In his 2019 budget presentation on the 22nd of November 2018, Finance Minister Mthuli Ncube put forward that from the 23rd of November, ZIMRA Customs authorities would be instructed to charge duty in foreign currency for imports of certain items.
“In order to redirect use of scarce foreign currency to the productive sectors of the economy, I propose that customs duty on motor vehicles be levied in foreign currency acceptable as legal tender, with effect from 23 November 2018.”
“Furthermore, payment of customs duty in foreign currency will also apply on Selected Goods. This measure will also apply on all import VAT and Surtax.”
This outraged a lot of people with two main arguments coming up. The first, the very issue of the availability of foreign currency. This is a time where the black market, the most reliable source of forex for those whose needs are not deemed a priority when allocating scarce foreign currency in the RBZ possession, has been sent further into hiding with the threat of 10 years in prison for those found dealing. This argument was met with a rebuttal: if you can find foreign currency to buy the good you can find foreign currency to pay duty. The other immediate complaint was how the government itself was showing a preference for USD but was settling its own payments with bond/RTGS, and claiming that 1 Bond = 1 USD.
There is reprieve however, for those importing commercial vehicles. “This measure will, however, not apply on imports of commercial motor vehicles and vehicles for use by the physically challenged.”
The minister announced the move as a measure to redirect demand for scarce foreign currency but it also has the advantage of giving government as source of foreign currency revenue.
Example: Importing Toyota Wish
As an importing nation and with many having to resort to the parallel market to source foreign currency, one immediate effect of this policy is an increase in the price of imports. A simple example would be importing a Toyota Wish 2003 model vehicle worth USD2600 CIF (Cost, Insurance and Freight up to the border entry point). Thus the Value For Duty purposes (VDP) would be $2600. This attracts duty of $1040 (40% of VDP). Surtax (Additional tax charged on passenger motor vehicles more than five years old) will be $910 (35% of VDP). Value for tax purposes (VTP) = VDP + Duty thus it would be $2600+$1040 = $3640.
The Value Added Tax would be $546 (15% of $3640). Thus the total money to purchase the car would be $5096 ($2600+ $1040 + $910 +$546 ). Under the previous system, only $2600 would be USD, while the duty and tax of $2496 could be settled by paying in bond or RTGS transfer. Now one must pay the $2496 for duty in US dollars. Assuming a parallel market rate of 1 USD = $3.5 Bond, the purchaser would’ve had to pay Bond $8736 to buy the USD2496 required to pay duty on the vehicle. If we go further and assume that the initial USD2600 was purchased on the parallel market at the same rate, the purchaser would have used $9100 bond to get it. Thus the total cost of the Toyota Wish including duty is Bond $17 836. Prior to this policy the same vehicle would’ve cost Bond $11 596 ($9100 + $2496). The policy has led to an increase in vehicle cost of 54%.
The table below summarizes the above figures:
Toyota Wish Import Costs - StartupBiz ZimbabweCosts of importing a 2003 Toyota Wish car before and after the introduction of forex duty - StartupBiz Zimbabwe
|Item||Costs||Before (Bond Notes/RTGS Value)||Now (Bond Notes/RTGS Value)|
Before the policy the buyer only needed to go to the parallel market for USD2600 but now has to go to the market for an additional USD2496. We quickly see that the demand for forex will increase. Given both the scarcity of forex in the market and the increased demand, the forex currency rates are expected to increase.
Example: Local Manufacturers
Where local substitutes exist this policy may provide breathing room for local manufacturers. Using a simple scenario; let’s assume a local producer manufactures a good for Bond $35, while the same product was available to an importer at a cost of Bond $30 prior to this policy. The importer would’ve had a cheaper product by Bond $5 and all else being equal would win the business every time. After this policy, assuming that the product is now paying forex duty, the importer’s cost increases to say Bond $40. Thus the imported product is now $10 more expensive, and assuming all other things being equal, the local manufacturer will win the business. Our example of course assumes that the local manufacturer is using local inputs but this may not always be the case and the impact on foreign currency prices may well impact the manufacturers prices too depending on their exposure to forex rates via imports.
Effects on aggregate demand
With time the policy may well achieve its goal of demand management. In the motor vehicle example the cost in Bond terms increased a whopping 54%, this will surely deter many would be buyers on the fringes of the market. As for the other goods placed under such policy the increment may make the imports unfavorable and see people opt for direct or indirect substitutes. The bulk of the items on the list are of a luxury nature giving the impression that they are replaceable to the end user. With motor vehicles the case may not be so simple as local substitutes may not be accessible to the market. Demand suppression may impact the economy negatively, shrinking the already small tax base. While in the short term it may improve government’s foreign currency position, the long run may lead to further economic contraction through suppressed aggregate demand.
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