The Zimbabwean economy is a soap opera that has many twists and turns. The latest addition to this action-packed story is PRESS STATEMENT 29052023, which comes a mere 4 weeks after the last set of measures to manage the monetary mayhem. After taking to social media to fight the US dollar dominance on the streets, the Finance Minister returned to his ivory tower to try a top-down approach.
To put it mildly, things haven’t gone to plan for the Finance Minister. The Zimbabwean dollar has drastically depreciated on official and parallel markets since the last set of measures was released. Meanwhile, the preferred Blended CPI inflation, which weighs most of the CPI basket in US dollars, also gave a huge thumbs down to the measures as it has returned to highs synonymous with the Zimbabwean dollar CPI basket.
Highlights
We cannot say for sure if more measures were needed, but more measures are what we got. Here are the highlights of the latest round of measures.
Treasury to buy surrendered foreign currency
This is an interesting measure. The Treasury (Ministry of Finance) will now effectively buy the foreign currency surrendered compulsorily by exporters. This brings clarity to the previously announced switch. Theoretically, this will reduce money supply growth by taking the Reserve Bank of Zimbabwe out of quasi-fiscal activities.
Banks taken out of the foreign currency equation
It will take some time to see what this means, but banks have been removed from the surrender foreign currency equation. They will no longer hold any surrendered amounts. What impact this will have on the Willing Buyer Willing Seller Rate (remember that?) is unclear, but it would seem the banking system is being left out.
1% tax on foreign payments
We can all admire Finance Minister Professor Mthuli Ncube for always following the activity. Levying an additional 1% tax on foreign payments follows firmly in this manner. 1% is not large enough to be a deterrent but it looks more like wanting a piece of the action.
Gold traceability
The Minister proposed a gold traceability system in line with international standards. This is most likely due to the dark clouds that the Gold Mafia documentary cast over Zimbabwean gold. In fairness to the minister, this is international best practice.
Fuel excise duty is now paid in foreign currency
In a move that may end Zimbabwean dollar fuel, the minister proposed that excise duty on fuel be paid in foreign currency. This doesn’t outlaw Zimbabwean dollar fuel sales but strains the profitability of those selling in Zimbabwean dollars.
Foreign currency IMTT now 1%
Mthuli Ncube’s signature Intermediated Money Transfer Tax (IMTT) is featured again. This time with a reduction to 1% on foreign currency transactions. This is to encourage the flow of foreign currency already in the banking system.
Govt agencies will use ZWL
In what will almost certainly be a huge arbitrage opportunity, government departments will collect all fees in Zimbabwean dollars. It is not clear yet how far-reaching this will be. The goal is to create a greater demand for the Zimbabwean dollar, giving it some value on the market. However, the disparity with the dominant parallel market will create an arbitrage opportunity. This measure will go as far as customs duty and ZESA payments by non-exporters.
90 days use it or lose it
Businesses will have 90 days to use retained foreign currency before liquidating it into Zimbabwean dollars. We have discussed this move many times before.
Auction capped at US$5 million
The minister proposed capping the weekly foreign currency auction at US$5 million in an interesting move. This is interesting. In its short history, the auction system has had trouble paying allotted foreign currency on time. This may be due to offering more than is presently available. However, the last auction allotted around US$14 million (from bids worth around US$60 million). A closed system would create a greater demand for the available USD and push the rate further up. The rationale for the US$5 million is not given, but this may spell dark days ahead for the auction.
Auction to pay within 24 hours
In good news, the auction will now pay within 24 hours. This is welcome news to participants who have had to wait as long as 6 weeks to receive their foreign currency. However, when coupled with the fact that it will be limited to US$5 million, there may be storm clouds brewing.
VAT on basics for export
Traditionally VAT does not apply to export products. VAT also does not apply to basic goods. However, the Finance Minister will levy VAT on basic goods manufactured for export. Again this move looks more like wanting a piece of the action.
Treasury assuming foreign currency debts
The main event in this statement is the assumption of foreign debt by the treasury. To understand why this is a big deal, we must look at how things are currently done. The Reserve Bank handling government debt is problematic because it allows the bank to print money to finance debt, causing money supply growth. As we have discussed, money supply growth is the cause behind the Zimbabwean dollar decline.
Separating the functions of creating money supply and handling government obligations is (in theory) an answer to the existing problem. We will have to see how it works in practice.
A mixed bag of measures that follows less than a month after another mixed bag of measures. While the Minister has shown more openness regarding the problems being addressed, this is likely nowhere near enough to arrest the twin economic problems of inflation and currency depreciation.
