PHILLIMON MHLANGA/LIVINGSTONE MARUFU
Capital market players are pushing for Government to ringfence a portion of real time gross settlement (RTGS) balances to shield investors from unstable foreign currency movement in the parallel market.
Finance minister Mthuli Ncube is next week expected to deliver his maiden national budget statement amid expectations of currency and tax reforms.
Market players are also pushing for the scrapping of the current capital gains withholding tax (CGWT) on marketable securities, which it said was burdensome on investors.
In 2019 National Budget submission through the Securities and Exchange Commission of Zimbabwe seen by Business Times, the Minister is called on to control the supply of RTGS dollars in the system.
SECZ said government should convert RTGS balances into a medium to long-term US Dollar bond of between five and 20 years. The bond should be tradable both locally and abroad.
“In order to curb parallel market activity and limit the devaluation of fixed income investments (including prescribed assets), there is need to control the supply of RTGS dollars in the system,” SECZ said. “It is proposed that the Government ring-fences a percentage of all the RTGS balances in circulation and convert them into a medium to long-term US Dollar bond of say five to 20 years, the bond should be tradable both locally and abroad. “Such a bond can mop up excess liquidity within the market that has been driving the sky-rocketing forex black market rates.
“Bond holders will be paid their interest and principal in US dollars at stipulated intervals, after an initial moratorium, as government gets its house in order. Zimbabwe wiped out close to a 100 years’ worth of savings during hyperinflation, and therefore we simply cannot afford to do it again, this time around. Ringfencing RTGS balances is a win/win solution whereby the Government can pay back what it borrowed from domestic depositors in an effort to rebuild confidence.
” The central bank has since ordered banks to ring-fence nostro foreign currency accounts to preserve value for money for the banking public and investors. This came after the apex bank received a loan from the Africa Export-Import Bank last month to back the bank balances.
“SECZ applauds government for the capital market related measures recently announced in both the Monetary and Fiscal Policy statement including the proposed introduction of an auction system as well as the ring-fencing of Nostro FCA accounts,” the capital regulator said.
“Foreign portfolio investors had for about two years been failing to repatriate their proceeds upon disposal due to foreign currency shortages, a development that had tainted investor confidence. Capital markets tend to operate and perform better in an open market environment.
On capital gains withholding tax (CGWT), SECZ said: “The current concept and practice of CGWT on marketable securities is burdensome on investors.
“It is also costly in the system to claim a refund if indeed a capital loss is realised. The current CGWT situation is more of a sales tax than a capital gain tax because even when the investor loses capital they are taxed one percent flat on selling. International investors at first glance view this situation as a tax on the gain but only to be taxed on losses as well hence it is a tax on sale.
“This distorts our market as the investor may feel misled and might deter market participation. The current CGWT of 1% on marketable securities just makes Zimbabwe’s capital market highly un-competitive relative to the region at a time when economies are competing for international capital flows,” SECZ added.
Economist Gift Mugano said the ring-fencing of both nostro accounts and Real Time Gross Settlement (RTGS) will help to preserve value for foreign currency earners and to boost market confidence.
“The measures are expected to strengthen the multi-currency system for financial and price stability and to increase inflows of foreign currency while buttressing government’s economic reforms started last year,” Mugano told Business Times.
“These measures will boost confidence and transparency in the foreign currency market and rein in inflation by mitigating rent seeking behaviour and mopping up excess liquidity within the economy.
“On nostro accounts more people are expected to bring in forex through diaspora remittances and investments as Zimbabwe is offering a seven percent interest rate through savings which is way better than many European banks including the London Bank which has an interest rate of one percent,” said Mugano.
He said the measures were necessary as a starting point towards right-sizing or re-balancing the economy.
