‘Liberalise forex auction system’

TINASHE MAKICHI / PHILLIMON MHLANGA


The Zimbabwe National Chamber of Commerce (ZNCC) is pushing for decentralisation of the foreign currency auction system to give room for individual banks to carry out the auctions as companies cannot wait for a week to procure the greenback to import raw materials.


The forex auction system was introduced last month to replace fixed exchange rate of 1:25.

The auction is held every Tuesday at the central bank.

To date four auctions have been held with the dollar trading at ZWL$68.88 this week from ZWL$65.80 last week.


In its submissions to the Ministry of Finance for consideration into the Mid Term Fiscal Policy Review, ZNCC argues that banks have better visibility and interaction with clients while also citing the need to increase frequency of the auction market given that the seven day period is too much in an environment where the exchange rate has been fluctuating on a daily basis.


Finance minister Mthuli Ncube presents the mid-term review policy today amid a worsening environment characterised by rising inflation, forex shortages and declining standards of living in an economy which is vying for a middle income status by 2030.


“There is a need to decentralise the auction system so that it can be done by individual banks rather than the central bank because banks have better visibility and interaction with clients. Auction should be on a daily basis,” ZNCC said.


According to the business lobby group, banks should be made accountable and results be published across the market which will also allow customers to evaluate their positions on an online or live system.


ZNCC argues that the auction system should be an exchange rate setting mechanism and not a forex allocation system while also proposing that there is need to ensure that the system works for Industry to access the much needed foreign currency.


Economic analyst Persistence Gwanyanya added that the MidTerm Fiscal Policy review must be anchored on stability measures centred on the functionality of the foreign currency auction system.


“We expect measures that will anchor stability and measures that are centred on functionality of the foreign currency auction system while also starting to fully and effectively identify the treasury’s role in the whole fiscal ecosystem.


“Going forward there is a need for discipline in money supply which I believe has not been well managed of late.

There has to be a balance because in the period of the Covid-19 pandemic there is also a need for monetary support of the economy hence my call for discipline going forward.

The Treasury needs to be a bit responsible and there should be a balance on the virtues of growth and stability,” Gwanyanya said.


ZNCC in its submissions lobbied the government that the existing mixed excise system applicable to cigarettes should be maintained being ad valorem (20%) plus a specific component.

The lobby group is of the opinion that the specific excise component should be increased to ZW$ 160 per mille from ZW$100 per mille with effect from August 2020, to take into account historical inflation.


An increase of the specific rate is regarded as reasonable in that it takes into account the inflation gap which was created during the course of the year.

The effective excise rate implemented in December 2019 adjusted for inflation for the month of August will be ZW$467, compared to the effective excise rate of ZW$461.


ZNCC argues that if the government is to increase excise as proposed, it is estimated that government revenues from the industry will close at an estimated ZWL$355m in the year 2020, which constitutes an increase of 458% compared to total excise collections for 2019.


“We propose that the existing mixed excise system applicable to cigarettes be maintained being ad valorem (20%) plus a specific component.

We further propose that the specific excise component be increased from ZW$100 per mille to ZW$ 160 per mille with effect from August 2020, to take into account the historical inflation,” ZNCC said.


ZNCC said legislative certainty and predictability is essential for industry players to properly organise their affairs in order to achieve sustainability and meaningful growth.

In this case revising an entire excise structure less than 12 months after its introduction goes against the principles of certainty and predictability.


“The current cigarette excise structure provides a reasonable balance between the preservation of government excise revenues and the sustainability of the industry in the context of a devastating hyperinflationary environment.”


The business lobby group said there must be serious monitoring mechanisms on subsidies that have been put in place because they have become a potential source of reserve money growth as well as acting as a catalyst for corruption especially by the elites .

“The move to cater for vulnerable groups through targeted subsidies at production level, in particular for basic commodities is a positive development in social protection, however this has to be seasonal –that is when shortages arise,” ZNCC said.


Given the impact of Covid-19, ZNCC noted that there is need to put a cap on government support towards State Owned Enterprises (SOEs) and should be clear on which SOEs will be supported post covid-19.


ZNCC proposed that Institutions should be structured in a manner that prevents rent-seeking behaviour for example regulatory authorities reporting to line Ministries.


“We recommend that they be put under OPC, for transparency and efficiencies and we need strong institutions –not strong individuals.”


Government is in the process of implementing a comprehensive programme to reform state enterprises and parastatals, to address weak governance and other operational and capitalisation related challenges.


The review is timely amid growing resentment within the public and private sectors amid concerns that the government was doing little to mend the faltering economy.


The public anger is driven by the rising cost of living in recent months.


Revenues are affected by lower growth this year and tax revenue shortfalls.


On the other hand, expenditures are on the rise driven by the government’s COVID-19 stimulus package and the ballooning wage bill for the public service.


Higher debt burden and lower revenues result in a jump of debt service costs and government workers’ salaries adjustments.


The revisions will be in line with market expectations but the big conundrum on how Zimbabwe will deal with uncontrolled debt spiral remains and the international financial institutions and the Paris Club which rejected Ncube’s pleas for bailouts.

The substantial funding needs for this year will result in larger domestic borrowing needs.


In the future, debt sustainability will remain a serious concern.


Fears mount the country’s budget deficit is likely to worsen as revenue collections are likely to underperform.

High government borrowings are likely to pose financial risks.


Economists said the budget will only be effective if backed by real
financial resources such as the United States dollars and sound economic
policies.


The country’s capacity to meet budgetary obligations hinges on its ability to secure foreign funding given the current liquidity crunch locally.


They said Ncube should address issues of employment as the unemployment rate is estimated above 90%, the current account deficit as well as bringing clarity to the use of local currency and also deal with the unstable exchange rate.


They also said there was little economic activity, and Ncube would be tempted to increase tax, thereby stifling industry further.


Currently, there are heightened investment security fears after President Emmerson Mnangagwa’s administration suspended trading of shares at the Zimbabwe Stock Exchange and fungible stocks, which were popular with investors, as part of efforts by the government to end the country’s economic crisis.


Analysts do see FDI flowing into the country soon.


Government recently suspended the transfer of shares in dual-listed shares in Old Mutual, PPC and SeedCo International for 12 months, saying there was manipulation of the exchange rate.


Old Mutual also has pockets of stocks trading on the London and Johannesburg stock exchanges while PPC and SeedCo stocks also trade on the Johannesburg and Botswana stock exchanges.


Until this move, investors who were unable to repatriate their earnings were buying Old Mutual, PPC or SeedCo stocks in Zimbabwe, using Zimbabwe dollars and then selling them abroad for United States dollars.


Government is targeting Old Mutual in a bid to halt currency plunge. Last week, ZANU-PF this week said Old Mutual should delist on ZSE and trade on a to-be introduced foreign currency bourse.


This was one way in which foreign investors could take their money out
of Zimbabwe, given the forex crisis.


This means, Ncube should come up with policies that are required to Stimulate investor confidence, foreign investment inflows and employment creation.


“That’s a nightmare. The direction of inflation influences the volatility the economy is experiencing. The local dollar has lost meaning, “economist Moses Chindu told Business Times.


“To deal with these variances which is going to be his biggest nightmare, I would expect the Finance minister to put his numbers in US dollars to make it a real financial plan and use the figures in Zimbabwe dollars as mirror account, given that government has allowed the use of the United States dollars in local transactions, otherwise he will lose respect.


“Yes, we expect some bit of stability due to the auction system but the market is resisting. It’s worrying because companies and individuals are still following the parallel rate.”

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