THE continuous depreciation of the local currency (ZW$) and surge in inflation has piled more pressure on the shaky formal business climate in Zimbabwe.
Annual inflation has increased from 60,6% in January to 96,4% in April 2022. Month-on-Month (MoM) inflation has advanced from 5,3% to 15,5% in the same period, reflecting the rate at which consumer buying power and earnings are being eroded in the economy.
Apart from the impact of inflation and rejection of the local currency by traders, formal business players face a plethora of operational constraints of a policy nature from the impact of foreign currency shortages and foreign exchange losses, low export retention levels, high levels of taxation, low consumer confidence and a complex regulatory environment where licences and permits must be renewed frequently to various government agencies.
Foreign exchange manipulation
Despite earning US$9,7 billion in foreign currency in 2021, Zimbabwe faces acute foreign exchange shortages in the formal market due to the manipulation of the auction system by the central bank.
The lack of a market-driven formal exchange rate has chased away independent holders of foreign currency and created artificial shortages in the economy, which are feeding rent-seeking behaviour by a privileged few.
Currently there is over US$2,4 billion that is parked in foreign currency accounts and billions in diaspora remittances (US$1,4 billion in 2021) or informal sector sales (estimated to be 60% of GDP) that bypasses the formal economy.
The impact to business is that there are limited formal and legal channels in the market to source foreign currency. The central bank regularly threatens businesses with arrests for indexing prices above their preferred rate, which is below the pegged prevailing rate on the auction platform.
Similarly, the apex bank tracks business transactions, which point to foreign currency trading and penalises businesses for it.
Export Retention Scheme
The current export retention scheme allows exporters to retain 60% of the export proceeds and surrender 40% to the central bank.
On local foreign currency sales, treasury retains 20% of all sales deposited in local banks.
Ordinarily, these measures would not be a challenge if the conversion rate was market determined. With the pegged auction rate at US$1: ZW$166 and the parallel market exchange rate at US$1:ZW$410, exporters are losing close to 60% of their real earnings on the surrendered earnings.
In other words, for every US$1 of exports, at least $0,24 is lost due to exchange rate disparities.
Similarly, on the 20% in foreign currency deposited locally, businesses are losing US$0,12 on every dollar.
This means that it is no longer sustainable to export value added goods from Zimbabwe.
This has resulted in manufactured exports declining sharply to below US$128 million in 2021.
The surge in inflation has increased the cost of production locally, while geopolitical factors also partly affect the cost of imported commodities, freight, insurance, and inland transportation.
This means that local manufacturers cannot compete with regional suppliers from South Africa where the rand is more stable and production cost is relatively lower.
As such, local producers are also finding it hard to compete on price in local shelves and the composition of imported raw materials that goes into local production has increased astronomically.
Foreign investor interest on the Zimbabwe Stock Exchange (ZSE) and local businesses has declined due to stringent foreign exchange controls especially restrictions on formally repatriating dividends and capital for foreign investors.
Foreign investors have to wait for a portion of their dividends to be approved on the auction system and be queued for payments.
The same applies to guaranteed exit when divesting from Zimbabwe.
The country’s foreign exchange regulations have been a pain to most investors who seek formal channels to repatriate dividends.
In the end, potential investors hold onto their capital or invest elsewhere in the region where exchange rate losses are minimal and capital movement is not restricted.
To improve the business climate and attract investment, the government needs to reform the current exchange controls and regulatory bottlenecks to ensure that investors use formal banking channels to repatriate their dividends and move capital out (subject to normal exchange control regulations and due diligence).
The current taxation regime in Zimbabwe is burdensome with many tax heads, levies, permits, licences and statutory fees seriously eroding competitiveness for formal economic players.
Multi layered taxes on electronic transactions (IMTT), excise duty on petroleum products and mining royalties need to be aligned with regional peers to manage production costs.
There is now an urgent need to simplify tax procedures for tax compliant businesses or individuals and payment of tax returns to applicants without subjecting the taxpayer to multiple audits.
Currently businesses evade taxes and do not file for tax returns as filing triggers an investigation into their wider business operations.
Zimbabwe has not had a consistent currency or consistent foreign exchange policy for several years.
The country’s central bank quasi-fiscal operations and deficit financing have necessitated astronomic levels of money printing at the expense of the economy.
The economy tanked in 2006-2009 and 2019-2020 due to hyperinflation. Recently, the central bank parcelled over US$3,8 billion in foreign debt to the taxpayer emanating from flawed foreign exchange policies.
At the core of the problem is the government’s desire to control the central bank monetary policy and ensure money printing can be done whenever tax revenues fall short of targeted government expenditure.
Between 2015 and 2021, the country promulgated hundreds of statutory instruments (temporary measures) aligned to monetary policy.
Some simply expired before parliamentary ratification. Policy consistency is a fundamental piece to the economic puzzle, without which it becomes difficult to attract both domestic and foreign investment.
Furthermore, Zimbabwe’s policy inconsistency on mining (exploration an actual licencing), land tenure (title deeds in agriculture), petroleum importation and grain marketing regulations have dented investor sentiments on the local market.
A 2018 study by the International Monetary Fund (IMF) discovered that 60% of the Zimbabwean economy is informal, second in the world only to Bolivia’s 62,3%.
The level of informalisation in the country is now estimated to be between 70-75%. This means that the shadow economy in Zimbabwe transacts billions more than the formal economy.
The shadow economy weighs heavily on economic recovery efforts as tax revenues dwindle and the treasury is forced to institute more taxes on the compliant few.
The local business climate has been punitive to investors who use formal channels to trade in the economy and this has accelerated the rate of informalisation, corruption and crowded out genuine investment.
The major reason why investor interest on the Zimbabwe Stock Exchange and local businesses has waned in the past three years is because of restrictions on repatriating dividends and capital for foreign investors.
The same applies to guaranteed exit when divesting from Zimbabwe.
The country’s foreign exchange regulations and inconsistent monetary policies have been a pain to most investors, who sought formal channels to repatriate dividends.
In the end, potential investors hold onto their capital or invest elsewhere in the region while existing ones look for illegal or unofficial channels to repatriate their dividends. The government must craft 10 years (or even more) investment policies that do not shift with change of personnel in government departments.
These policies must align with other Southern African countries, which compete for the same investment inflows and are endowed with similar natural resources.
Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). — email@example.com or Twitter @VictorBhoroma1.