Wrong buttons were pressed during the central bank’s initial efforts to map out a defence plan for Zimbabwe Gold (ZiG), triggering an explosion of setbacks that have pushed the economy deeper into peril, according to a new report by the manufacturing industry.
Authorities scrambled to introduce the gold-backed ZiG in April, as they battled protracted carnage after bond notes chipped away over three quarters of value during a first quarter marked by high inflation and instability.
Bond notes had been in circulation for about a decade.
Reserve Bank of Zimbabwe (RBZ) governor John Mushayavanhu told the Zimbabwe Independent this week he was exploring new ways of boosting demand for the currency.
Mushayavanhu had agreed with government to compel companies to pay 50% of corporate tax in ZiG, with the remainder in foreign currency.
In theory, policymakers predicted the strategy would fire up appetite for ZiG - indexed transactions and place the currency on a firm footing.
However, upheavals in the past few weeks — which forced authorities to devalue ZiG by 43% last Friday — exposed weak points in the central bank’s plans.
A Confederation of Zimbabwe Industries (CZI) 12-page analysis of currency dynamics obtained by the Independent showed the industrial lobby had argued weeks before the bloodbath that companies were reporting losses, making it difficult for corporate tax to kindle demand for ZiG, which has been rejected across markets.
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CZI argued that a viable option would be zeroing in on a vibrant tax head like Pay as You Earn (PAYE), as it queried why policymakers had glossed over ramifications of a rioting black market.
The report had hinted that the ZiG defence strategy had been built on shaky ground.
“Corporate tax is currently the worst performing tax head in terms of overall tax contribution,” said CZI’s report, which is titled ‘Inflation and Currency Developments Update and Review of the Mid - Term Monetary Policy Statement’.
“Thus, selecting such a tax head as the basis for demand for ZiG is bound to have very little traction. Government needs to be bold enough and select a performing tax head, such as PAYE as the basis for the requirement to pay 50% in local currency. It is not expected that the inflationary pressures will (taper) within the short term unless these measures aimed at creating demand for local currency are enhanced beyond the current QPDs (quarterly payments dates) as most businesses are in loss positions and hence remain unaffected,” CZI argued.
Zimbabwe Revenue Authority (Zimra) data for the first half showed corporate tax struggled, missing targets by 14%.
Zimra attributed the sluggish performance to competition from an informal sector that is estimated to be controlling 72% on the economy.
“While the requirement to pay QPDs in local currency was a positive step, for most firms the ZiG that they get from the surrender requirements is more than enough to settle their QPDs as profitability has significantly shrunk as businesses try to remain competitive. The depreciating ZiG on the parallel market has a risk of causing long lasting inflationary pressures, unless it is controlled. Controlling the parallel market exchange rate can be achieved by enhancing access to foreign currency by a wider market. However, given that currently there is not enough foreign currency for every possible importer, there is need for policies to continue to prioritise demand for the local currency,” CZI added.
The black market exchange rate depreciated by 17% between July and August, according to CZI.
ZiG has struggled to hold ground against a brutal black market, where it has recently traded at premiums of up to 100%.
The currency has been confronted with rejection from retailers, fuel service stations, tuckshops, and public service institutions including schools.
In the past few weeks, economists have warned of potentially dire consequences of price hikes and currency volatilities on an economy that has slashed 2024 growth targets three times – as ZiG crumbles.
In November, the Ministry of Finance forecast gross domestic product (GDP) to rise by 5,3%, before downgrading to 3,2% this July.
But in a monetary policy statement released on August 30, the RBZ slashed GDP growth to 2%.
ZiG has also surrendered value on the formal markets, sliding from US$1: ZiG13,56 on introduction to about US$1: ZiG13,95 currently.
But it has plummeted by wider margins on the black market from about US$1:ZiG16 at launch to about US$1:ZiG40 this week.
In a potentially dreadful repeat of history and tragedy, a leading economist warned last week that Zimbabwe was trudging back to 2008, when 500 billion percent hyperinflation forced the country to ditch its currency in favour of dollarisation.
Fundamentals behind the slide remain a subject of speculation.
But the downward spiral is expected to have far-reaching consequences on millions.
“The parallel market premium should be among the critical variables which the RBZ should be seeking to contain,” CZI said.
“The widening parallel market premium was not acknowledged (in the August 30 monetary policy) as a problem, even though it has a key role in destabilising prices and, hence creating inflationary effects. As already mentioned, the premise that the exchange rate is stable could be the undoing of the monetary policy, as the parallel market exchange rate has a role in influencing market behaviour. Currently, the market has rejected the official exchange rate as market driven hence the parallel market is again considered as the market rate and already used in service and product pricing. The adjustment of US dollar prices in formal retail shops to very high levels compared to the informal sector is an indication that the exchange rate - induced distortions are already fully at play.”
“The RBZ should prioritise achieving alignment between parallel and official exchange rates by allowing banks the flexibility to set exchange rates based on the price expectations of willing sellers. The RBZ can intervene strategically to maintain market stability and orderly trading conditions,” CZI argued.
In his response to the Independent, Mushayavanhu said some of the factors undermining ZiG included the decision by some markets to avoid “the local currency, thus undermining its stability and the de[1]dollarisation process”.
“As such, the creation of the demand for the local currency is critical to entrenching its stability.
“The Reserve Bank of Zimbabwe considers the mandatory requirement for payment of 50% of the QPDs as important for creating a super demand for the domestic currency,” he said.
“This implies that businesses trading exclusively in US dollars will need to sell part of their foreign currency on the interbank market for foreign exchange to get the equivalent local currency for tax. Moreover, this measure encourages businesses to accept the local currency. In this regard, the Reserve Bank is appreciative and fully supportive of the Government’s provisions in the recently gazetted Finance Act which provides for mandatory payments of corporate taxes and some government services in local currency. Nevertheless, engagement with the Ministry of Finance, Economic Development and Investment Promotion continues and new ways to expand ZiG demand and usage are being explored on a continuing basis,” he added.
