On Monday the 10th of May the government of Zimbabwe announced new incentives for exporters. They announced that all exporters can retain 80% of their incremental (over averages) exports, companies listed on the Victoria Falls Stock Exchange (VFEX) will be allowed to retain 100% of their foreign currency earnings and that gold miners will be allowed to sell incremental produce (over average) directly and not to Fidelity Printers. The goals of these incentives are to improve exports, discourage side marketing particularly in gold and improve foreign currency flows into the country to support the official foreign exchange auction market. What does all this mean and how effective are these new ideas?
Exporters retain 80% of incremental exports
From what we know right now, exporters will be allowed to retain 80% of their incremental exports. The rules currently allow exporters to retain 60% of their export proceeds as foreign currency. The incremental element is calculated on their average. You can see the problem that this will present for the average exporter, whether the average is calculated in total or as a moving average every increment moves your average up. So each time you export more, your average goes up and the incremental portion becomes smaller or disappears. It’s a smart mechanism, an incentive that automatically extinguishes itself. Also, it’s important to remember that exporters aren’t exactly holding back exports but rather work based on demand for their products.
VFEX listed counters retain 100%
The Victoria Falls Stock Exchange can so far be described as a damp squib. It was a wonderful idea but as we pointed out in this article the setting up of an offshore financial centre is a massive undertaking. The VFEX has only managed to attract one listing so far and registered 3 trades. The government looks to incentivise VFEX listing by allowing exporters listed there to retain 100% of their exports in foreign currency. That is a great prospect but is it enough? Firstly we are told the auction system is working just fine for those who are buying currency from it. Now, this may not be the full story, we know the system has its challenges but so far it is good enough. The listing comes with heavy requirements in terms of corporate governance, disclosures and financial reporting. If the auction system is working perfectly is the pain of listing worth it?
Gold miners may sell incremental produce directly
The problem of side marketing and smuggling has drastically affected gold deliveries to the government buyer Fidelity Printers and Refinery. The incentive is meant to improve the flow of foreign currency into the country. When we last touched the subject Fidelity proposed to buy gold at US$45 per gram when prices on the world market were US$55 per gram, so the exporter using this example would receive an extra US$10 (or 22%) per gram, which they would be allowed to retain as foreign currency. However, that little mathematical problem creeps in where each incremental delivery increases your average. This means the incentive will shrink and probably disappear. A smart incentive from the government but perhaps not as attractive to those it targets as they may just opt to continue using other channels whatever they may be.
It is essential and should be commended that the government continues to look for ways to improve foreign currency flows to the country while also looking to boost production. The proof of the pudding is always in the eating and we may see some improvement courtesy of these policies but they seem to fall short of the requirements to be effective. Of course, these are not the only incentives the government is pursuing as they push to reduce the duty on raw material imports and reduce corporate tax among other measures.