Source: Currency volatility not good for recovery plan – The Zimbabwe Independent November 30, 2018
THE 2019 National Budget presented by Finance minister Mthuli Ncube, though commendable for putting in place fiscal austerity and fiscal consolidation measures to contain the widening fiscal deficit, falls far short of addressing the elephant in the room: currency volatility and associated distortions.
By Kudzai Kuwaza
Ncube’s maiden budget statement, presented under the theme ‘‘Austerity for Prosperity”, introduced a number of cost- saving measures such as the cutting of salaries of senior government officials by 5%, the retirement of more than 2 000 youth officers and the reduction of foreign embassies.
It also cut agricultural subsidies and a stop to absorption of non-performing loans, among other things.
Although the cuts have been widely welcome, the measures are still seen as inadequate and largely skewed against ordinary Zimbabweans, particularly the duty paid on imported vehicles which have been branded a luxury when they are actually now a need. Top government officials’ vehicles are imported duty-free.
Zimbabweans have generally resorted to buying vehicles outside the country due to their affordability and far from being a luxury, the vehicles are being used for travel in a country which has a dysfunctional public transport system. They are also used for business. The taxes are over and above the 2% tax imposed by Ncube on electronic transactions on October 1, which has contributed to the chaos in the economy as evidenced by the increase in prices of basic commodities.
However, the failure by the Finance minister to address the currency volatility in the market has probably been the most damning aspect of the budget statement.
Ncube — who got his fingers scotched soon after taking up his new job when he attempted to officially re-dollarise the economy, demonitise bond notes and later bring back the defunct local currency — did not address issue. He took a cautious approach which is likely to leave the thriving parallel market booming as arbitrage opportunities remain and expand.
Ncube said this week he left currency reform untouched because he wants to first fix macro-economic fundamentals and critical issues like the fiscal deficit and current account deficit, money supply and inflation through austerity measures and fiscal consolidation before tackling currency reforms.
“We only need to do currency reforms when (economic) fundamentals are strong. This means the budget deficit should be under control, current account deficit is uncer control, inflation is under control, and so forth,” Ncube said. “So this is the roadmap.”
However, Ncube’s remarks in the budget that the US dollar remains at 1:1 to RTGS and bond notes despite announcing measures that are contrary to that notion could have devastating repercussions for not only business, but also for the economy at large.
Ncube announced that duty on vehicles imported will only be accepted in foreign currency despite maintaining that the country is operating in a multi-currency regime which allows various forms of currency, including bond notes and RTGS, to be used as methods of payment.
The rejection of other forms of currency for duty payment by government, particularly in RTGS and bond notes, exposes the policy contradiction by government. The contradiction has been seen as a tacit admission by government that the local forms of currency, which the RTGS and bond notes are, do have the same value as the US dollar.
The unavailability of the US dollar, which has rapidly disappeared since the introduction of bond notes in 2016, has been worsened with government criminalising the buying of the greenback on the alternative market. Anyone caught trading the greenback on the black market will be jailed for an effective 10 years. This has effectively ensured that ordinary Zimbabweans have no access to foreign currency, but are required to pay duty and tax for goods imported into the country in that same forex.
The disparity could worsen arbitrage and create serious social upheaval. Already, workers including civil servants have begun demanding payment in foreign currency, at a time there is an acute shortage of forex in the country.
The budget’s failure to address the currency distortion in the market will have a seriously adverse impact on workers in the country, according to Zimbabwe Congress of Trade Unions (ZCTU) president Peter Mutasa.
“The budget fell short of what the ordinary man and business were expecting in terms of clarity on the currency issue,” Mutasa said. “The failure to address distortions is going to create winners and losers and the majority of the workers and the poor are going to be the losers. The US dollar is now being used as the unit of account but workers do not earn in US dollars.”
In an interview last week, Emcoz senior vice-president and banking executive Israel Murefu said the pronouncement of payment in duty is further acknowledgement by government that the US Dollar is not at par with RTGS and bond notes.
“Currency volatility is posing a threat to the local currency as a store of value,” Murefu said. “The separation of RTGS and nostro is clearly an acceptance that the currencies are not the same and this has been further been buttressed by government insisting that some taxes be paid in forex. If the currencies were the same, government should accept either currency for any transaction attracting tax or duty.”
Business consultant Simon Kayereka said the maintenance of the fallacy that the RTGS and bond notes are at par will have serious consequences on the economy.
“There is blind pretence and unwillingness to confront the reality that the bond note is not a currency and must be phased out,” Kayereka said.