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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
..........................................................................................................
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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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