SUPPLEMENT TO

THE FIRST HALF 2006

MONETARY POLICY REVIEW STATEMENT

DELIVERED BY DR G. GONO, GOVERNOR

OF THE RESERVE BANK OF ZIMBABWE

July 2006

DELIVERED BY DR G. GONO, GOVERNOR

OF THE RESERVE BANK OF ZIMBABWE

July 2006

DEVELOPMENTAL SME PROJECTS INTERVENTION TO SUPPORT THE YOUTH,

WOMEN AND OTHER DISADVANTAGED GROUPS

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CONTENTS

PAGE

1. Introduction ..........................................................................................................2

2. Common Challenges Faced by SMEs ................................................................4

3. Measures To Address The Challenges ...............................................................4

4. Experiences Of Other Countries In Promoting SMEs...................................5

5. Contextual SME Issues In Zimbabwe ................................................................7

6. Reserve Bank Interventions In the SME Sector ..............................................8

7. Conclusion .......................................................................................................... 11

8. Annex 1: Sectoral Breakdown Of Examples Of SME Projects That Qualify

For Support ........................................................................................ 13

9. Annex 2: Provincial Natural Endowment-Based SME Projects ............... 17

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1.0 INTRODUCTION

1.1 The role of Small and Medium-sized Enterprises (SMEs) is critical for strengtheningeconomic performance and employment creation, particularly in developingcountries such as Zimbabwe.

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1.2 In Africa and the world over, SMEs contribute very significantly in terms ofemployment creation and growth.

1.3 For instance, in Indonesia, SMEs account for 98% of employment creation andgrowth with Japan and Thailand contributing 81% and 78% respectively.

1.4 SMEs are, thus, impeccable engines of economic growth which complement theefforts of the private and public sector to enhance the national development process.

1.5 SMEs have provided practical solutions to such challenges as poverty and declininghousehold incomes to meet family basics such as food, school fees, and access tohealth services, among others.

1.6 Key drivers to consider in the case of nurturing and supporting SMEs are their labourintensity nature, capital saving capacity, harnessing of local resource endowmentsand reliance on fewer imports, flexibility and adaptability, innovativeness and stronglinkages with other sectors of the economy.

1.7 The high level of adaptability also makes it easy for SMEs to thrive in any environment,hence they become an appropriate business model to promote rural developmentwhich will decelerate rural-urban migration that is currently giving headaches tomany governments in the world.

1.8 Reflecting the sectors central role, SMEs represent over 95% of enterprises inmost Organization for Economic Corporation and Development countries (OECD)1

and generate over 50% of private sector employment.

1.9 Governments, therefore continue to apply an array of policies and programs topromote entrepreneurship and boost development of SMEs. These programsgenerally aim to alleviate the challenges faced by SMEs and seek to identify andimplement best practice policies.

1 Australia Austria Belgium Canada Switzerland Germany Denmark Spain Finland France Great Britain Greece IrelandIceland Italy Japan South Korea Luxemburg Mexico Netherlands Norway New Zealand Portugal

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2.0 COMMON CHALLENGES FACED BY SMES

2.1 The SMEs sector, while playing a critical role in economic growth and development,is confronted with a number of challenges which include the following:

i. Access to finance remains the critical challenge facing SMEs worldwide.Accessibility and availability of finance is very limited, as the majority ofSMEs are owner capitalized;

ii. Limited access to finance is a major obstacle to development of SMEs inAfrica. Their inherent higher perceived risk and lack of collateral makefinancial institutions reluctant to lend them;

iii. SMEs also lack the capacity to conduct research and development needed tocommercialize ideas and grow businesses;

iv. Weak business structures;

v. Poorly defined legal and regulatory frameworks;

vi. Poor marketing channels;

vii. Difficulties in adapting to environmental changes;

viii. Insufficient management resources; finance, Human Resources andtechnology; and

ix. Absence of supportive institutional structures;

3.0 MEASURES TO ADDRESS THE CHALLENGES

3.1 In view of the challenges faced by SMEs, it is imperative that tailor-made support begiven to this critical sector. Effective interventions include the provision of financialsupport and entrepreneurial development training, as well as mentorship frameworks.

3.2 Financial Support include the following:

Diverse credit finance (loan programs); Equity finance; Credit Guarantee Schemes for SMEs; and Tax breaks for SMEs

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3.3 Under entrepreneurial and management support, the following are the main areasthat need intervention;

Start up business support; Business diversification support; Strengthening of management base; SME turnaround support, and Mentorship programmes and sub-contracting by bigger corporates.

4.0 EXPERIENCES OF OTHER COUNTRIES INPROMOTING SMES

4.1 Findings from empirical studies on the role of SMEs in economic development in anumber of countries have revealed the following:-

a) The financial sector has a major role to play in the creation and deliveryof practical solutions to the challenges of sustainable development.

b) The SME and microfinance sectors have to be supported financially andtechnically - to become part of the formal economy which will play a crucialrole in the deepening of the financial sector and mobilization of financialresources.

c) Bangladesh, Uganda,India,South Korea, Malaysia and the Philippines provideexciting empirical evidence as on the microfinance revolution as adevelopment intervention.

d) Public-private partnerships (PPP) are valuable mechanisms for developingpractical responses to African challenges.

e) Access to financial services is necessary to address problems faced bySMEs.

f) Capacity building in the SME sector by banks is necessary to ensure longterm business planning and management.

SPECIFIC COUNTRY EXPERIENCES

4.2 The Nigerian Central Bank has increasingly exercised its power as a regulator inline with internationally accepted norms and has been at the forefront on influentialprograms such as the Small and Medium Industry Equity Investment Scheme (SMIEIS)aimed at boosting equity investment in SMEs.

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4.3 Since 2001, all Nigerian based banks have been mandated by the SMIEIS to set aside10% of the pre-tax profits to finance SMEs. Funds are invested as equity, either as acash injection or conversion of existing debts owed to participating banks.

4.4 In South Africa, a partnership between ABSA, First National Bank, Nedbank Groupand Standard Bank and the Government was initiated in 2003 to develop low costtransaction accounts, enabling the banks to cover at least 70% of the un-bankedmarket (low income group) in a relatively short time.

4.5 Japans SME policy was structured in 3 phases as follows:

i. Reconstruction period;ii. High growth;iii. Stable growth period.

4.6 The Reconstruction period saw the establishment of Government financial institutionsfor SMEs, credit insurance system, formation of SME business associations suchas the Chamber of Commerce and Industry.

4.7 The high growth period was aimed at upgrading the structure and improving theproductivity of SMEs through the enhancement of facilities and promotion of sub-contractor SMEs as well as support measures for start ups, new businesses andbusiness innovation.

4.8 The Stable Growth period was geared towards fostering the diverse and vigorousgrowth of independent SMEs and meeting the demands of the global economy.

4.9 The Canadian Government offers financing programs to support the creation andgrowth of SMEs through a loan guarantee program and state owned financialinstitutions.

4.10 The range of financial services spans from:

i. Traditional term debt financing (5-20 years loans to finance capital assets); andii. Provision of pure equity financing through venture capital, among other innovative

structures.

4.11 Chinas SMEs were historically constrained by lack of financial support.

4.12 China, however, recognized that vibrant SMEs are an essential part of sustainedeconomic development and worked on improving the operating environment.

4.13 Consistent with this, the Chinese central government created a network of creditguarantee agencies in the late 1990s and tasked the SME Bureau to oversee them.

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4.14 Chinas growing credit guarantee system was a step in the right direction, especiallysince the banking systems lending decisions were strictly on a commercial basis.

4.15 The most remarkable aspect of Chinas small and medium enterprises is their rapidgrowth despite their inability to tap the official financial system.

4.16 Today, Chinese experts estimate that SMEs are now responsible for about 60% ofChinas industrial output, employing about 75% of the workforce in Chinas citiesand towns.

4.17 SMEs are responsible for creating most new urban jobs, and they are the maindestination for workers laid-off from state-owned enterprises (SOEs) that re-enterthe workforce.

4.18 Many of the SMEs are private firms, started by enterprising individuals. Furthermore,some of the SMEs have moved into market segments once dominated by state firms.

4.19 In New Zealand, the concept of SMEs is also vibrant. The significance of the SMEsector in New Zealand has, thus, been increasing, with further opportunities presentedby globalisation and technological development.

4.20 Reflecting this significance, SMEs accounted for 29.7% of total employment inFebruary 2005, with the number of people employed by SMEs increasing by 7%between 2004 and 2005.

4.21 New Zealands SME sector also accounts for quite a significant proportion of thecountrys output. The SME contribution to output increased from 37.2 % in 2003 to39% in 2004 accounting for 23.8% in value added output.

5.0 CONTEXTUAL SME ISSUES IN ZIMBABWE

5.1 Whilst in Zimbabwe, Government has made commitment to the full developmentand the full transformation of the SME sector over the years, there has not been acomprehensive intervention programme that recognizes the need for our YouthsWomen and other disadvantaged groups to be supported in developing entrepreneurialcapabilities.

5.2 This development, largely a result of resource constraints cannot be allowed toremain uncorrected.

5.3 A peculiarity worth noting is also that Government nurtures students for at least 11years (7 years in primary school and 4 years at secondary level) and yet, thereafter,there seems to be limited frameworks that unlock the wealth invested in those 11years.

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5.4 Against this background, the Ministry of SMEs ought to play a very strategic role inthe development of the sector.

5.5 Support activities ought to range from policy initiatives, technical capacity building,and financing among other numerous and significant interventions, and as the CentralBank, we have seen it fit that we facilitate this process through the provision of anSME Development seed fund.

5.6 It is, however, important to note that a strong institutional framework supporting thedevelopment of SMEs is already in place in Zimbabwe, as evidenced by such long-standing institutions as SEDCO, Empretec, and UNIDO, the ILO arms, among severalother institutions currently providing technical and financial support to the sector.

5.7 The turnaround of the Zimbabwean economy calls for a holistic approach buildingon these existing strengths so as to realize sustained growth and overall economicperformance across the board.

6.0 RESERVE BANK INTERVENTIONS IN THE SMESECTOR

6.1 In order to reinforce the broader macro-economic policies being implemented, ithas become necessary that a meaningful programme be introduced to tackle thesetbacks of high unemployment levels among our youths, as well as poverty levelsamong the low income groups of our communities.

6.2 Within the framework of addressing the gender issues, as part of the countrysstrategy to fulfill the Millennium Development Goals (MDGs), the SME programmeshould also cultivate broad -based empowerment avenues for women and otherdisadvantaged groups.

6.3 Empirical research shows that the socio-economic challenges of rising crime,escalating HIV/AIDS infection rates and other stresses are positively correlatedwith unemployment and poverty levels.

6.4 In this regard, therefore, National programmes ought to be tailor-made towards abroad-based attack on poverty through job creation.

6.5 To this end, therefore, the Reserve Bank of Zimbabwe is pleased to unveil a Z$16trillion SME fund to promote the activities and projects of this critical sector. TheCentral Bank encourages rural banking initiatives by mainstream banks, and we standready to introduce appropriate incentives to those banks that assume this NationalDevelopmental role.

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Applicable Interest Rate

6.6 The SME Development fund programme will extend concessional financing supportto qualifying SME projects at an interest rate of 70% per annum.

6.7 We call upon the Banking Sector to match this allocation dollar for dollar, thoughtheir applicable interest rate needs not be the 70%, as banks ordinarily take intoaccount aspects of their overheads and other considerations in managing their lendingactivities.

6.8 If the banking sector matches the $16 trillion provided by the Reserve Bank, theNation would benefit from the resultant $32 trillion resource-base for the SMEsector.

6.9 For maximum National impact, these funds will be allocated across all provinces,based on population distribution and known economic activity concentrations.

6.10 Assuming an average support to the tune of $250 million per project, the total numberof projects that would stand to benefit would be around 128 000, and if each isassumed to employ 7 people, then total direct employment creation and/ or sustainedwill be 896 000, which is equivalent to around 3 years of school levers, at an averageof 300 000 per year.

6.11 If one assumes that each employed person supports about 4 people, including self,then the overall beneficiaries will be 3 584 000, outside direct agriculture.

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6.12 The SME fund will seek to create jobs for the Youth, promote value-addition andgreater focus on export promotion.

6.13 The following activities will be the focus:

(a) Agro-processing to support the Agrarian Reform;

(b) Construction industry to fight inflation being caused by rental increases;

(c) Mining sector development;

(d) Animal husbandry and raising of chickens; and

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(e) Other SME activities, as expanded in Annex 1.

7.0 CONCLUSSION

7.1 Success of any macro or micro-economic policy intervention largely hinges on thepassion and intensity of implementation.

7.2 In coming up with this eclectic, practical intervention to the countrys current set-backs of unemployment and low income levels, particularly in rural communities,the overriding objective is to cultivate a solemn realization among us as Zimbabweansthat meaningful development has its roots in the SME sector.

7.3 As a Central Bank, we are under no illusion, though, that such development willcome on a silver platter without the need for sustained macro-economic policiesthat reduce inflation; macroeconomic policies that attract investment inflows; andinterventions that rejuvenate the export sector.

7.4 Our humble contribution is to plant a seed, which seed will require watering fromall Zimbabweans to germinate into the proverbial fig-tree that has meaning to themajority of our population.

7.5 Our firm inclination is that economic policies that have no effect on the majoritypoor are not much helpful to the cause of human development.

7.6 The essence of humanity, thus, begins and ends on the often overlooked pivots offood sufficiency; access to decent housing; access to good health facilities andequally importantly, simple peace of mind.

7.7 Without sources of income, our Youths are rendered idle hives of tomorrowsdestruction.

7.8 Without jobs, our Youths cannot have peace of mind.

7.9 Without a means of livelihood, the 60-70% of our majority currently residing inrural areas will fast lose the meaning of our hard-earned political independence; andsoon they will demand their fair share of the National cake from those that bask inthe armchairs of wealth.

7.10 Yes, through Governments far-sighted Land Reform Programme, many of yester-years unemployed are being absorbed into agriculture as the mainstay of theeconomy.

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7.11 This notwithstanding, the countrys developmental prospects will be made brighterthrough micro-level interventions that create a lasting buffer against the vagaries ofdrought.

7.12 Through a comprehensive SME programme, our rural communities will becomemasters of their own economic destinies, which in turn would free the need forfood hand- outs in times of drought or provision of subsidized inputs from CentralGovernment.

7.13 As a minimum contribution towards making this, our dream come true, we call uponall stake-holders, both in the Public and Private sectors, to share this Vision and seethe virtues of a growing SME sector.

7.14 We also call upon the banking sector to assume a greater role in building thedevelopmental base of the economy through the adoption of credit riskmanagement systems that have a human face.

7.15 Shunning the SME sector is no different from a builder who fails to see the collectivestrength of minute bricks , which when bound together create an unshakable wall.

7.16 Lastly, to the potential beneficiaries of this SME programme, we implore that allfunds borrowed be put to good productive use, so as to allow other aspiring borrowersequal opportunity to transform their entrepreneurial dreams into tangible wealth forour Great Country Zimbabwe.

Thank you

DR G GONO,GOVERNOR,RESERVE BANK OF ZIMBABWE31 JULY 2006

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ANNEX 1: Sectoral Breakdown of EXAMPLES OF SME Projects thatQUALIFY FOR SUPPORT

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ANNEX 2: PROVINCIAL NATURAL ENDOWNMENT-BASED SME POJECTS

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NOTES

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NOTES

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