LAST week’s pronouncement by the Zimbabwe Revenue Authority (Zimra) that businesses charging in foreign currency will have their taxes levied in forex is inconsistent with the official multi-currency system policy and the position that the US dollar is trading at par with the bond note and Real-Time Gross Settlement (RTGS) balances, amid a worsening currency volatility crisis.
By Tinashe Kairiza
This is the latest in a series of contradictions which include the separation of forex accounts with bond note or RTGS accounts.
“Zimbabwe Revenue Authority has noticed that there are businesses that are trading, withholding and collecting Value-Added Tax, Pay As You Earn, Capital Gains Tax and other taxes in multi-currencies,” said the tax collector in a statement.
“Following this observation, Zimra has found it necessary to clarify that these businesses should remit taxes in the specific currencies in which they collect them without any conversion to RTGS, bond notes, local point of sale and mobile money.”
To use a simple example, Zimra will not levy tax using RTGS, mobile money or bond notes from a purchase of a two-kilogramme packet of rice for US$3, but will levy a US dollar-denominated tariff. Under the pronouncement, tax remittances will vary, depending on the currency of choice used for payment, meaning if a trader uses the RTGS system they will use the same system for tax payment.
Free market proponents cautioned against pegging the surrogate currency at its inception in 2016 at parity with the US dollar, arguing that the bond notes would exacerbate acute foreign currency shortages on the market in line with Gresham’s Law which stipulates that “bad money drives out good”.
Zimra’s announcement follows recent interventions by the fiscal and monetary authorities to ring-fence nostro foreign currency accounts (FCAs) from bond note- denominated RTGS bank balances. The raft of measures unnerved the market, triggering a wave of sharp price increases as the value of the surrogate currency rapidly tumbled against the firming greenback. Even after separating the two distinct bank accounts, government ironically insists the greenback is at par with the fiat currency.
Resultantly, the market is in panic mode. There is wide speculation and a wave of price increases choking the country’s frail economy and poverty-stricken citizens emanating from the disequilibrium between the greenback and the surrogate currency.
Even several government departments —among them the Registrar-General’s Office — are now demanding payment in foreign currency for some services, while choosing to settle their tax obligations through cheaper payment alternatives such as RTGS and electronic transaction systems.
The market has been thrown into turmoil by the disparity between the greenback and the inferior bond note, although government continues to insist that the two currencies are trading pari passu while employing commandist policies to arrest the worsening currency volatility crisis.
Ironically, Industry and Commerce deputy minister Raj Modi exposed government’s policy inconsistency and denial around the real value of the US dollar and the surrogate currency, derisively now known as “Zollars”, by insisting on payment in foreign currency at his liquor retail outlet in Bulawayo.
As the foreign currency shortage crisis escalates, Zimra’s announcement also exposes the government’s desperation to mobilise forex, never mind that the move exposes policy inconsistency.
Such inconsistencies, particularly around the exchange rate, are also unsettling investors while frustrating business efforts to plan comprehensively.
Zimbabwe’s market chaos has been exacerbated by the allocation of foreign currency by the central bank to importing firms benchmarked on an equivalent exchange rate between the US dollar and the bond note or RTGS when the currencies are trading at variance on the thriving parallel market.
The already dire situation has been compounded by state subsidies to firms importing basic commodities such as fuel, wheat and cooking oil through foreign currency allocations from the Reserve Bank of Zimbabwe (RBZ) at a rate of 1:1 between the US dollar and the quasi-currency. This triggered massive distortions and speculation on the market.
Amid the glaring disparities between the greenback and the fiat currency, government has adopted a futile approach to contain the currency volatility crisis through a combination of commandist law-and-order measures.
President Emmerson Mnangagwa’s administration, which has repeatedly expressed commitment to free-market economics, is ironically crafting punitive legislation to slap hefty fines on retailers and manufacturers “illegally” hiking prices of commodities. The move is reminiscent of the hyperinflationary era which peaked in 2008 when former president Robert Mugabe attempted to contain spiralling prices through price controls — triggering massive capital flight and the disappearance of basic commodities from shop shelves.
The government has been intimidating the business community against “arbitrarily increasing prices” as part of a broader war to contain the currency turmoil.
Recently, Mnangagwa passed regulations which give the state power to seize assets suspected to have been amassed illicitly, while illegal foreign currency dealings will attract a custodial sentence of 10 years. Critics have pointed out that, in the absence of fundamental economic reform, such commandist orders will not arrest the currency volatility crisis.
Prominent economic analyst John Robertson says the Zimra position contradicts the stance announced by the RBZ and government which insist that the US dollar is at par with the bond note.
“It (Zimra directive to levy tax in forex) conflicts the policy position of the RBZ. We are legally entitled to pay tax in any mode of payment under the RBZ regulations,” Robertson said. “We have to accept that the two currencies (bond and US dollar) are not equivalent. We have to leave it to the market to decide. The 1:1 relationship is funding corruption. People can behave corruptly if they have a privilege.”
Economist Tinashe Kaduwo said the bond currency had dramatically failed to hold its own, adding Zimbabwe was on the path to re-dollarisation.
“This is just an indirect way by the government of accepting that the US dollar and bond note are no longer at par. No wonder why even local gold buyers are also being compelled to purchase in forex. “De-dollarisation has failed and the economy is slowly re-dollarising. Government has already set a precedent which citizens and the private sector will definitely follow,” Kaduwo said.