Building Through Thick

The global economic crisis occasioned by the COVID-19 Pandemic has exacerbated Zimbabwe's economic constrains. However, concerted efforts towards returning the country on a sure path of progress is ongoing, led by seasoned economic experts heading some of the country's key sectors. In this exclusive interview with the governor of the Reserve Bank of Zimbabwe, John Mangudya, he shares some of the Central Bank's efforts towards restoring economic sunshine in the southern African country. The Zimbabwean economy has been on the path of recovery and growth after years of challenges and recession. Available data reveals that the Zimbabwean economy grew by 6.3% in 2021, with projections to continue on this path in 2022. What were some of the policies and reforms of the Central Bank that have contributed to this growth?

Indeed, the Zimbabwean economy is on a sustained growth trajectory having recorded a phenomenal growth of 7.8% in 2021, higher than the 6.3% estimated by some international institutions. The economy is also expected to grow by 4.6% in 2022, compared to the sub-Saharan African average growth of 3.8%. This growth is attributed to measures being implemented by the Central Bank and Government to stabilise the economy and support growth. Some of the growth-enhancing measures that have been undertaken by the Central Bank include the following: Ÿ Creating monetary and financial conditions appropriate for business growth through a balanced monetary policy stance of pursuing stability, while mitigating against possible output losses and the risk of financial instability arising from tight monetary policy in the face of the

current shock-prone global environment. This policy stance is reflected by a different interest rate system being pursued by the

Central Bank, where the Bank policy rate is currently at 200% to curb speculative borrowing, while the medium-term lending rate is at 100% to cater for productive lending; Ÿ Instituting appropriate legal and regulatory environment for a safe, sound, and resilient banking sector able to support and underwrite sustainable business.

In this context, the Central Bank continues to foster compliance of banking institutions to stipulated minimum capital requirements; Ÿ Ensuring the availability of foreign currency to the productive sectors of the economy through the forex auction system, which, to date, has dispensed about US$3.5 billion since its inception in June 2020, representing around 95.20% of total bids submitted.

Commendably about 70% of the allotments have gone towards supporting the productive sectors of the economy; Ÿ Supporting the productive sectors of the economy, notably primary agriculture, agro-processing, and

SMEs through the concessional medium-term lending facility. The

Bank has dispensed ZW$9.3 billion since the launch of the facility; Ÿ Ensuring an efficient payment system under a dual currency regime for seamless settlement of business transactions; a critical condition for attracting investment; and Ÿ Supporting savings mobilisation for investment by compelling banks to remunerate time and saving deposits at interest rates that protect the value and implementing alternative saving instruments such as the recently introduced gold coins. The Central

Bank has put a floor on deposit rates currently at 40% and 80% for savings and time deposits, respectively.

As a result of these interventions and policy measures being implemented by the Bank, real sector productivity has significantly expanded, manufacturing capacity utilisation increased, banking sector deposits increased and savings, which are critical for supporting investment and the potential growth rate of the economy have also increased. These factors have combined to support the country's economic growth trajectory. The African Development Bank Group, multilateral finance institutions, the Zimbabwean government, and other partners recently agreed to work together to develop an action plan that will resolve the country's debt arrears. What are the contributions of the Central Bank to the country's debt resolution strategy and action plan?

The Central Bank is fully behind any efforts aimed at resolving the country's debt arrears challenge which involves strategies to clear the country's external payment arrears to traditional creditors, notably, the World Bank, AfDB and bilateral creditors, from both the Paris and non-Paris club. This is important not only to mend the country's relations with traditional creditors but also to enhance the country's creditworthiness and to unlock the much-needed credit lines from the traditional multilateral and bilateral creditors that have ceased lending operations to Zimbabwe due to external payment arrears.

The Central Bank is a member of the country's External Debt and Development Committee (EDDC) at both the technical and executive levels. The EDDC is responsible for coming up with debt resolution strategies and evaluating proposals for the arrears clearance programme. In this context, the Bank is actively involved in the debt resolution process. Globally, the COVID-19 pandemic affected millions of people dependent on the informal economy and contract and casual workers in the formal sectors. What have been the responses of the Bank in cushioning the impact of the pandemic on Zimbabwe?

Like other Developing African Countries, Zimbabwe has a large share of the informal economy, which is estimated at more than 40% of the country's GDP. This means that the sector employs a significant percentage of the country's workforce. The informal sector was disproportionately affected in terms of production, employment and income earnings during the COVID19 pandemic, which called for interventions by both the fiscal and monetary authorities to rescue the sector. The Central Bank instituted some measures in support of the sector and the economy at large. The Central Bank promptly responded to cushion the impact of the pandemic through the following monetary incentives and policy measures: Ÿ Allowing the use of free foreign exchange resources to ensure seamless business at a time when the transacting agents were faced with multiple constraints emanating from the restrictive measures towards the pandemic, including limited travelling and lockdowns. Ÿ Putting in place monetary incentives towards business promotion, including the reduction of the CentralzBank policy rate from 35% to 15% per annum and reducing statutory reserve requirements for banks from 5% to 2.5% in March 2020. Ÿ Putting in place a concessionary

SMEs Facility amounting to Z$500 million at inception. The facility assisted in ensuring adequate liquidity to the SMEs in all the productive sectors of the economy including hard-hit sectors such as tourism among others. Ÿ Introduced a dedicated SMEs foreign currency auction system to ensure that adequate foreign currency is channeled to the SMEs to allow them to import necessary raw materials, consumables and plant and equipment during the

COVID-19 crisis and aftermath of the crisis.

You recently launched a regulatory sandbox framework to encourage innovations in the fintech and further liberalised the operations of the bureau de change to promote financial inclusion. What are some of the expected outcomes of this framework on the nation's economy?

The Fintech Regulatory Sandbox (FRS) was launched in 2021 as a way of testing new financial innovations in a controlled environment before they are launched on the market.

This is important to assess the nature of the innovation and the risks involved given the potential impact of financial innovations on the financial system. The FRS is thus a way of safeguarding the financial system while promoting fintech innovation.

I am happy that since the launch of the sandbox, the Central Bank has admitted two financial technology firms into the Fintech Regulatory Sandbox (the Sandbox) namely Lloyd Crowd Funding and Uhuru Innovative Solutions who are providing solutions in capital raising and money transfer, respectively.

The initiation of regulatory testing is a signal of the Central Bank's commitment to promoting responsible innovation and the results are expected to provide the Bank with critical evidence in the formation of an appropriate regulatory framework for financial technology in the country.

The liberalisation of the activities of bureaux dechange by allowing them to put a 10% markup over the official exchange rate has gone a long way in sustaining the activities of these institutions, which in the process enhances financial inclusion through promoting the trading of foreign currency through formal channels. Kindly tell us about the regulatory environment and some of your reforms to strengthen and inspire confidence in the country's banking and financial systems.

The current regulatory environment is conducive to the country's banking and financial systems. The Central Bank has allowed the use of free funds for domestic transactions in the economy. Consequently, economic agents are free to keep their bank deposits in the currency of their choice. The Central Bank has also consistently assured the public that it will not introducet policies that will prejudice depositors, especially with regard to foreign currency accounts (FCA). This policy stance has seen FCA deposits in the banking sector significantly increasing from less than US$300m in 2018 to current averages of above US$1.7 billion. The significant increase in FCA deposits is evidence of restored and sustained confidence in the country's banking sector.

The Central Bank also continues to foster compliance of banking institutions regarding responsible pricing in terms of interest on deposits and bank charges. Reflecting this policy stance, the Central Bank has put a floor on deposit rates for savings and time deposits currently at 40% and 80%, respectively.

The Central Bank employs various supervisory techniques which are continuously refined to take cognizance of international best practices. The methodologies include macroprudential measures and macroprudential supervision incorporating risk-based supervision, consolidated supervision, and financial stability assessments, underpinned by early warning systems and a supportive legislative framework

Other Central Bank specific key reforms to strengthen and inspire confidence in the country's banking and financial systems, include. Ÿ Prescription of new capital requirements that take cognisance of the dynamic operating environment; Ÿ Implementation of Basel III Liquidity Standards to ensure banks have sufficient liquidity buffers to meet net cash outflows in stressed conditions; enhancement of

Macroprudential Policy Framework; Ÿ Operationalisation of the Contingency Planning and

Systemic Risk Management Framework; strengthening of corporate governance practices and risk management systems in banking institutions; and Ÿ Enhancement of sustainability standards and financial inclusivity; as well as amendments to the Banking Act to ensure it is fully supportive of ongoing reforms.

The Central Bank is facilitating banking institutions' implementation of sustainability standards through a certification initiative driven by the European Organization for Sustainable Development. Banking institutions that are prepared to take meaningful action early and integrate sustainability practices into their business strategies will have an advantage over peers as the sustainable finance market matures.

The Central Bank has also enhanced the credit infrastructure to ensure effective and efficient access to credit, promote financial stability and foster socially responsible economic growth. The credit registry has bridged the information asymmetry between lenders and borrowers while implementation of the collateral registry will promote access to finance. Since your appointment as Governor of the Reserve Bank of Zimbabwe, what would you say are some of your achievements?

The experience of serving the Central Bank has been both an honour and an inspiration. I took office at a time when the economy had started to show signs of stress typified by deflation, which started in September 2014 and ended in February 2017. The country was also facing challenges of high non-performing loans in the banking sector, acute cash shortages and shortage of change in the retail sector since the country was operating under a full dollarisation system.

My first term was, therefore, focused on managing the impact of low aggregate demand and competitiveness of the national economy, which the Bank achieved through the administration of the export incentive scheme and promotion of a cash-lite society to alleviate the cash challenge. My first term was also characterized by the need to return the Bank backto-basics of central banking.

The aggressive promotion of electronic means of payment greatly assisted in resolving the cash challenges and in accelerating the country's financial inclusion agenda. The use of electronic means of payments currently stood at 96% of retail and wholesale payments, which is among the highest in Africa.

The export incentive scheme introduced by the Bank in 2016 and administered through bond notes, created a strong platform for sustained foreign currency generation in the national economy.

As a result, the country is currently recording high foreign currency receipts, with US$9.7 billion having been received in 2021, the highest ever. Foreign currency receipts are expected to continue rising as already shown by a 33% increase in foreign currency receipts for the first half of 2022, compared to the same period in 2021.

My second term which took effect on 1 May 2019 was substantially different from the first term on account of different policies pursued by the Government of Zimbabwe during the two terms. The successful transition to the use of the local currency as a functional currency gave the Central Bank scope to conduct traditional monetary policy functions of a central bank which were nonexistent during full dollarization.

However, the introduction of the local currency was met with mixed reactions and anxiety by the general public and businesses, which led to a significant increase in inflation that reached 837.5% in July 2020 and is currently on a downward trajectory.

My achievements during the current term include precisely dealing with inflationary pressures caused by behavioural factors largely emanating from the unavoidable currency reforms and further exacerbated by external shocks from the Russia-Ukraine conflict.

The robust monetary policy framework put in place by the Central Bank has greatly assisted in managing inflation and exchange rate pressures, thus preventing the economy from plunging into the hyperinflationary era experienced by the country in 2008.

The introduction of the foreign exchange auction system on 23 June 2020 was a great achievement as it assisted in reducing inflation from a peak of 837.5% in July 2020 to 50.2% in August 2021.

I am also happy that the current measures being implemented by the Central Bank, notably the successful roll-out of gold coins whose uptake continues to be favourable, have assisted in stabilising the exchange rate, whose volatility has been driven by a store of value considerations by the public and forward pricing behaviour by economic agents.

As of 13 September 2022, 8,699 gold coins have been sold mopping ZW$7.9 billion from the market. Reflecting this policy stance, the parallel market premium that had reached 140% in July 2022 has been significantly reduced to between 5-10%, well within the international acceptable benchmark when compared to

premiums typically observed intransition economies of between 10-15%.

Since I assumed my duties, the Central Bank has ably managed to ensure that the banking sector remained safe, sound, and sustainable to support economic activity.

The creation of the Zimbabwe Asset Management Company (ZAMCO) in 2015, has sustainably addressed the problem of high non-performing loans in the banking sector, which reached a peak of 23% before declining to current low levels of around 1%, well within the internationally accepted benchmark of below 5%.

The positive achievements to date give me sufficient confidence that the Central Bank will be able to bring inflation further down to single-digit levels within the SADC benchmarks before the end of my second term, thus leaving a legacy of great achievement on the Central Bank's mandate of ensuring price and financial system stability.