What are the New Fiscal Measures and impacts to businesses?
The Ministry of finance, on Monday, announced additional measures to save the free falling local currency. Year to date the ZW has lost 65% on the auction market and 26% of that was lost all in 1 session last week on Tuesday. On the parallel market, the local unit has shed about 74% since the beginning of the year.
The parallel market is trading at a premium of 85% to the auction market and demand for foreign currency on the auction market has trebled in recent weeks touching an all time high of US$60 million against a year-to-date average weekly allocation of US$17 million. on the backdrop of the wide premium, businesses have adjusted their pricing in favour of the US$ and in instances where the pricing is in local currency, players have sought to recoup value by adjusting prices to near parallel market implied levels.
Before announcing the current measures, government has sought intervention through scrapping liquidation on local foreign currency transfers, lifting of restrictions on importation of basic goods and promotion of use of local currency by government agencies
| Measure | Commentary |
| Auction will be limited to US$5 million per week
Winning auction bids will be funded within 24 hours of award |
On the outset the measures introduced on Monday sought to upend the auction market, which was first introduced in February 2019 and later amended in June 2020 and again in May 2022. The managed Dutch auction system has been the mainstay of forex management and distribution in Zimbabwe since “de dollarisation”. Year to date the auction has dispensed an average of US$17 million a week, which is a decline from an average of US$31 million a week in 2022. Allotting a total of US$5 million via the auction effectively cuts off the auction market avenue as a significant determinant of the exchange rate in Zimbabwe. Even so as it diminishes the market’s position as the prime source of forex outside own Fx receipts by exporters. |
| Treasury will now fund the Zimdollar component of the 25% foreign currency surrendered by exporters, in order to eliminate the creation of additional money supply.
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In line with the review above, Ministry of Finance will become the custodian of surrender funds from exporters, a function previously managed by the RBZ. The shift is due to 2 key developments, first the near disbandment of the auction market highlighted above, which reduces the need of the RBZ to control surrender funds and leverage these in successive auction markets. with a limited allocation, a significant portion of the surrender funds will be now be free for allocation via the decentralised Banks controlled Interbank market. It is also key to note that Treasury highlights this as a key driver of liquidity creation by the RBZ, in the past. The RBZ was printing money to fund the auction. Instead Treasury will now take receipts from taxes paid in Zimdollar to settle the surrender funds. |
| Collected forex to be channeled towards extinguishing forex currency loans assumed by RBZ while banks will no longer keep surrendered forex. Treasury will settle all liabilities to the banks. | Of the surrender funds collected Treasury says it is committed to extinguishing external debt assumed from companies, by the RBZ, at the point of dedollarisation. This appears a noble gesture, but not one without adverse payoffs. There is presently a higher demand for forex, exporting forex through settlement of outstanding debts will grossly reduce forex funds readily available for purchase by individuals and importing companies. Typically, the surrender funds should, in the short term, while government speeds up sterilisation, be channelled towards the interbank and gradually repurposed as currency stabilises. The hope however from government’s perspective is that with a more liberalised exchange rate, companies are more willing to exchange their forex holdings outside of the surrender portion, via the interbank, thus covering up for rechanelled surrender supply channeled towards debt. This is logical to the extend that volatility cools off. In the interim, caution will have to be taken to avoid further currency depreciation. |
| Introduction of a 1% tax on all foreign transactions.
Maintain USD cash withdrawal tax at 2% |
The introduction of 1% tax on all foreign transactions is a measure meant to reduce appetite for foreign transactions. It stems forex outflows, especially on non-essentials. In essence it makes imports more expensive, even as it increases the cost of external funding. On the other hand, it increases tax due to government. With exports of almost US$8 billion, and an addition US$1 in other payments, a 1% will raise a substantial forex tax base for government, which would counter the impact of reduced forex revenue from cuts in excise duty among others. Maintaining 2% USD withdrawal tax, is again an effort to preserve hard currency in the system by penalising withdrawals. Most economic actors would prefer withdrawal to keeping balances with banks due to past nostalgias. |
| Reduce local Interbank foreign transactions IMT tax to 1%
Reduce the POS IMT tax in foreign currency to 1% |
The first measure has the same effect of encouraging the utilisation of banking systems as opposed to a cash economy, with regards to forex. It is now relatively cheaper and more economical to transact in forex via the banking system than in the past. With a reduced tax, players can now prefer to transfer USD as settlement without the burden of higher tax and liquidation. The measure to reduce POS IMT tax in foreign currency also buttress the initiative of forex preservation within the banking ecosystem. |
| All excise duty on fuel will now be paid for in foreign currency | Fuel in Zimbabwe is sold exclusively in forex and realigning the duty was long overdue. Charging the duty in local currency deprived government and benefitted fuel importers. outside of gullibility, this should not drive the price of fuel up, but rather reduce retail margins to normal levels. Fuel sector players should be able to absorb the cost and not push it to consumers. |
| All customs duty to be payable in local currency with the exception of select goods | This is a bold step, which falls in line with the promotion of the local currency. Zimbabwe imports goods and services to the tune of US$8 billion per annum and taxation on these imports has in the past been payable in forex. This is over a billion in forex. Payment of duty in local currency increases the demand for the Zimdollar and the assumption is that government will not lose income since the exchange rate will now be freely floating. In the past government did not want to lose income via excise duty out of the knowledge that the auction exchange rate was not freely floated and thus grossly overvalued the Zimdollar. |
| Export proceeds unutilised after 90 days will be liquidated onto the interbank market | If the market becomes more liberal achieving a liberalised exchange rate, general liquidation ceases to be concern to exporters. This leads us to a point not covered, which is to say is the dumping of the auction market good enough to suppose a liberalised exchange rate. At present, the interbank market has caps in terms of transactable amount per individual or company. The market also still has circuit breakers which disallows it to move beyond certain margin per session against the auction. To date the market has been driving very insignificant values due to those restrictions. This means in its present form the interbank market is incapable of stabilising the exchange rate. We expect the RBZ to immediately present the new rules guiding the interbank bank following the Treasury’s pronouncements on Monday. |
| Introduction of VAT on exports of basic goods and other commodities, refundable by ZIMRA on export | There has been reports of Fraud and the Treasury has seen it fit to standardize export by charging 15%. |
| Government will further sterilise excess liquidity through issuance of TBs and RBZ’s tightening monetary policy tools
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Above all the measures, government need to close the liquidity tap and curtail money supply growth. The liquidity menacing the market is not only as a result of auction market funding. RBZ has been issuing currency for various ends and this will need to stop. This is the archilles heels for the government. The Zimdollar will only survive if discipline in fiscal management is adopted. Every other stabilisation measure only works to some extend limited by the levels of new money creation. In any case the growth in local liquidity should not outpace that of foreign currency, as a disequilibrium will depreciate the local currency’s value. |
