS operated for nine months in 2009.

8.4 The average number of transactions moved per day also increased by 61% percent in the year 2010 to 7 464 transactions compared to 4 646

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transactions, in the year to 2009.

8.5 The increases are attributed to the growing levels of confidence in the RTGS system as a safe and efficient mode of payment for both high value and time critical payments.

8.6 The figure below shows the comparative detail of activities within the RTGS system during the years 2009 and 2010.

RTGS Values and Volumes 2009 and 2010

9. RETAIL PAYMENTS

Inter-bank cheque system

9.1 The activities of the inter-bank cheque system recorded a total of 174,403 amounting to USD42.4 million, processed through the Harare and Bulawayo Clearing Houses from January to December 2010.

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Cheque volumes increased at a monthly average of 10%, while values rose by 9%.

9.2 The figure below shows a gradual upward trend in cheque values and volumes on a monthly basis from January to December 2010.

9.3 In line with economic trends, the Central Bank and Bankers Association of Zimbabwe have resolved to review the cheque limits upward and new limits will be announced in due course.

9.4 As Monetary Authorities we remind all players to observe sound risk management practices and internal controls on an on-going basis. This is meant to minimize risks associated with paper based payment instruments.

Card Payment System

9.5 The cumulative total of card transactions from January to November 2010 was 2.8 million amounting to US$304 million. Of this amount, ATMs January2011 59 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

constituted 84%, while POS represented 16%.

9.6 Volumes and values of card based transactions increased at a monthly average of 11% and 44% respectively during the period under review.

9.7 The Figure below illustrates that ATM values and volumes represent the bulk of card based activity as compared to POS transactions during the period under review.

POS AND ATMs VALUES AND VOLUMES FROM JANURY TO NOVEMBER 2010

9.8 Growth in ATMs value of transactions is attributed mainly to the sharing of infrastructure by all commercial banks which has brought convenience to the transacting public. However, the POS population remains limited thereby constraining the widespread use of cards in the country.

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9.9 In this regard, we call upon banks and other relevant stakeholders to deliberately invest in POS infrastructure throughout the country so as to promote the use of cards as an electronic payment mechanism.

Mobile and Internet Payment Systems

9.10 A cumulative total of mobile and internet transactions of 457 513 valued at USD193.13 million were processed from January to November 2010. Of the US$193.13 million, internet transactions accounted for 99%, while mobile payments were 1% of the same amount.

9.11 Mobile phone penetration in Africa has leapfrogged and Zimbabwe is no exception with a subscriber base estimated to be over 5 million. This has created an opportunity for banks and other players to leverage on Information and Communication Technology developments.

9.12 Consistent with these developments, the Central Bank approved the establishment of mobile phone banking initiatives in the country. This is consistent with our goal to promote electronic payments and financial inclusion.

9.13 We remain resolute in urging the financial services sector and other stakeholders in the market to explore ways of furthering the utilization of these communication tools as channels for retail payments on a large scale across banks, borders and networks.

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SECURITIES SETTLEMENT

9.14 The Securities Commission of Zimbabwe (SECZ) which is spearheading the project to implement a central securities depository for equities has now awarded a tender to a selected company to establish the system.

9.15 The Central Bank is working in collaboration with the Securities Commission of Zimbabwe (SECZ) to implement a Securities Settlement System (SSS) for equities.

9.16 In line with regional and international best practices it is envisaged that the depository will be linked to the RTGS system to ensure delivery versus payment (DvP).

10. REGIONAL AND INTERNATIONAL DEVELOPMENTS

10.1 During the period under review, the Reserve Bank continued to work closely with both regional and international bodies. In this regard, the Central Bank participated in payment systems Integration Projects for SADC and COMESA. The REPSS (Regional Payment and Settlement System) payment system Integration Projects for COMESA is at an advanced stage of implementation whilst the SADC Project is still at its initial stage.

10.2 The Central Bank also continues to closely cooperate with other central Banks and bodies such as the International Monetary Fund, World Bank and Bank for International Settlement on payment, clearing and securities settlement issues and stand ready to further this collaboration into the future.

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11. POLICY ADVICE

11.1 As part of its core deliverables, the Reserve Bank has and does continue to profer advice to Government.

11.2 To this end, the Reserve Bank did offer various pieces of advice to Government on the following issues:

(a) Indigenisation and Economic Empowerment;

(b) Politics and the Economy;

(c) Agricultural sector support and the importance of mechanisation;

(d) Parastatal reform;

(e) Stabilization of the energy sector;

(f) Local Authorities reform;

(g) Skills retention;

(h) Diaspora participation in the local economy;

(i) Financial inclusion of the poor;

(j) Industrial policy reforms and Investment Promotion;

(k) Women and Youth Development Strategies;

(l) Export-led development strategy; and January2011 63 Monetary :: Policy Statement MonJaenutaray2r0y11 :: Policy Statement

(m) The importance of alternative energy sources.

11.3 As Monetary Authorities, we encourage that those in relevant political formations, Government Ministries, Public Enterprises and local authorities take into account our modest recommendations with open minds, so as to allow the virtues of objectivity to flourish.

12. SANCTIONS

12.1 Zimbabwe’s full recovery and return to the path of lasting prosperity continues to be heavily constrained by the debilitating effects of the illegal sanctions being imposed on the country.

12.2 The Reserve Bank continues to urge those responsible for the imposition of the sanctions to please free us from this unjust handicap which is negatively affecting not just the alleged targeted few, but the majority of vulnerable Zimbabweans.

12.3 The promulgated tenets of fairness, justice and equality of all breeds of humanity must be allowed to prevail through the removal of the illegal sanctions on Zimbabwe.

13. CONCLUSION

13.1 Zimbabwe’s full recovery and growth prospects are bright.

13.2 Concerted efforts must be invested in cultivating the sustenance of a conducive environment for the deepening of business and investor confidence.

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13.3 Resurging inflationary pressures have to be fought through the unfailing armoury of increased capacity utilisation across all productive sectors of the economy.

13.4 Promotion of food security in the country must remain a non-negotiable priority, given the multiple negative effects on the rest of the country’s economic, social and political tentacles that emanate from instances of food shortages.

13.5 The Reserve Bank, which has successfully realigned its operational structures, remains committed to fully discharging its statutory mandate.

13.6 I commit this Monetary Policy Statement in God’s hands.

Thank you.

DR G. GONO GOVERNOR RESERVE BANK OF ZIMBABWE

January 2011

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