‘Act on budget measures to anchor rate, inflation’

Zimbabwe needs effective implementation of measures proposed in the 2024 mid-term budget review statement to anchor durable stability in the exchange rate and inflation, according to the Confederation of Zimbabwe Industries (CZI).

Limited access to foreign currency on the interbank market, CZI also noted, poses serious challenges for the wider acceptance of the Zimbabwe Gold (ZiG), the new currency introduced just over four months ago.

The country’s most influential business lobby, said in its latest economic update that while the country had seen stable inflation and exchange rate since the introduction of ZiG in April, inflation prospects remained elevated in the outlook.

CZI also noted that despite the prevailing stability, the economy remained largely dollarised.

Since the introduction of the new currency (ZiG), prices have relatively declined in ZiG, as reflected by inflation.

The ZiG month-on-month inflation slightly declined into negative territory for the second time since the inception of the structured currency in April 2024. Month-on-month inflation decreased to -0,1 percent in July 2024 from 0,0 percent in June 2024, shedding 0.1 percentage points.

In his 2024 mid-term budget presentation on July 25, 2024, Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube, announced some policy measures to strengthen the demand for the local currency.

The US dollar year-on-year inflation for July declined to 3,6 percent, shedding 0.2 percentage points from the rate of 3.8 percent in June 2024. However, the positive inflation rate means that US dollar prices in July 2024 were still higher compared to the same period in 2023.

Among the key policy decisions to promote the use of ZiG was the requirement that corporates whose revenue exceeds 50 percent in foreign currency pay their corporate tax on a 50:50 basis. Companies that have their revenue exceeding 50 percent in local currency can pay their corporate tax proportionally in the currency of trade.

“This is expected to see firms trading in USD seeking to liquidate some USD to meet tax obligations in September 2024,” CZI said.

The minister also proposed that all presumptive taxes be paid in local currency, regardless of currency of trade.

CZI said this implied that the largely cash-based small-scale businesses might either be forced to accept ZiG or would need to sell US dollars to get ZiG for payment of their tax obligations.

Further, the Treasury chief said customs duty would now be paid in local currency on selected finished goods used as inputs in production in specified industries, for example; fresh cheese, waffles and wafers and orange juice among others.

CZI noted that this meant that the need for US dollars to import the products would also need to be matched by the demand for ZiG for payment of customs duty.

“If the measures are fully implemented, the demand for ZiG will increase, which might see the willing buyer willing seller platform becoming characterised by other willing sellers besides the government.

“This would be a critical step towards a market-determined exchange rate,” CZI said.

In the previous two months (June and July 2024), CZI said, the ZiG has been showing signs of depreciation at the formal platform. However, at the parallel market, the depreciation has even been wider, hence the parallel market premium is now high.

“A huge parallel market premium does not only impose inflationary pressure in ZiG but in USD as firms would also need to adjust USD prices upwards to be deemed compliant by the Financial Intelligence Unit of the RBZ.

“Thus, inflationary pressures remain elevated in the outlook, unless the pipeline demand is eliminated,” CZI said.

The industrial lobby group said some companies were still struggling to obtain foreign exchange on the official market, a development CZI said could undermine the acceptability and wide use of ZiG.

However, last month the RBZ announced that there had been a build-up in pipeline demand for foreign currency at banks, thus putting undue pressure on the foreign exchange market.

In response to that, the apex bank injected US$50 million into the interbank foreign exchange market guided by the obtaining pipeline demand at banks as at that time.

“This shows that despite the stability of ZiG, there is excess demand for USD, which should have resulted in a significant depreciation of ZiG where the exchange rate truly market determined.”

“The existence of pipeline demand generally cements the need for measures to increase demand for ZiG so that holders of the USD could become willing to sell in exchange for ZiG,” CZI said.

Mthuli said the demand and use of the domestic currency by the Government, and the general public was “being enhanced by prescribing the payment of some taxes exclusively in local currency, including payment for Government services”.

Economist, Professor Gift Mugano, said while it was commendable that the Government had taken measures to promote the new domestic currency, the interventions remained insufficient.

“I want to argue that probably he has not done much in terms of extending the effective use of ZiG. If I was the Minister of Finance, I would say all taxes coming to me, I want them in ZiG.

“Clearly because I should be proud of my money, but I guess he is inside and he knows his books and how they are balancing in terms of availability of liquidity; it is a good move,” he said.

Prof Mugano said the challenge though was limited liquidity, a result of the central bank’s tight monetary policy to anchor stability following prolonged periods of volatility and high inflation.

He, however, said improving liquidity to match demand would create challenges like driving inflation or exchange rate volatility up to a point where this becomes excess to demand.

Prof Mugano said measures to promote the use and attractiveness of ZiG required comprehensive measures that ensure that the domestic currency is well supported and widely used.

He said various economic ministries in Zimbabwe needed to work driving production.

“The best way to defend a currency is to power it through production. That’s why you see that the American dollar is the most competitive currency in the world because America is highly productive.

Competitiveness is identical to productivity. Productivity is synonymous with production; if you are a productive economy, your currency also becomes strong,” he said.

Prof Mugano said a study he carried out indicated that Zimbabwe was importing up US$4 billion annually; products it could produce locally including crude cooking oil, fruits and vegetables, tissue and paper, cereals and soya beans, among others.

Zimbabwe loses millions worth of forex importing things it could produce given the abundance of skills, water bodies, quality soils and good climate to produce them.

“Imagine if those players in the value chain did not have to import soya and it was locally available, who would care about foreign currency,” he said.

“That’s why I argue that we need structural policies, which are very dynamic and disruptive. Disruptive in the sense that it must reduce the cost of how things are produced in Zimbabwe.

“We need industrial policy and various structural policy instruments. We need trade policy, we need agricultural policy, we need an energy master plan.

“When you look at the industrial policy alone; you need a local content policy, local content Act, local content regulations,” Prof Mugano said.

He noted initiatives by Buy Zimbabwe to promote the consumption of local products were inadequate since they were not supported by any legislation.

Such a law would stipulate incentives associated with certain levels of local content to be enjoyed by companies that meet them, which has worked well in South Africa.

“We need an indaba on production,” Prof Mugano said, stressing discussions around how to improve the economy in Zimbabwe currency centred on academic and non-practical solutions or strategies.

Prof Mugano also said Zimbabwe needed to promote formalisation of the informal sector to be able to effectively enforce policy measures and accountability by economic agents.

He said the current high level of informality would present challenges for authorities to enforce certain policy interventions proposed in the mid-term budget, given most informal sector players are of no fixed abode.-ebsinessweek