- February 2, 2020
- Posted in LOCAL
When Zimbabwe dollarised in early 2009, it was a case of the Government formalising what was already in play.
It effectively “dollarised” the economy by allowing the United States (US) dollar and other foreign currencies to be used as legal tender in the country after hyperinflation had devastated the value of the local currency.
Recent developments are showing similar trends to events just before the economy dollarised; including extensive use of the US dollar in the informal sector, and for huge transactions outside the formal system. It is arguable that the single biggest reason that formal businesses are not using the US dollar is Statutory Instrument 142 of 2019.
SI-142 of 2019, which was promulgated last June effectively ended the long-standing multi currency system (or dollarisation) and determined the “Zimbabwe dollar” as the sole legal trading currency in the country. Last week, the Zimbabwe Revenue Authority (Zimra), having noted the continued use of the US dollar, said firms charging for goods and services and paying their employees in foreign currency, should remit taxes in similar currency.
“It has come to the attention of the commissioner general of the Zimbabwe Revenue Authority that some businesses are trading in both RTGS dollars and foreign currencies. Following this observation, Zimra has found it necessary to clarify that in accordance with section 4A of the Finance Act (Chapter,23:04) and section 38 of the Value Added Tax Act (Chapter, 23:12) these businesses should remit taxes in foreign currencies,” said Zimra in a notice.
“All employers who are paying remuneration in foreign currency should remit the employee’s tax in foreign currency.
If part of the remuneration is paid partly in foreign currency and partly in RTGS dollar, the employers shall apportion the employee’s tax accordingly and remit both the foreign currency and RTGS dollar to the commissioner on or before the due date.
“All specific assets sold in foreign currency shall pay CGT in foreign currency.
“With effect from January 1, 2020 all specified assets purported to have been disposed of in Zimbabwean dollars shall be deemed to have been sold in US dollar at the market value unless the seller provides documentary proof that the asset in question has been sold in Zimbabweans dollars.”
Effectively, this means that Zimra is now demanding as Pay As You Earn, Value Added Tax (VAT), Income Tax, Capital Gains Tax (CGT) and mining royalties in foreign currency from firms trading in such. It seems like an indictment of the de-dollarisation efforts that Government has been seeking to implement, which began with the removal of the 1:1 peg between the RTGS dollar and the US dollar last February.
Experts say a successful de-dollarisation strategy should comprise a comprehensive mix of structural reforms that address the macroeconomic environment to ensure a positive fiscal balance, positive current account balance and improvement on the global debt position.
In a research note dated October 2019, Imara Asset Management ‘predicted’ a relapse to use of the US dollar.
“We have been researching the whole concept of de-dollarisation. Fortunately, there is an IMF Working Paper authored by Kokenye, Ley and Veyrune dated August 2010 on the subject.
“For de-dollarisation to work they argue that a number of economic ingredients are essential and most are market-based as legislation on its own tends to fail. There should be a credible macroeconomic stabilisation policy that leads to low inflation, two-way exchange rate flexibility and a functioning foreign exchange market (Zimbabwe does not have these).
Second there should be Efficient Liquidity Management which leads to market-based interest rates (Zimbabwe does not allow this).
“Third there should be fiscal consolidation to stabilise inflation (Zimbabwe fails again). Fourth there should be Biased Taxation that allows the Zimbabwe dollar to be treated favourably vs foreign currencies (Zimbabwe fails this test too). Fifth the market needs instruments to hedge foreign exchange risk and inflation risk such as inflation linked bonds (Zimbabwe has none). Six, there should be Financial Liberalisation whereby banks can set their own interest rates to achieve real returns (Fails again),” explained Imara Asset Management CEO John Legat.
“Seven, all Government operations should be in local currency such as tax collection (Zimbabwe taxes in US dollar in certain sectors so fail). Eight the local payments system must be biased to the local currency but in Zimbabwe the lack of cash makes it easier to use US dollar cash. Nine, foreign exchange regulations should favour domestic users of foreign exchange but in Zimbabwe foreign medical expenses and foreign school fees are allowable for example.
“Bottom line, Zimbabwe fails on most requirements to de-dollarise and if anything continues to bias policy that favours dollarisation. Even then, we can find few cases in economic history where de-dollarisation has worked. In the few cases where it has, it has done so thanks to an internationally backed economic reform programme that prompted large capital inflows. Zimbabwe has no capital inflows and is unlikely to get them anytime soon. Our base case scenario, that determines our strategy going forwards, therefore remains the same; de-dollarisation will fail and dollarisation in some form is inevitable.”
In an earlier interview with Business Weekly, University of Zimbabwe (UZ) economics professor Dr Clever Mumbengegwi, hinted that the de-dollarisation effort was not complete as Zimbabweans were still ‘psychologically connected’ to the US dollar.
“The disconnect is where you have the US dollar being the store of value for most people, as well as being the anchor for prices yet on the consumption side wages and transactions being based on the Zimbabwe dollar.
“So there is a disconnect there, and the issue is the exchange rate, and as long as we have shortages of foreign currency it will be very difficult to connect the two,” he said.
When Zimbabwe “dollarised” around 2009, some experts claimed that the country’s monetary authorities missed a beat on full dollarisation — whose preconditions include permission from US monetary authorities as well as commitment by Zimbabwean authorities to non-reversal; in effect a forfeiture of monetary sovereignty — that is why the dollarisation phase was a struggle.
Is the country again struggling to cope with the consequences of half-baked monetary solutions?