The Reserve Bank of Zimbabwe (RBZ) has been navigating a complex monetary landscape since the introduction of the Zimbabwe Gold (ZiG) in April 2024. While the central bank has made significant strides in stabilising prices and anchoring currency confidence, its approach raises critical questions about alignment with broader fiscal objectives.
The government, through the Ministry of Finance, Economic Development and Investment Promotion, has set an aggressive growth agenda centred on infrastructure development and internal construction. Yet, the RBZ’s tight monetary stance — characterised by high interest rates and stringent reserve requirements — appears at odds with these ambitions.
Is this incongruity between fiscal and monetary policies sustainable, both short and long term? Or does it risk undermining the very transformation the current administration seeks?
Economic activity denominated in local currency declined slightly from 75 percent in April 2024 to 70 percent as of January 2025, despite initial optimism following the ZiG launch. This dip underscores lingering trust issues with the new currency, as it was with the old Zimbabwe dollar it replaced.
Meanwhile, exporters’ United States dollar surrender levels rose modestly from 25 percent to 30 percent, reflecting incremental progress in the central bank’s forex retention from exporters, but still insufficient to meet industrial needs.
To enhance market efficiency, RBZ has removed pricing margins and caps for forex transactions. We anticipate they must have already put robust oversight mechanisms after this move to reigniting speculative behaviour — a concern given the parallel market premium, which widened temporarily before stabilising.
On the inflation front, the RBZ faced turbulence in late 2024 when month-on-month ZiG inflation surged due to heightened parallel market activities and other matters. To counteract this volatility, the Monetary Policy Committee (MPC) raised the policy rate to 35 percent, increased statutory reserve requirements to 30 percent, and introduced greater exchange rate flexibility under the willing-buyer-willing-seller system.
These include allowing greater exchange rate flexibility, standardising statutory reserve ratios for foreign currency deposits at 20 percent, and ensuring that up to 50 percent of liquidated export surrender forex receipts are channelled back into the interbank market to keep rates volatility in check.
Additionally, the RBZ has removed limits on foreign exchange trading volumes and increased the annual limit for prepaid international debit and credit cards to US$1 million, promoting ease of doing business while closely monitoring potential risks such as capital outflows or speculative behaviour.
These measures have notably stabilised both official and parallel exchange rates, albeit at a cost. A higher policy rate suppresses borrowing and investment, while elevated reserve ratios reduce banks’ ability to extend credit. For context, Botswana, to pick one example, maintains reserve ratios closer to eight percent. South Africa, another neighbouring country, keeps them around two percent — a stark contrast that highlights the trade-offs Zimbabwe is making for stability.
The RBZ’s success in building reserves cannot be overstated. Gold holdings rose significantly since April 2024 when the new currency was introduced. Backing for reserve money coverage are more than three times the money stock, with approximately US$540 million covering ZiG3,4 billion in circulation as of November 8, 2024. This coverage exceeds international norms, where reserve money is typically backed 1,5 to two times by foreign reserves.
Excess coverage, though it must be understood, ties up resources that could otherwise fund productive sectors. Also, the removal of weekly forex trading limits and the increase in prepaid card thresholds will promote ease of doing business but equally expose the economy to potential capital outflows, if not closely monitored. These two are only but the beginning of seemingly tangent directions between the monetary and fiscal policy.
From a theoretical perspective, the interplay between the two policies can be analysed using what we call the Phillips Curve, which, simply put, suggests a trade-off between inflation and unemployment. In Zimbabwe’s case, maintaining single-digit inflation has been pursued through tight monetary conditions, which, inadvertently, have constrained the economic dynamism.
With ZiG inflation projected to average below three percent month-on-month (MoM) in 2025, the MPC’s efforts appear effective. On the inverse, this stability comes at the expense of liquidity, particularly in the banking sector, where deposit-to-loan ratios hover below 60 percent.
By comparison, Botswana boasts ratios closer to 75 percent, while South Africa is almost fully awash with funding for economic needs achieving nearly 90 percent of deposits being loaned out. Such disparities highlight how constrained monetary policy limits private sector participation in growth initiatives. Which, as we have seen in Zimbabwe, ultimately leads to the government intervening. In fact, the RBZ itself has had to come in with it’s own Targeted Finance Facility (TFF), which we will speak about later.
Considering the impact on infrastructure projects in the country as outlined in the 2025 National Budget announced on the November 28, 2024 by the Minister of Finance, Professor Mthuli Ncube, the appetite for internal liquidity is voracious.
Construction, a key driver of GDP growth, requires substantial financing, often sourced externally but equally via domestic loans. Under current conditions, however, banks are reluctant to lend due to perceived risks, regulatory constraints, and outright stiflingly tight environment engendered by the Central Bank.
Applying the Loanable Funds Theory, we see that reduced credit availability will certainly increase the cost of capital for construction firms. If banks cannot finance these projects adequately, the Government may need to step in, increasing public debt levels. Something we have seen numerous times.
According to projections, gross fixed capital investment is expected to grow by only 4,6 percent in 2025, far below the 20 percent year-on-year (YoY) target set for certain sectors like education and health, as outlined in table six of the 2025 National Budget Statement.
To quantify the funding shortfall, let us examine the construction sector’s financing needs. If construction accounts for 2,8 percent of GDP this year as it did last year, and the economy is to reach its target growth rate of six percent, the required financing amounts to roughly 0,294 percent of GDP. Given total banking sector deposits of ZiG89,07 billion, the implied funding gap for construction only already stands at ZiG,44 billion under current conditions.
And here’s the kicker. Construction in 2025 is envisaged at above three percent of GDP (not 2,8 percent), which means the funding gap for this sector alone could be around ZiG6 billion. This deficit could delay flagship projects like the Harare-Masvingo-Beitbridge Road and/or the Lake Gwayi-Tshangani, unless alternative funding sources materialise.
Yet banks, in part because of the tightened monetary policy, are sitting on almost half all deposits instead of extending loans to a thirsty economy.
Moreover, the reliance on Non-Negotiable Certificates of Deposit (NNCDs) to mop up excess liquidity further complicates matters. NNCD issuance dropped sharply to ZiG123 million in September 2024, signalling successful liquidity management, but this has also left little room for discretionary lending.
Using the Money Multiplier Formula, Zimbabwe’s multiplier sits at just 3,33 compared to typical multipliers of 8 to10 in stable economies. In this case we have used the multiplier formula to measure the extent to which an initial change in reserve money translates into a larger change in broad money supply; in Zimbabwe’s context, a multiplier of 3,33 indicates that every unit of reserve money supports 3,33 units of broad money, reflecting the tight liquidity conditions and constrained credit creation due to high reserve requirements.
Thus, we have a situation where the RBZ tightens liquidity, while the government targets expenditure led growth, for instance expanding infrastructure spending as it allocated ZiG58,6 billion toward projects ranging from roads to energy systems. This allocation in the 2025 national budget represents 21,2 percent of all internal expenditures planned for this year and 2,1 percent of the total budget, highlighting a significant focus from the fiscal side on internally funded infrastructure development.
How will these priorities be met when monetary policy actively discourages lending?
Then, as for the TFF, introduced to channel funds to priority sectors and offer some relief, it is a tacit admission by our finance leaders that intervention is needed. That it is funded through banks’ statutory reserves opens a whole other slew of legal and technical questions which we may need to find separate time and space to do justice to it.
Suffice to say for now that another layer of complexity arises from commodity price fluctuations on the global market. Despite robust global gold prices, exports of other minerals like platinum group metals (PGMs) and lithium remain subdued. Export receipts grew marginally by 0.8 percent YoY, driven primarily by gold (16,7 percent) and tobacco (17,1 percent), while a decline in PGMs (-8,3 percent) and diamonds (-20,3 percent) reflects their current depressed international demand. Any further drop in mineral prices would exacerbate the current account balance, worsening Zimbabwe’s trade deficit and putting pressure on macroeconomic stability.
According to simulations we made, a small decrease in export prices could lead to disproportionate declines in earnings, eroding forex inflows and increasing inflationary pressures because of the high pass through rate for our currency exchanges in the country (that is the sensitivity of local prices to exchange rate changes).
The fiscal framework for 2025 underscores these tensions. Total expenditures are pegged at ZiG276,4 billion, including recurrent costs of ZiG235,8 billion and capital outlays of ZiG40,6 billion. Recurrent spending dominates, accounting for nearly 85,7 percent of total expenditures, largely driven by compensation for employees (55,2 percent) and operational expenses (15,5 percent).
Simply put, for every dollar the country earns, more than 55 cents funds civil servants’ salary needs and above 15 cents are for recurring overhead, leaving under 30 cents only for development, savings, debt servicing, investments etc.
While prudent, this allocation leaves limited fiscal space for transformative investments as you can see. Then add to that environment an RBZ insisting on keeping a cap on local funding and a treasury likely to miss targeted fiscal deficits below 1.5 percent of GDP, aligning expenditures strictly with available revenues.
In the absence of external fresh funds or a record high jump in exports, something internally will have to give. Either slowing of construction, local payments thereof, or liquidity increases leading to inflation rising again. Dicey conundrum our authorities have to solve.
Efforts to diversify the economy into manufacturing and services also face hurdles. Manufacturing output is projected to grow by 3,1 percent in 2025, supported by agricultural recovery and improved power supply. Capacity utilisation, currently at 52,1 percent, is expected to recover to a commendable 55 percent, yet this improvement depends heavily on access to affordable credit.
High interest rates and restricted liquidity hinder manufacturers’ ability to invest in modern equipment or scale operations. Similarly, tourism, projected to grow by 4,3 percent, relies on infrastructure upgrades and marketing campaigns funded partly through external assistance. Will tightened monetary conditions deter private sector involvement in complementary areas like hospitality and entertainment?
Zimbabwe must strike a delicate balance between controlling inflation and promoting credit flow. Could gradual adjustments to reserve ratios, perhaps lowering them to 25 percent, unlock much-needed liquidity without compromising stability?
As of February 2025, Zimbabwe’s reserve ratio stands at 30 percent, and lowering it to 25 percent would release approximately ZiG17,8 billion (equivalent to US$694 million) in additional liquidity into the economy. What will be left is ensuring that liquidity is not channelled to the parallel market if released.
The growth of gold reserves to approximately 2,7 tonnes as at January 2025 from the 1,5 tonnes recorded in April 2024 when the ZiG currency was introduced reflects a significant build-up in holdings in under a year!
Be that as it may, these measures are at odds with the government’s growth-oriented fiscal agenda, particularly regarding infrastructure and industrialisation. As Zimbabwe looks ahead to National Development Strategy 2 and Vision 2030, policymakers must reconcile these divergent paths.
