Unpacking the latest economic reforms

Persistence Gwanyanya
Faced with a deteriorating monetary situation occasioned by excessive money growth, the Reserve Bank of Zimbabwe, in its recent Monetary Policy Statement, made interventions to right-size the economy and strengthen the multiple currency system.

Whilst it is widely acknowledged that the ideal situation is for Zimbabwe reintroduce a sovereign currency, we are not yet ready for that, which could be why the RBZ is advocating for strengthening of the multiple currency regime.

Logic behind FCAs

This has necessitated separation of bank accounts into Real Time Gross Settlement System (RTFS) and nostro foreign currency accounts (FCAs) effective October 15, 2018 to protect foreign currency earners, Diaspora remittances, free funds, export retention proceeds and loan proceeds by ring-fencing them.

The FCAs simply indicate that Zimbabwe is still officially dollarised and is using other countries’ currencies.

Thus, it’s logical for the liabilities contracted before the effective date of this measure to be settled in local RTGS, which removes local creditors’ fears of loss due to exchange rate risk.

The maintenance of an exchange rate of 1:1 between the two accounts could be seen as a soft landing strategy to manage public reaction and, overtime, the exchange rate peg could be abandoned to reflect the shortages of foreign currency in an import-dependent Zimbabwe.

This is how the economy will right-size over time.

It will become increasingly difficult to access foreign currency at the set rate, meaning that we shall see increased pressure on the demand for foreign currency.

This means that some companies will likely still resort to the black market in search of foreign currency, thus presenting a high inflation risk.

Forex retention

To cushion the general public from this potential inflation, the RBZ has maintained the foreign currency retention scheme for major foreign currency-earners to meet the nation’s requirements for necessities.

The RBZ has reviewed foreign currency retention on gold, platinum, diamonds, chrome, tobacco and cotton — which earn more than 85 percent of Zimbabwe’s foreign currency — to 30 percent for gold; 35 percent for platinum, diamonds and chrome; and 20 percent for tobacco and cotton.

This is meant to benefit the rest of us who do not earn foreign currency by ensuring there are still resources to import necessities like fuel, electricity and medicine.

However, all other exporters can now retain 100 percent of their foreign currency to meet their import requirements, which incentivises them to export more.

Money transfer taxes

Finance and Economic Development Minister Professor Mthuli Ncube reviewed the Intermediated Money Transfer Tax from 5c per transaction to 2c per dollar, effective October 1, 2018 in a move that was not well received by the public.

The idea of a proportionate tax system in a highly informalised economy is welcome as it allows Government to effectively expand its tentacles in the informal sector and increase revenue inflows.

However, this presents an extra burden on the formally employed. It is thus advisable for the Minister to review the other tax heads such as Pay As You Earn and income tax that affect those in the formal economy to lessen their burden.

It also negates the efforts to increase savings as these charges far much higher than the interest of five percent on the savings bond.

One would be tempted to think that this is a temporary measure to discourage the black market for currencies as well as a deliberate attempt to right-size the private sector.

However, the new tax has since been tweaked to address the concerns of the market.

Right-sizing Government

Zimbabwe’s currency instability can be traced to artificial money creation by Government.

Since 2013, Government borrowing through Treasury Bills and overdrafts has surged 67 percent from 10 percent.

Domestic debt has grown from $276 million in 2012 to US$9,5 billion.

As at August 31, 2018, TBs had grown to US$7,6 billion from US$2,1 billion in 2016 and the overdraft on the RBZ was $2,3 billion against a statutory limit of $676 million calculated at 20 percent of the previous year’s revenue.

The total national debt at $16,9 billion has also breached the statutory limit of 70 percent of GDP.

This is why measures to right-size the economy have become important, calling for commitment by Government to implement the austerity measures.

A cocktail of credible austerity measures intended to reduce the fiscal deficit form 14 percent of GDP to 3 percent in the previous budget were not implemented.

No economic stability can be achieved in the absence of political will to implement austerity measures.

Happily, President Emmerson Mnangagwa is addressing this by giving Prof Ncube the assurance that he will provide the much-needed political will.

Economic right-sizing has been extended to the private sector to deal with excess liquidity there.

As in any normal economy, the RBZ has imposed a Statutory Reserve Requirement of five percent on RTGS balances to mop up liquidity as a way of stabilising currency.

Sustainable recovery

The only way Zimbabwe can achieve sustainable recovery is through economic rebalancing.

This imperative will take the form of reducing consumption of mainly imports whilst concurrently increasing production of mainly exports.

The monetary policy has sought to do the first of reducing consumption at mainly Government level through reduction of TB issuance, and if need be, by ensuring that TBS are traded through the auction system for transparency and price efficiency as well as reducing overdraft on RBZ to the statutory limit of 20 percent of previous year’s revenue.

Being a commodity-dependent economy, Zimbabwe should seek to unlock more revenue from its commodities mainly gold and tobacco which are seen as quick wins to earn significant amount of foreign currency will be used to diversify the economy by supporting mainly the manufacturing sector, which is important is important to address her jobless and deindustrialisation problems.

The RBZ contends that with proper financing there is huge potential to increase our gold production to 100 tonnes a year from the current 30 tonnes to earn an estimated amount of US$4 billion, which is equivalent to our national budget.

The same applies to our tobacco, which has potential to generate about $1,5 billion a year.

Suffice to mention that solving the country’s socio-economic challenges is a two-way street and as such the demand management policies announced by the Government should be supported by the supply-side policies, which include sound industrial and agriculture policies.

 

Persistence Gwanyanya is an economic and financial expert. He is also a founder of Percycon Global Fund Managers and Percycon Advisory Services

 

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