Analysis: Of economic hitmen, Damascene moment

BUSINESS REPORTER

President Emmerson Mnangagwa said Saturday there were economic hitmen behind the exchange rate depreciation as he went for broke with a raft of measures to rescue the local currency.

Business Times analyses the new measures to buttress the local currency.

It’s the lending stupid!

Mnangagwa directed banks to suspend lending to companies and the government. This suspension is until further notice to give room for investigations.

By their business, banks take deposits at a lower costs and give loans to customers at a higher cost to get interest income. Deposits are liabilities to a bank while a loan becomes an asset. How will banks survive if they keep piling up deposits (liabilities) without loans (assets)?

The directive comes at a time there were concerns that banks were fleecing customers through bank charges as they were now getting more income from the non-funded side of the business. Can’t lend and can’t get more from non-funded income without grumbles from authorities—the bane of Zimbabwe banking. The unintended consequence of such a move is that it will upset the sector which is the nerve centre of the economy.

A sweetener for exporters

Mnangagwa said the liquidation of the surrender portion of export proceeds will be settled at the willing buyer, willing seller exchange rate. Exporters have been clamouring for an increase in retention threshold with industry proposing to wholly retain export proceeds.

Government reaffirmed its commitment for exporters to pay more of their taxes in domestic currency. It said this is currently under review.

Shifting sands

Central bank chief John Mangudya said the auction allotment backlog would be cleared by end of March. Finance minister Mthuli Ncube said the backlog would be cleared by the end of April. President Mnangagwa said government was proceeding to provide available resources for the allotment backlog to be cleared by the end of this month.

At a meeting between government and business in October, Mangudya made a bold declaration: the central bank committed to deal with the funding backlog of foreign exchange allotments and take appropriate measures to ensure that the backlog does not recur. Talk is cheap hence the allotment backlog.

Mnangagwa directed the central bank to ensure that all foreign currency allotments are settled within 14 days post auction allotment and that the auction system only allots foreign currency that is available. Eureka, famed mathematician Archimedes would have said.

It’s a mystery why the central bank was selling the foreign currency which is not there.

ZSE: The new punching bag

When a hyena wants to devour its young one, it accuses it of smelling like a goat, so says an African proverb. Similarly, the government has come with lots of excuses whenever it wants to deal with the stock market.

Two years ago, the Old Mutual Implied Rate was blamed for the routing of the local currency and led to the halting of trading on the Zimbabwe Stock Exchange for more than two months.

This time, the government accuses the bourse of providing a platform for speculative short term buying and has put a 40% capital gains tax for shares held for a period of 270 days.

Capital gains tax will remain at 20% for long term investment beyond 270 days.

Not the be-all and end-all

There have been calls that the foreign currency auction system is not the accurate measure of the exchange rate as the gap between the official and parallel market widens.

Mnangagwa said the willing-buyer-willing-seller foreign exchange system will continue to be used as price discovery of the exchange rate and for the smooth operation of the auction system.

Over time, the auction rate and the interbank rate established through the willing-buyer-willing-seller will provide the basis for orderly unification of the exchange rate, Mnangagwa said.

Cash is Number 1 enemy 

Government reviewed the foreign currency withdrawal levy to 2% from 5 cents per transaction to discourage the withdrawal of cash. The import of this is that it discourages people from using formal channels and promotes the use of the National Mattress Bank which has zero charges.