ANALYSIS: Zimbabwean economy re-dollarizing rapidly
The recent public notice by the Zimbabwe Revenue Authority (ZIMRA) on the payment of domestic taxes in foreign currency is nothing short of a tacit admission by the government that de-dollarization has failed. The affected domestic taxes include Pay-As-You-Earn (PAYE), Value Added Tax (VAT), Corporate Tax, Capital Gains Tax (CGT) and Mining Royalties.
By Victor Bhoroma
The notice adds to the promulgated Statutory Instrument (SI) 252A of 2018 which provides for the payment of Customs and Excise Duty for selected goods in foreign currencies other than the local Zimbabwean Dollar. The list of the selected goods is quite extensive and includes motor vehicles, leather products, cigarettes and a host of agricultural products among others.
The notice by ZIMRA came in the same week that the Monetary Policy Committee (MPC) indexed minimum capital requirements for local banks in United States Dollars. It also follows the Supreme Court of Zimbabwe’s landmark ruling which declared that all debts incurred in United States dollars on or before 22 February 2019 are payable in the local currency at the rate of 1:1.
If the current Interbank rate is used, the ruling means that the taxman will now be paid less than US$261 million for tax arrears amounting to over US$4.5 billion as of December 2018. The ruling also means that the government will in effect pay about US$550 million for domestic debts that amounted to over US$9.5 billion in December 2018.
The court ruling clears any confusion that may arise with US Dollar debts that will be incurred in future and implicitly lays the foundation for efforts to re-dollarize the economy directly or indirectly via “Foreign Currency trading exemptions”.
Beyond the ZIMRA notice, the market was made to believe that SI 142 of 2019 which banned trading in foreign currency was the law. Under Section 2 of SI 142 of 2019, it is stated that the British pound, Euro, United States dollar, South African rand, Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe. The section further says, accordingly, the Zimbabwe dollar shall, with effect from the 24th June, 2019, be the sole legal tender in Zimbabwe in all transactions.
However the ZIMRA notice means that producers can now freely trade either in local currency, foreign currencies or both provided they pay the government in the currency of trading. The notice further provides the account numbers for onward tax remittances, implying that tax payers will simply need to deposit what is due to the taxman without any questions being asked.
Soon after the promulgation of SI 142 of 2019, the government made exemptions to local petroleum marketing companies, chrome miners, Non-Governmental Organizations (NGOs), embassies and multinational corporations operating locally to use foreign currencies for local transactions through their Foreign Currency Accounts (FCAs). The hospitality industry (Including fast food restaurants), the National Railways of Zimbabwe (NRZ) and mining sector later followed on the central bank exemptions list.
It is not the first time that foreign currency trading exemptions have been used in the local market. Back in September 2008, the Reserve Bank of Zimbabwe (RBZ) tacitly admitted to the damage caused by the hyperinflation (250 million percent in July 2008) by licensing various local producers in the market under the Foreign Currency Licensed Warehouses and Shops (FOLIWARS). The exemption initially applied to about 1000 shops but it later exempted almost all local manufacturers and telecommunications companies.
The market has accepted that the pharmaceutical producers and retailers can openly trade in foreign currency, just as much as it is done in Victoria Falls, Kariba, Bulawayo and Beitbridge. Sensing inflation inspired losses in using the Zimbabwean Dollar, the Small to Medium Enterprises (SMEs) and the informal sector began re-dollarizing as far back as August 2019 when inflation eclipsed 289%. With the influence wielded by the informal sector in the Zimbabwean economy, it was only a matter of time. It can however be argued that the US Dollar never left the local market despite spirited efforts by the government to criminalize its use through various legislations.
It is evident that the local market (Including the government itself) has no trust in the Zimbabwean Dollar and the economy is justifiably re-dollarizing in the face of hyperinflation and low confidence in government policies. The prices that prevail in the local market are simply US Dollar prices that are simply converted to local unit using the parallel market rate in order to evade persecution by law enforcement agents, otherwise the market is partially dollarized. These Zim Dollar prices change constantly with the movements on the parallel market, piling more pressure to local producers to adopt a currency which brings stability and certainty.
The rushed introduction of the Zimbabwean Dollar in June 2019, before addressing key macroeconomic fundamentals and instituting governance reforms has been nothing short of a disaster for the Zimbabwean economy. Erosion of incomes for labour and commerce have been complemented by billions of losses in US Dollar for pension funds and the Zimbabwe Stock Exchange (ZSE) market. The reality of stagflation has finally dawned on the government.
With inflation rate over 521%, economic contraction of over 6.5% in 2019 and unemployment rate of over 95%: Policy options are far and wide. Increasing money supply to boost economic growth will lead to spiraling inflation, income erosion and decline in aggregate demand while the partially implemented austerity reforms of 2019 meant decline in production in the absence of a stable currency.
Zimbabwe has walked the dollarization path before and the wave is now so powerful that government will find it difficult to ignore whilst it struggles to meet its mandate of providing public services to the citizens. The adoption of the US Dollar in 2009 left the central bank’s money printing machinery redundant but it stabilized the economy and tamed the scourge of hyperinflation (largely caused by excessive money printing to fund quasi-fiscal activities and budget deficits).
Dollarization allowed Zimbabwe to eliminate exchange rate risks, build real savings, boost lending rates, improve the investment climate, resume financial intermediation, reduce transaction costs in trade and retool production through accessing foreign lines of credit. The local currency has failed the above in less than 6 months.
The notice by ZIMRA may give the restive civil service a legitimate reason to ask for remuneration in foreign currency considering the tax collector also feels that payment of domestic taxes in a battered local currency does not equate to being paid in a stable foreign currency. Partial re-dollarization might be a soft admission strategy to allow the economy to gradually find its feet and avoid inevitable contraction in 2020. After all dollarization in 2008 was championed by the market with the government succumbing when it was inevitable.
In 2020, the market is leading the government as has been the case in countries that dollarized before Zimbabwe such as Cambodia, Venezuela, Argentina, Bolivia, Peru, El Salvador, Chile and Georgia. Dollarization may also be an easier pill to swallow temporarily than implementing economic, social and political reforms that are critical in bringing sustainable economic development.
These reforms include guarantees to property rights (Including finalizing land tenure issues), rule of law, good governance and political stability, curbing corruption, cutting runaway government expenditure by simply spending below tax revenues and improving the business climate locally. Despite the tacit admission, the market hopes that the government has got a plan to significantly increase local production, tackle sovereign debt issues, unlock investment through improving investor confidence and build foreign currency reserves in the event that re-dollarization carries the day in 2020.
Victor Bhoroma is a freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on firstname.lastname@example.org or follow him on Twitter @VictorBhoroma1.