• Reduced Forex Retention for Exporters: The RBZ has reduced the foreign currency retention rate for exporters from 75% to 70%, requiring them to surrender 30% of their forex earnings
• Interbank Foreign Exchange Market Reforms: The RBZ has removed the 5% trading margin on forex transactions to improve price discovery and exchange rate efficiency, although this may introduce volatility risks
• Mandatory Reporting in ZiG: Businesses are now required to report financial statements in the local currency, ZiG

Harare- The highest banking authority, Reserve Bank of Zimbabwe released its 1HY2025 Monetary Policy Statement on the 6^th of February 2025, articulating monetary development and policies that will underpin the first half of the year. Key pillars of the strategy include strengthening the local currency (ZiG) through increased foreign reserves, optimizing the foreign exchange market for better liquidity and efficiency, and ensuring prudent liquidity management to curb inflationary pressures.

Foreign Currency Retention for Exporters

The 2025 MPS has instituted a downward revision in foreign currency retention for exporters, reducing the retention rate from 75% to 70%. This adjustment represents a critical juncture in the policy landscape, as exporters have long advocated for a reduction in mandatory surrender portions to a range of 5% to 10%.

Under the new framework, exporters are now mandated to surrender 30% of their forex earnings to the Reserve Bank of Zimbabwe (RBZ), an increase from the previous 25%. Consequently, if a company exports goods valued at US100million, it retains US$70 million, while the remaining US$30 million is converted into local currency.

The local currency is currently overvalued, evidenced by the premium between the formal and parallel market exchange rates. As of November 2024, the parallel market rate surged to between 45 and 50 ZiG per dollar, in stark contrast to the formal market rate of 26 ZiG per dollar.

By January 2025, this disparity has slightly narrowed to a range of 35 to 40 ZiG per dollar. This exchange rate divergence translates into a potential revenue shortfall of approximately US2.67million, equating to an  8.8% loss on the original 100 million revenue.

Such substantial discrepancies in exchange rates pose significant risks to production and productivity, ultimately jeopardizing export volumes. Companies may opt to scale back their export activities, given that local sales could yield higher profit margins compared to international transactions.

While this policy measure aims to enhance the circulation of the local currency and promote its usage, it simultaneously constrains exporters' access to USD. This situation could precipitate liquidity challenges for businesses that depend on foreign currency for imports and international transactions. Although the policy ostensibly supports the local currency, it may impede exporters' capacity to fulfil foreign obligations, thereby adversely affecting their operational efficiency and overall competitiveness in the global market.

US Dollar Denominated Deposit Facility (USDDDF)

  Now, with the reduction in export retentions, exporters can invest the surrendered 5% of forex in an interest-bearing USD deposit at the RBZ, withdrawable in ZiG. One of the positive effects of the USDDDF is that it provides an incentive for exporters to surrender their foreign exchange earnings, which can help to reduce forex hoarding and increase the supply of foreign exchange in the market. This can lead to improved liquidity in the foreign exchange market and reduce the country's reliance on the black market.

However, while it offers stability, the USDDDF may have unintended consequences on the local economy. It limits the immediate access to USD for operational needs, which can strain businesses that rely heavily on foreign currency. This can lead to inefficiencies in the use of forex, as exporters may be forced to hold onto USD deposits rather than using them for urgent business needs.

Interbank Foreign Exchange Market Reforms

The central bank has removed the 5% trading margin on forex transactions.    The removal of the 5% trading margin on forex transactions offer greater flexibility for dealers and is expected to improve price discovery and exchange rate efficiency. However, though it may also introduce volatility risks. This can be particularly challenging for smaller enterprises that lack the resources and expertise to manage forex risks. The reforms may lead to exchange rate fluctuations, which can negatively impact businesses that rely on stable exchange rates for their operations and largely disadvantage smaller enterprises, leading to unequal competition in the market.

In terms of the effects on the local currency, the USDDDF and the Interbank Foreign Exchange Market Reforms can help to stabilize it. By reducing forex hoarding and improving liquidity in the foreign exchange market, the USDDDF can help to reduce the demand for USD and stabilize the value of the ZiD. The Interbank Foreign Exchange Market Reforms can also help to promote greater stability in the foreign exchange market, which can reduce the risks associated with forex transactions and promote greater confidence in the local currency.

On the downside, businesses may prefer to hold onto USD deposits rather than converting them to local currency. This can lead to a depreciation of the ZWG, making imports more expensive and potentially fueling inflation. The Interbank Foreign Exchange Market Reforms may also lead to a depreciation of the ZWG, as the removal of the trading margin can lead to a decrease in the value of the local currency.

Functional & Presentation Currency Requirement

Businesses are now required to report financial statements in ZiG. While this standardizes financial reporting, it complicates multi-currency transactions and may introduce forex translation losses, particularly for businesses with significant foreign currency exposure. While this standardizes financial reporting, it complicates multi-currency transactions and may introduce forex translation losses, particularly for businesses with significant foreign currency exposure.

Currently, 1 USD fetches 26 ZiG on the formal market, but the real value is estimated to be around 37 ZiG on the parallel market. This means that businesses will have to report their financial statements using the artificially low formal exchange rate, which does not reflect the true value of their foreign currency earnings.

Interest Rate Adjustments 

The Bank Policy Rate was maintained at 35% to support the tight monetary policy stance. While this encourages local currency savings and discourages speculative borrowing, it raises borrowing costs for businesses. Higher interest rates may limit access to working capital and slow business expansion, particularly for small and medium-sized enterprises (SMEs).

Statutory Reserve Requirements (SRR)

The bank  standardized SRR at 30% for demand deposits and 15% for savings and fixed deposits to sustain tight liquidity conditions. While this helps control money supply and inflation, it reduces the lending capacity of banks, tightening credit access for businesses and potentially slowing investment and expansion.

Targeted Finance Facility (TFF)

  A new facility aimed at supporting productive sectors and wholesalers/retailers, funded by statutory reserves, seeks to provide sector-specific liquidity without increasing money supply. While this helps businesses access capital, stringent eligibility requirements may limit its effectiveness.

Liquidity Management & Banking Charges

Strict control of excess liquidity and reduced bank fees for small transactions encourage formal banking usage and stabilize the currency. While this lowers banking costs for SMEs, it limits liquidity flexibility, which could be challenging for businesses with fluctuating cash flow needs.

Promotion of Digital Payments & POS Systems

 The bank issued mandatory issuance of POS machines for all business accounts to enhance financial inclusion and digital economy participation. However, it increases compliance costs for small businesses, even as it expands customer payment options.

On informal trading, the mandatory use of POS machines requires businesses, including informal traders, to process transactions through formal banking channels. This creates a digital trail of sales and revenue, making it easier for tax authorities to track and verify income. POS systems provide real-time data on sales, which can be cross-referenced with tax filings. This transparency makes it more difficult for businesses to hide revenue or manipulate financial records

Overall View

In light of the 2025 MPS, businesses in Zimbabwe must adopt strategic financial and operational adjustments to remain resilient in the evolving economic landscape.

Businesses should prioritize hedging strategies to mitigate exchange rate risks, particularly given the reduction in forex retention for exporters. Optimizing forex usage by prioritizing essential imports and strategically settling foreign obligations will be crucial. Holding foreign currency in interest-bearing accounts like the USDDDF can also provide stability.

With high borrowing costs remaining, businesses should explore alternative financing methods such as equity funding, strategic partnerships, and internal funds. Utilizing sector-based lending under the Targeted Finance Facility (TFF) can help ease financial pressure.

Also, tight liquidity conditions necessitate robust cash flow management. Businesses should reduce non-essential expenses, improve inventory management, and integrate digital payment solutions to facilitate faster transactions and better liquidity control.

As financial statements must now be presented in ZiG, businesses must ensure accurate tracking of exchange rate movements to prevent valuation losses. Integrating digital payment solutions, such as POS machines, will enhance efficiency and customer convenience while reducing reliance on cash transactions.

Besides, the rising cost of doing business requires a review of pricing strategies to accommodate inflation and forex fluctuations. Businesses should seek cost-effective local suppliers to minimize dependence on expensive imports and explore alternative revenue streams, such as new export markets and diversified product offerings.

Given tight credit conditions, businesses should prioritize productivity improvements, process optimization, and cost-cutting measures over aggressive expansion plans. Investing in automation and digital solutions can enhance efficiency while reducing operational expenses.

Effects on ZWG

The MPS aims to strengthen the local currency through increased foreign reserves, optimized foreign exchange market liquidity and efficiency, and prudent liquidity management to curb inflationary pressures.

On the positive side, the reduction in export retentions is expected to increase the circulation of ZiG, promoting its use as a local currency while the USDDDF and Interbank Foreign Exchange Market Reforms can help improve liquidity in the foreign exchange market, reducing the demand for USD and stabilizing the value of ZiG. The USDDDF also provides an incentive for exporters to surrender their foreign exchange earnings, reducing forex hoarding and increasing the supply of foreign exchange in the market.

However, there are also potential negative effects on the ZiG. Businesses may prefer to hold onto USD deposits rather than converting them to local currency, leading to a depreciation of ZiG. The reduction in export retentions reduces exporters' access to USD, potentially creating liquidity constraints for businesses reliant on foreign currency. The Interbank Foreign Exchange Market Reforms may also introduce volatility risks, particularly for smaller enterprises that lack the resources and expertise to manage forex risks.

To mitigate these risks, businesses should prioritize hedging strategies to mitigate exchange rate risks. Optimizing forex usage by prioritizing essential imports and strategically settling foreign obligations will also be crucial.

Businesses should explore alternative revenue streams, such as new export markets and diversified product offerings, to reduce their reliance on foreign currency. By adopting these strategies, businesses can minimize the potential negative effects of the MPS on the ZiG and maintain their competitiveness in the market.

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