Honeymoon short-lived: The Visible Hand allegedly Choked the Bride!

The Victoria Falls Stock Exchange (VFEX) brought hope to many exporting companies, hoping that they could be able to squeeze every value possible from their exports. Its favourable export retention threshold had even prompted other entities to abandon their long-time relationship with the Zimbabwe Stock Exchange (ZSE) and start a new marriage on the VFEX.

Unfortunately, what issuers had envisioned is now somewhat different from the reality on the ground, at least for now. The Central Bank through its latest Monetary Policy Statement made some structural changes which got issuers re-examining the benefits of their decision to migrate to the US-dollar-denominated exchange.

Rewind, when bond notes were introduced back in 2016, they were termed an ‘export incentive’. A 3% incentive to anyone who exports, to boost foreign currency receipts. To the extent that even those who received remittances enjoyed this incentive since technically they exported labour. Although technically bond notes eventually seized to exist in our monetary system, they paved way for local currency.

Fast forward, the local currency is now an import incentive i.e. through the auction system and an export disincentive through these retentions. OK, let us break it down. If you are an importer in Zimbabwe and you have local currency, you can be incentivised to conduct your importing business by applying for foreign currency through the foreign currency system at a rate that is not equivalent to the alternative rate. Over US$ 3.7 billion has so far been extended to importers in various sectors of the economy. At the same time, an exporter is disincentivised by having to liquidate a certain percentage of her foreign currency at a rate that is not equivalent to the transactional rate.

ART Corporation, a manufacturing company and an exporter which is also listed on the ZSE highlighted in its third-quarter trading update that these unfavourable retentions threatened the viability of the exporting business. This is at a time when over three-quarters of transactions in Zimbabwe on average are now denominated in the foreign currency according to the national statistics agency.

Although the VFEX still offer value to both issuers and investors, it is important to remember that the incremental retention benefit could have contributed significantly to the decision to move. All the corporate listings on the VFEX were by introduction, with corporates migrating from the ZSE.

Padenga Holdings, which operates crocodile farms and is into gold production was the first company to be lured by the benefits of the VFEX which included 100% incremental export retention. The Botswana Stock Exchange, Seed Co International followed after the suspension together with Old Mutual and PPC on the ZSE. The nickel producer, Bindura Nickel Corporation, which is an exporter was also attracted by the proposition of the VFEX. This incentive is now suspended with a 75% standardised retention threshold, with ease of administration highlighted as the reason for suspension.

Although the word ‘suspension’ might signal that there could be a reversal of policy, the impact of the change in the meantime should need to be examined on a company-per-company basis. Whilst it is true that the policy is inconsistent and government intervention is detrimental to investor confidence, one then needs to compare the fifteen-percentage point increase in retention versus the twenty per cent incremental retention suspension.

It is worth noting that Zimbabwe had US$ 11.6 billion foreign currency receipts in 2022, with a 17% increment from 2021 numbers. Of that number, exports were US$ 7.42 billion, representing a 16.5% increment from the previous year’s numbers. Sectors like Gold, Tobacco and Tourism registered impressive growth rates in exports as well.

It is no surprise since small-scale gold producers, who contributed 24kgs of the 35kg total production were incentivised through the Gold Incentive Scheme put in place by Government in 2021. These small-scale producers registered a 30% growth in exports compared to the 19% registered by the primary exporters.

Furthermore, the tourism sector registered a 134% increment in its foreign currency receipts as it fully recovers from the lockdowns and travel bans, but more importantly, we should remember that this sector was enjoying a 100% retention threshold. A standardised 75% retention on exports and 85% retention on local sales in foreign currency, across all sectors of the economy will imply that the honeymoon period for this industry will be short-lived.

Another stellar performance came from the Tobacco sector which saw exports jump by 68% in 2022 to US$ 968 million. Amongst the reasons to explain this rise is the fact that the tobacco farmers were retaining 75% of their sales in foreign currency when everybody else was still at 60%. Fortunately, this number has been raised to 85% for Tobacco and Cotton specifically and we anticipate seeing more exports.

The short-lived honeymoon speaks to the period when economic agents were able to get more value for their foreign currency generated, either through exports or domestic foreign currency sales. The proof is in the pudding that such sectors produced significantly better results. Perhaps instead of focusing on those corporates or sectors with retentions reduced, we should also assess those whose retentions were increased.