THE prevailing foreign currency retention thresholds to various sectors of the economy are acting as a disincentive to formal production and investment in the country. Zimbabwe’s economy contracted by between 6,5% and 12% in 2019 for the first time since 2008.
At the heart of the economic decline is the foreign exchange control directive that compels all exporters to cede a portion of their export proceeds to the government at the ruling interbank exchange rate within 24 hours of receipt.
The directive also obliges the exporters to utilise their export proceeds within 30 days before they are forfeited to Zimbabwean dollars at the interbank rate. The policy has not been favourable to various producers due to the spread between the interbank rate (currently at US$1: ZW$17,54) and the parallel market rate (trading above ZW$26,50).
Furthermore, the exporters bemoan the need to settle foreign obligations (including dividends), import spares and raw materials that need foreign currency. The Reserve Bank of Zimbabwe (RBZ) passed Exchange Control Directive RU 28 of 2019 on February 22 of the same year and that directive has seen production slump in key sectors that anchor the local economy such as tobacco farming, mining and manufacturing.
Previously, the Zimbabwe Miners Federation (ZMF), Chamber of Mines, Zimbabwe Tobacco Association (ZTA) and Confederation of Zimbabwe Industries (CZI) have tried to engage the central bank and the government to have the export retention thresholds reviewed upwards. As a result of the forced retention, producers have resorted to diverting produce to the parallel market.
Gold exports fell from an all-time high of 33,2 tonnes recorded in 2018 to 27,6 tonnes in 2019. The trend is expected to continue in 2020 as smuggling channels to South Africa continue to see more supplies from disgruntled miners. The Zimbabwean government pointed out that the country is losing at least 34 tonnes of gold worth close to US$2 billion every year due to smuggling of gold. The figure multiplies if smuggling of other minerals such as diamonds, nickel and chrome is factored in.
Equally disgruntled are tobacco farmers who produced a record high of 258 kilogrammes of the golden leaf in 2019. Despite the 2% growth in delivered tobacco from the 2018 output, earnings fell from US$736,2 million to US$522,6 million in 2019. The average price for tobacco in 2019 was US$2,03 per kg, 30,52% lower than the average price of US$2,92 per kg paid in 2018.
Tobacco farmers went home poorer as 50% of their earnings were retained by the government while strict conditions were set on the utilisation of the remaining 50%. This year, less tobacco is expected at the auction floors as registered growers and seed sales have significantly declined for the 2019/20 planting season.
The manufacturing sector is largely feeling the pinch of the export retention scheme on the settlement of their foreign obligations. The central bank retains 20% of the exporter’s earnings in the manufacturing sector and unlike other sectors, the manufacturing sector in Zimbabwe is hamstrung by the high production costs in a market in which they are compelled to sell their produce in local currency.
The RBZ committed to assume foreign legacy debts of over US$1,2 billion at a rate of 1:1 to the US dollar in February 2019. However, no payment has been made to date, leaving local manufacturers to fend for themselves and renegotiate with foreign suppliers.
Manufacturers’ debts constitute the biggest chunk of the debts that date as far back as 2015. Local manufacturers require more than US$300 million per month to import raw materials and settle foreign debts. As a result, capacity utilisation has slumped in the sector especially for manufacturers of pharmaceuticals, industrial and home chemicals, clothing and footwear, packaging materials and plastics, auto parts, tyres and cement.
The central bank has justified the export retention scheme as necessary since all natural resources are owned by the government. The apex bank points that there is need to cushion other sectors of the economy that do not earn foreign currency but play a critical role in the local economy. The central bank points that in order to ensure price stability, foreign currency requirements for strategic imports such as fuel, electricity, water chemicals, medicines, cooking oil, maize and wheat shall be met through letters of credit (LCs) facilities and support by the foreign exchange allocation committee.
This effectively means that the government is still subsidising the importation of the above commodities for the local market since various importers access foreign currency through a centralised system instead of the open market.
The question, however, remains on the sustainability of such government interventions in the market and its contribution to the scourge of corruption on the allocation of foreign currency by the apex bank.
Foreign currency is now a hot commodity in Zimbabwe due to record inflation of over 521% bedeviling the recently introduced Zimdollar. The Zimbabwe Anti-Corruption Commission recently pointed out that Zimbabwe loses at least US$1,8 billion annually to corruption and the allocation of foreign currency has been fingered as being central to various cartels that control the local market.
The office of the Prosecutor-General recently highlighted that shortages of electricity, fuel and medicine can be traced back to the influence of various cartels that control the local economy.
It is now critical for the central bank to review upwards the retention thresholds in line with justifiable demands from producers, while reporting on the utilisation of these retained earnings since these are public funds.
However, the most sustainable policy would be to allow exporters to retain all their export earnings while repatriating 100% of them to Zimbabwe either through selling to local financial institutions (including bureaux de change) or maintaining those proceeds in foreign currency accounts (FCA). This will be key in oiling the local interbank market. The latter is practiced in various Sub-Saharan countries such as Mozambique, Malawi, South Africa and Rwanda. Other countries such as Ghana, Tanzania and Zambia have completely removed foreign exchange controls in order to attract foreign investment and push their economies to free market capitalism.
Bhoroma is a marketer by profession, freelance economic analyst and holds an MBA from the University of Zimbabwe. — email@example.com or Twitter: @VictorBhoroma1.