There has been a lot of chatter in government offices about measures coming soon to defend the currency which has been on a freefall in recent times against the US dollar. The measures that have been promised finally came and were delivered from the highest office in the land, President Emmerson Mnangagwa. The measures were announced in a live televised evening speech on Saturday the 7th of May. There were a lot of highlights to pour through with the document. Let’s look at some of the bigger ones.
Compensation for January 2019 losses
In what can only be called an interesting move the government pledged to compensate those who suffered losses in January 2019 when the government finally threw in the towel on the fallacy that we were using US dollars. Compensation is being arranged for those with amounts below US$1000 at the time though no further details were given on the rate of compensation. The President also said they were working on compensation for amounts up to US$100000. A noble move in principle but it will certainly throw the cat amongst the pigeons.
Auction to pay within 14 days and only allot available cash
We have long known that the auction was allotting money they didn’t have. Evidenced by the growing waiting periods that organisations have suffered on the auction going as long as 3 months. The government pledged to pay within 14 days which is still a long wait for the money they supposedly have. They have also pledged to only allot available cash. This may force the auction custodians to face the reality of the auction rate.
Interbank (1 April) to continue and to be unified with the auction-rate
The interbank rate, which is the rate that banks transact at with people for foreign currency and is distinct from the auction-rate will continue to operate. In a sensible move, the government seeks t unify the auction and interbank rates as they should be. Not too long ago, the government was chasing after businesses which used more than one exchange rate. Those trading on the interbank market also received a boost allowing them up to US$5000 per trade and US$10000 per week. As we expected when the interbank system was launched banks have bought more foreign currency than they have sold.
Retailers and wholesalers allowed a 10% premium on interbank
The interbank rate has been placed front and centre allowing retailers, wholesalers and other institutions to use it in their pricing. They have been allowed to place a 10% premium on this rate in their pricing. The interbank rate is currently around 280 Zimbabwean dollars for one US dollar. Which brings the “official” rate closer to the parallel market rate (around 400). This is reminiscent of the bond notes that were introduced as a proxy before the introduction of the new Zimbabwean dollar but perhaps we are seeing a pattern where there isn’t one.
Reserve money growth target to zero
The biggest and most important move herein is the adjustment of the reserve money growth target to zero percent quarterly. Yes, that is correct, the government has pledged not to grow money supply at all. The graph below shows the broad money supply and just how tough a task curtailing Reserve money growth to zero will be to implement based on the recent past. This is the measure Zimbabwe needs but no growth may prove a step too far.
Much was made of the preference for foreign currency in Zimbabwe and the following highlights from the statement can be identified
IMTT doubled on forex transfers
The Intermediated Money Transfer Tax (IMTT) will double on foreign currency transactions (4%)while remaining at 2% on Zimbabwean dollar transactions. The rise in local foreign currency remittance services and remittances is evident and they are going for a piece of the action. Is this enough to make Zimbabwean dollar transactions preferable? Probably not but it certainly will make transacting in cash preferable for foreign currency holders.
Forex withdrawal levy up from 5 cents to 2% for amounts over US$1000
The foreign currency withdrawals levy has been increased from a flat 5 cents per transaction to 2% per transaction for amounts over US$1000. This counteracts some of the effects of the doubling of the IMTT on foreign currency transfers. However, given the experience of Zimbabweans in the past withdrawing and holding your cash will still be more attractive.
Forex surrender now at the interbank rate
For exporters, a small measure of relief as foreign currency surrender will now be done at the interbank rate (currently 270) rather than the auction-rate (currently 160). While this still falls way short of the valuation at the dominant parallel market rate I guess exporters will take the little good news they can get.
No 3rd party country foreign payments
The President also said there will no longer be third party country foreign currency payments. Without going into further detail this has left us to believe that 3rd party country foreign payments mean payments routed through countries other than the countries of the parties involved in the transaction. This is clearly to address the possibility of foreign currency flowing out of the country through creative means.
No more bank lending
The second biggest and most important measure in this statement is the blocking of bank lending to both the government and the private sector. While lending to the private sector has often been blamed for speculative activity on the parallel market and stock exchange we know for sure that government debt has been on the increase. So curtailing government borrowing is a welcome measure that may bring some sanity. We await more detail from the RBZ to see how existing loans and lines of credit will be treated.
The ZSE also received some focus. It was inevitable after Campaigners such as Chris Mutsvangwa had much to say about the abuse of the ZSE by speculators. The big shock was an increment to Capital gains tax on the sale of ZSE shares held for less than 270 days to 40% from 2% (though the document says 20% which as far as we can tell is an error). This is meant to curb short term investment patterns that they claim have become prevalent on the ZSE. One cannot ignore the government simply following the activity to increase tax revenue though. The President also said an electronic monitoring system will be implemented to keep an eye on ZSE transactions. This leaves us wondering what they were doing all along? A full article on the effect and meaning of these measures will follow.
Opening up public transport but…
So the government decided to open up public transport but will not change any of the other rules in place in this regard. So this means we will likely still face some issues, particularly with the import ban on the usual 18 seaters with people only being allowed to import larger capacity vehicles. This is a welcome move after the transport situation had become untenable.
Everybody wants to know what comes next and the truth is nobody knows. Zimbabwe is the definition of a VUCA (Volatile, Uncertain, Complex and Ambiguous) environment. Even forecasts made based on these rules will be shaken up by more rules to follow if the past is anything to go by.