Exchequer rejects the greenback!

As measures to stabilise the local currency continue to be explored, announced and implemented, it seems the authorities have finally taken the advice from most economic analysts to underwrite their own currency. This comes as the Ministry of Finance and Economic Development (MoFED) announced last Friday night that more tax liability will be settled in local currency, in what it called, “Promotion of the use of the local currency in the economy - payment of taxes in Zimbabwean dollar”.

The phrase underwriting own currency is borrowed from investment banking literature, whereby an underwritten offering is the one where the sponsoring broker commits and promises to purchase the securities in the event low appetite in the market to eliminate the risk of undersubscription. By the same token, economic analysts and commentators were calling the government to accept its local currency for payments of taxes and other payments to its agencies.

The Zimbabwean dollar which was officially reintroduced in February 2019, albeit having being around since late 2016 although in different forms, was now facing existential threat as a number of retailers and other economic agents were looking for clever ways of declining it as a form of payment. The highly volatile local currency has lost over seventy percent of its value in the months of May and June 2023 alone, as the monetary authorities moved to what they termed a market determined exchange.

Amongst many measures from both the Apex Banks and the Exchequer, these latest pronouncements of quarterly corporate taxes in local currency is opined by many analysts to be the last piece of the puzzle.?Corporate Income Tax in Zimbabwe is paid cumulatively in quarters and the deadline dates for these payments are called Quarterly Payment Dates and famously referred to as QPDs, and the QPD for the second quarter of 2023 was on Sunday 23 June.

Barely two days ahead of the QDP the Exchequer announced that for tax obligations in local currency, no entity will be allowed to pay their tax liability in the United States Dollar, and for those who have US-Dollar tax obligations, only half of that can be settled in the greenback with the remaining fifty per cent obligation required in the local Zimbabwean dollar. Supporters of this move are quick to explain how this move will instantly force corporates to look for the Zimdollar and in the best case expect it to reverse the currency depreciation we have been witnessing.

Treasury was also quick to warn these corporates against playing in the parallel market to secure local Zimbabwean dollars to offset these obligations. An alternative was proffered though, which is to contact their banks with their foreign currency and on their behalf the banks sell that foreign currency to the Reserve Bank of Zimbabwe.

Those who are circumspect and cautious about breaking the law also highlighted that these measures were against the Section 4A of the Finance Act which requires tax liabilities to be settled in the currency in which the transactions were concluded. The measures were also circulated initially via social media and corporates can only follow formal instructions not social media. Although a statutory instrument might thereafter follow, the income tax payment dates will be way past and the next ones will be after three months.

Assuming that the intended objective of the measures works and the taxes are paid in local currency, how will the Exchequer be able to fulfil some of her obligations which are denominated in US-dollar? Civil servants currently receive the bigger portion of their income in foreign currency as an allowance and we were told that government contractors are now paid the bigger portion of their payments in foreign currency. Corporate Income Tax is a significant source of Government revenue contributing just under 14% to the fiscus in the forth quarter of 2022 whilst its real growth was 10%.

Treasury recently took over the export retention exercise from the RBZ and perhaps it will use the foreign currency surrenders from exporters to fund its operations whilst financing them with taxes in the local currency. A war chest of US$400 million from the Afrexim Bank is also reported to be part of the arsenal that will help bring stability on the currency front and help bring the government programs to life.

As long as the proverbial “tap” remains closed, the plan has a chance to work as the government underwrites its own currency. Perhaps if the government’s appetite for its own currency continues the foreign currency retentions could be scrapped, something I opine exporters will welcome.?