New measures to foster stability, Zimdollar demand Minister of Finance and Economic Development Mthuli Ncube

Business Reporters

The economic support measures announced by the Government on Monday will help stabilise the exchange rate, promote the demand and wider use of the domestic currency, as well as encourage foreign currency deposits in the banking sector, economic analysts have said.

The stability of the exchange rate should in turn anchor price stability and drive the demand for local currency in domestic transactions, which economic agents have lately been avoiding due to its volatility.

Early this month, the Government introduced a raft of measures to stabilise the economy, which included increasing the foreign currency retention threshold on domestic foreign currency sales to 100 percent, transferring of all external loan obligations to Treasury, and allowing the duty-free importation of basic goods.

On Monday, Finance and Economic Development Minister, Professor Mthuli Ncube, said the latest measures were meant to ensure effective implementation of the earlier policy interventions.

The major highlight of the latest economic support measures entails transferring full responsibility of paying exporters for the foreign currency surrender portion to eliminate ungoverned money supply growth.

Treasury will, with effect from tomorrow, be in charge of collecting foreign currency surrendered by exporters, with the proceeds used to service the RBZ external loan obligations.

It means the Finance ministry will create space in the National Budget to cater for the transparent settlement of the 25 percent foreign currency surrender from all exporters and 15 percent for tobacco and cotton farmers.

Previously, the function was the sole responsibility of the central bank, an arrangement many economic observers felt created a hole for money supply growth.

In terms of the new measures, banks will no longer hold foreign currency surrendered by exporters while all the liabilities to the banks will be settled through the Treasury, in terms of funds provisioned in the budget.

In an interview, Harare-based economist Mr Carlos Tadya said: “I think this policy measure will reduce the creation of money supply although the big question remains how the Treasury will fund these retentions.”

However, the new supportive measures have created additional revenue streams such as a 1 percent export tax on foreign payments.

Prof Ncube has indicated though that all duties and taxes, except for specified luxury goods, shall be paid for in local currency, an arrangement that should help increase tax revenue to fund liquidations by exporters, while promoting wider use and demand of the Zimbabwe dollar.

The Government is also expected to make huge savings from value-for-money audits, which will create additional latitude to fund exporter surrender obligations by reducing money spent on contractors and suppliers to the Government.

Under the value-for-money audits, all Government departments are required to carry out intense scrutiny of invoices before paying for goods and services to determine if quotations represent fair and prevailing market value.

Last week, the National Competitiveness Commission (NCC), in a joint report on the recent price increases with the Competition and Tariff Commission, said there was a need to properly fund the central bank to be able to meet the export surrender obligations, which it said appeared to be a major driver of money supply growth.

“All surrender purchases must be done in a money supply neutral manner. We recommend that the Ministry (of Finance) publish the amount that will be allocated to the Reserve Bank for this purpose and how this will be raised by the Ministry,” said the organisations in a report.

The report also recommended the Government to improve management of the large payments to contractors for key public infrastructure projects to avoid sudden surges in local currency liquidity, which has often been blamed for driving US dollar demand and exerting pressure on the exchange rate. 

It also said the central bank should keep a lid on all potential sources of money supply growth to contain exchange rate movements.

With the payment of customs duties and payments to the Government agencies now required to be in local currency, there would be a firmer demand for the Zimbabwean dollar, which should strengthen the value of the local unit, another analyst said.

“The policy position is to reverse the costly dollarisation,” said economics Professor Gift Mugano.

The reduction of Intermediated Money Transfer Tax on domestic foreign currency transfers from 2 percent to 1 percent, and increase of the retention threshold on domestic foreign currency sales to 100 percent, would encourage businesses and bank their US dollar cash sales, added Prof Mugano.

A lot of businesses trading in US dollars were avoiding using the banking system to avoid forced surrender of a portion of their revenue as well as the perceived high cost of banking services.

The companies were reportedly experiencing huge exchange rate losses on the back of the 2 percent IMTT tax, bank charges, and 15 percent export retention, which they saw as an indirect and unbudgeted tax on their businesses.

The losses emanating from the compulsory export forex retention were arising from the disparities between the official exchange rate and black market rates because the companies were paid at an official exchange rate, below the prices they faced in the market when they spent in local currency.

There was no desire or incentive for businesses collecting US dollar cash to deposit in banks, which denied Treasury tax and reduced circulation of foreign currency in the economy.

Full implementation of the real Dutch Auction System (timely payment, notification of funds available in advance, and selecting the highest bidder) will improve transparency, confidence, and efficiency in the trading of foreign currency in the economy, which should eliminate pricing distortions.

Due to disparities between exchange rates, formal business was thrown into quandary on proper pricing models for both US and Zimbabwe dollar currency, which would allow them to make health margins either side while complying with the laws of the country.

When the auction system was introduced in June 2020, it was expected to help with price discovery, a critical element of the market required to eliminate the parallel market.

Treasury has since introduced new measures to enhance the efficiency and effectiveness of the foreign currency auction system, now restructured to a true Dutch Auction, although now be limited to trading US$5 million a week, which should go a long way in fostering real market price discovery.

Yesterday, Zimbabwe dollar further weakened by almost 36,4 percent to $2 577/US$1, as market forces start to dictate the real prices.

Parallel market rates are around $3 500. 

Analysts said if the exchange rates were allowed to converge, demand for US dollars on the open market will subside, leading to a gradual strengthening of the Zimbabwe dollar and price stability.

Economist Mr Eddie Cross noted efforts had been made to address some of the key issues responsible for volatility and distortions characterising the domestic economy.

“The parallel market firmed a bit today (yesterday); that is the first firming that we have seen (in a long time), but I think we gotta wait and see what the market does tomorrow (today) and the next day.

“I think the market has to make a decision, my personal feeling is that it is a mixed bag, but I have my misgivings about it being effective. We need to stop the Reserve Bank from printing money. There are some measures towards that, but it’s not entirely clear.

“We also now need a (proper) market for foreign exchange; the interbank must become the main market for foreign exchange and must be totally free; it must be without any Government intervention,” said Mr Cross.

He stressed that if authorities want to save the Zimbabwe dollar, they should continue to implement measures that make the local currency important in trading.

“The Government’s gotta start with its own income; they gotta start collecting all the taxes in local currency; I think they have made a step about it, but I do not think they did enough,” Mr Cross added.

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