eBusiness Weekly
Economy Uncensored with Tapiwanashe Mangwiro
The country has experienced a lot of turbulence in terms of currency volatility and new laws and adjustments have come in order to find stability between the local currency and the greenback for the betterment of the economy.
In that regard, the economy has been boiling for the past three months with the local currency on a free fall on the parallel market much to the instability of prices in formal retail shops leading to a double digit blended inflation rise.
However, the Minister of Finance and Economic Development, Professor Mthuli Ncube, saw the need to bring in a raft of measures meant to stop what most have said for over 12 months and he ignored them.
So this week, we look at what they mean and how they are intended to work.
Buying 25 percent of export retention
Treasury announced that it will be buying the retention threshold from industry starting June 1, 2023 (yesterday) taking off the task from the Reserve Bank of Zimbabwe (RBZ), which had the role to fund the buying of retentions.
“Treasury will now fund the Zimbabwe Dollar component of the 25 percent foreign currency surrendered by exporters, in order to eliminate the creation of additional money supply. The foreign currency collected from the 25 percent that is surrendered, will now be collected by Treasury…,” the statement reads.
With this move, the authorities just acknowledged what my fellow economists and other analysts have said for over 12 months that the funding of retentions by RBZ were inflationary as they increased money supply.
This led to the central bank plucking figures from thin air and debiting them into exporters accounts as they took the 25 percent of foreign currency they had earned. Local currency plucked from thin air found its way into the market leading to demand for USDs as the auction was slow to pay and never adequate to fill market hunger as there was no cash to sell.
As a result, more money was created, the central bank needed money to fund the auction and borrowed US$10 million from Afreximbank to fund the initial auction, which added to an already ballooning debt for the central bank.
How will Treasury pull this out?
As with everything in the country, people have asked how the minister will manage to pull off this operation when the economy is 80 percent in dollar terms. However, the minister added more changes to his adjustments.
“Promotion of use of the domestic currency: All Government Agencies including Parastatals will substantially now collect their fees in local currency; Payments to ZESA by non-exporters will be made in the local currency; All Customs Duty to be payable in local currency, with the exception of designated or luxury goods. and where the importer opts to pay in foreign currency; Introduce a 1 percent tax on all foreign payments,” the statement reads.
Mthuli is banking his hopes on the promotion of use of the local currency as he has put an order that his agencies will collect their fees in local currency and customs duty which will get him to stock local currency on top of the VAT and PAYEE he collects.
This coupled by the $500 billion he has saved through the value for money strategy will be sufficient to purchase foreign currency which he will use to pay external debt assumed from the RBZ and feed some to the auction market.
All foreign payments now attract a tax which is also going to be used to fund debt repayments and fund the auction market, making sure the forex purse never runs dry.
Treasury seeks to use treasury bills to mop up some of the excess liquidity in the market as a way of balancing the equation and will use that money to purchase the 25 percent retention, making it a zero sum game.
Last kicks of a dying Auction
We seem to be finally seeing the death of the foreign currency market, which some believe is the cause for most of today’s problems as industry milked cheap forex offered to them at the expense of fiscus.
According to the Treasury, starting from next week, only US$5 million will be on offer and paid within 24 hours.
“The weekly auction will be limited to a maximum of US$5 million; As from June 1, 2023, winning bids at the auction will be paid within 24 hours of award,” the press statement added.
Thankfully, we are now witnessing a true Dutch auction in which we offer what we have and pay the amount promptly. However, bids have been on average at US$30 million meaning more local currency is in the public domain.
Foreign currency auction from next week simply is a price setter as the Treasury tries to eliminate the premium between the parallel and official market rate, and also tries to migrate the auction market to a proper interbank market pushing more trades to that platform.
To put it into practice, as of the last RBZ communique, the interbank market financed 3 percent of foreign payments in 2022, with the auction funding 24 percent and the rest coming from nostro accounts. The hope is to move the 24 percent and eat a sizeable chunk of the nostro payments.
It is now a matter of when will it close than will it close?
Adding to a real Dutch auction, there were pronouncements made that help industry such as the reduction of the IMTT from 2 percent to 1 percent as this encourages more flow of money in the system at a lesser cost than before.
Mandatory forex liquidation
All export proceeds that remain unutilised after 90 days will be liquidated onto the interbank market and some argue that this will cause reckless use of money, with some arguing that it will be a way of forcing companies to invest more in their operations.
However, my thought is that the minister is trying to give the interbank market relevance and oiling it, making everyone a participant and bringing more trades to the formal market.
Verdict
As much as the Treasury has opened its eyes and ears to the market, it seems a bit late and damage is already done.
They have done more harm to the local currency by trying to protect it, and should have let the market talk through the exchange rate as is normal.
All hope now lies in the confidence of the citizens in the monetary authorities and that no need for money printing will arise anytime soon so that we have a policy that will last for 12 months at least and not be chopped tomorrow.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn.
