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Business Reporters
Zimbabwe is making strides towards de-dollarisation, a journey that is far from accomplishment overnight, but steadily gaining momentum.
The Mid-Term 2024 Fiscal Policy outlines a comprehensive strategy to stabilise the Zimbabwe Gold (ZiG), the country’s precious metal and forex reserves-backed domestic currency.
Among the interventions are also measures to promote the wider use of the currency in domestic transactions.
Notably, the half-year fiscal policy review mandates presumptive tax payments in local currency, regardless of the currency used for business transactions.
This is crucial as micro, small, and medium enterprises, which contribute a significant portion of the national gross domestic product, predominantly qualify for presumptive tax and often conduct business in foreign currency.
Further, businesses that generate more than 50 percent of their revenue in foreign currency are required to settle their tax obligations on a 50/50 split between ZiG and forex.
Requiring tax payments in local currency will drive strong demand for the local currency by obligating all businesses to take payment in ZiG.
“The Minister (of Finance, Economic Development and Investment Promotion Prof Mthuli Ncube) talked about reducing presumptive taxes as a way of incentivising compliance and formalisation of businesses,” economist Ms Gladys Shumbambiri-Mutsopotsi said.
“I think that’s a positive development. Also, the new requirement that all presumptive taxes be paid exclusively in ZiG is also positive in that it helps to create a very strong demand for the ZIG and to sustain that demand, which is critical in terms of the stability of ZIG.
“And of course, 50 percent of corporate tax payable in ZIG, again, that’s positive.”
The measures also include provisions for accepting local currency for duties on selected non-essential imports and compelling Government agencies to charge certain fees in domestic currency.
The Government has announced plans to fully implement de-dollarisation within the next two years.
“The structured currency is a step towards the Government’s goal of de-dollarisation, which appears to be progressing well given the stability observed since the introduction of the ZiG currency in April 2024,” said Mr Carlos Tadya, a Harare-based economist.
“I understand people have been skeptical about the ZiG’s survival due to continued hard currency payments.
“However, this is a gradual, phased approach that requires careful implementation and patience. It’s important to realise that this process could take years.
“While the Government has provided tentative timelines, exact predictions are challenging.”
Analysts said the phased de-dollarisation requires a multifaceted approach that includes simultaneous efforts to bolster the domestic economy.
Stimulating production, which the Government has demonstrably been doing, is crucial to supporting the stability of local supply as this reduces reliance on imports.
Financial inclusion is another essential component, as it broadens access to credit and savings, empowering individuals and businesses. These measures, coupled with other fundamental economic reforms, are indispensable for creating a stable environment conducive to the adoption of the local currency.
The Government is not just pushing to promote the use of local currency for the sake of it. Local currency has many benefits, which include monetary policy freedom to influence the pace of economic growth.
The Reserve Bank can use various monetary policy tools to stimulate or slow down economic growth, thereby giving the country leeway to determine growth levels that generate the desired number of jobs.
Local currency can also help derive competitiveness of local products, given foreign currencies such as the US dollar are too strong, which builds into the cost of production.
Forex by its nature, requires one to export first before they earn it, which limits credit creation required to boost production.
“A stable (local) currency is the cornerstone of a thriving economy. It inspires confidence, fosters investment, and empowers individuals to reach their full potential,” said Mr Pillars supporting the transition include significant investments in key economic sectors such as agriculture, mining, and manufacturing, as well as the revitalisation of State-owned enterprises.
Observers have noted that boosting production through targeted investments will be instrumental in stabilising the currency.
As the ZiG gains traction, public confidence is expected to grow, leading to increased savings and credit availability for productive sectors.
The revival of critical parastatals under the auspices of the Mutapa Investment Fund is seen as a pivotal step in fostering long-term economic stability.
Parastatals and State-owned enterprises have been key contributors to the nation’s GDP, and a functional sovereign wealth fund will serve as a crucial buffer against external shocks like global mineral price fluctuations.
An International Monetary Fund (IMF) staff team led by Mr Wojciech Maliszewski, which conducted a second mission to Harare between June 18-27, 2024 noted that the newly constituted Mutapa Investment Fund would “be key for the stabilisation effort.”
In recognising the Mutapa Investment Fund’s crucial role in national economic stabilisation, the mission, however, emphasised the need for a robust governance framework.
“Strengthened governance framework for the newly constituted Mutapa Investment Fund will be key for the stabilisation effort,” said the IMF mission.
“Steps to this end should include ensuring that the fund’s mandate is clearly defined and aligned with the National Development Strategy; enhancing its transparency and ensuring full integration in the budget process and adhering to highest standards of corporate accountability.”
Value addition through beneficiation of minerals remains paramount to shield the country from the impacts of global commodity price downturns, which have historically eroded national earnings.
Zimbabwe experienced hyperinflation in the mid-2000s, leading to the complete collapse of its currency.
As a result, the country adopted a multi-currency system in 2009, primarily using the US dollar.
The move stabilised the economy and brought relief to citizens struggling with rampant inflation.
Between 2009 and 2019, the US dollar became the dominant currency, alongside other foreign currencies like the South African Rand and Botswana Pula.
In 2019, Government reintroduced a local currency, the RTGS dollar, pegged to the US dollar. However, the value of the RTGS dollar rapidly depreciated, leading to renewed economic instability and price increases.
Online Reporter