10pc trading margin scrapped, outcry over impact

10 May, 2024 - 00:05 0 Views
10pc trading margin scrapped, outcry over impact Finance and Economic Development and Investment Promotion Deputy Minister David Mnangagwa

eBusiness Weekly

Business Writers

The decision by Government to scrap the 10 percent markup allowed on goods priced in foreign currency has been met with mixed reactions with some believing it will penalise businesses exploiting unofficial exchange rates while others criticized the policy and said it discourages businesses and hinders formalization of the informal economy.

Yesterday Government scrapped Statutory Instrument 118A of 2022, which provided for businesses to price their products at the official exchange rate plus a margin, as it has become irrelevant following the introduction of a new stable currency earlier last month.

The legislation, Exchange Control (Amendment of Schedule to Exchange Control Act) Notice, 2024, went through the parliament on Wednesday and was gazetted yesterday.

In terms of the new provisions, a natural or legal person shall be guilty of a civil infringement if he or she, being a seller of goods or services, offers such goods or services at an exchange rate above the prevailing average interbank foreign currency selling rate published by the Reserve Bank of Zimbabwe (RBZ).

“In the event of default in complying with sub-paragraph (12), the civil penalty shall provide for; (a) a combination of; (i) a fixed penalty of two hundred thousand ZiG or an amount equivalent to the value of the foreign currency charged for the goods or services in question (whichever is the greater amount),” reads an excerpt from the SI.

Further, violation of the law will also provide for a cumulative penalty over a period not exceeding ninety days of five per centum of the outstanding amount of the fixed penalty for each day (beginning on the day after the service of a civil penalty order) that the fixed penalty or any outstanding amount thereof remains unpaid by the defaulter.

Promulgated in 2022 under the Presidential Powers (Temporary Measures) (Amendment of Exchange Control Act) Regulations, SI 118A stipulated that traders must offer goods and services at a rate of no more than 10 percent above the prevailing interbank rate published by the RBZ.

The old legislation caused distortions in the pricing of goods in a multicurrency regime where prices tracked the open market exchange rate but the law required to follow the official rate.

The piece of legislation was introduced the height of exchange rate volatility, which resulted in businesses charging margins way above the official exchange rate as they chased the parallel market rate.

But the now prevailing stable Zimbabwe Gold (ZiG) exchange rate means a 10 percent margin becomes excessive profit and allows businesses to rip off customers.

Speaking at the BPL Africa Connect Business Summit held in collaboration with First Capital Bank Zimbabwe in Harare yesterday, Deputy Minister of Finance and Investment Promotion David Mnangagwa said said the Government saw it fit to scrap the law which was causing arbitrage in the market.

“On Wednesday I was in parliament pushing through an SI that could not just be done through Presidential Powers, it had to be adopted by Parliament and it will be gazetted today (yesterday) from tomorrow (today), all the supermarkets or grocery stores that were putting the 10 percent margin above the exchange rate will now be penalised for doing so.

“This was a bad SI, a bad law, a few weeks ago for businesses because it kept the capabilities on pricing, the whole of industry was mad angry about it, and at the ministry, we said let’s remove this.

“When the new structured currency came the same law became an avenue for profiteering, now that it has been repealed, the Government will be penalising those who offend, you find that some people will be unhappy but it is a bad policy,” said Deputy Minister Mnangagwa.

The scrapping of the 10 percent comes at a time Finance and Economic Development Minister Mthuli Ncube said all economic agents must use the official exchange rate when pricing their goods, despite the fact some of the businesses have to get forex at a higher cost on the open market due to shortages on the formal market.

The minister also stressed that since the exchange rate was market-determined, there was no basis for any economic agents to use any other rate “other than the prevailing average interbank foreign currency selling exchange rate”.

However, the scrapping of SI 118A has been met with mixed reactions.

Businessman Denford Mutashu said the SI is divorced from market reality and expectations of business, because the exchange rate that has been operating in the economy has been viewed as falling far short of the cost recovery expectations of business “and we are talking to a formal economy that has not been growing much and has been under-spending largely because of the policy environment”.

“We should actually come up with policies that will ensure sustainability and viability of the formal economy while attracting those in the informal economy to want to join the endorsement of formalisation.”

Mutashu argues that the new policy discourages informal businesses from formalising as they will not have the flexibility to price their products competitively.

He reasons that witnessing formal businesses struggle with new regulations deters informal businesses from joining the formal sector. Furthermore, the recent standardisation of a tax on transactions (IMTT) to 2 percent significantly increases business costs, accoding to Mutashu who is the President of Confederation of Zimbabwe Retailers.

These additional expenses ultimately translate to higher prices for consumers, further hindering economic activity, he said.

In Mutashu’s view, the combination of the new policy and the IMTT increase discourages businesses and weakens the formal economy.

However, economist Dr Prosper Chitambara said the scrapping of the 10 percent trading margin, and the associated penalties essentially penalises businesses that use unofficial exchange rates in terms of their pricing.

He,however said, there will be a need to ensure that businesses that require foreign exchange to import are able to access that foreign exchange from the banking sector.

Walter Mandeya, an analyst with Trigrams Investment said the need to stabilise the operating environment and provide a level playing field, “has necessitated the scrapping of the 10 percent margin of safety previously allowed for pricing by the retail sector”.

“But as with all things, government should be prepared for unintended consequences, especially if the supply of USD on the willing buyer willing seller model does not improve”, Mandeya said.

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