The Confederation of Zimbabwe Industries (CZI) has criticized the Reserve Bank of Zimbabwe’s (RBZ) recent proposal to support the Zimbabwe Gold (ZiG) currency, labeling it misguided.
RBZ Governor John Mushayavanhu informed the Zimbabwe Independent that the government has approved a plan requiring companies to pay 50% of their corporate tax in ZiG, with the remainder in foreign currency, to increase demand for the local currency.
However, a detailed 12-page analysis by CZI, conducted prior to the ZiG’s depreciation and subsequent 43% devaluation, indicates that many companies are already reporting significant losses, making it unlikely that corporate tax payments will stimulate demand for the currency.
CZI suggests an alternative approach in its report, “Inflation and Currency Developments Update and Review of the Mid-Term Monetary Policy Statement,” proposing that Pay As You Earn (PAYE) could serve as a better basis for driving demand for ZiG. The report states:
- Corporate tax is currently the worst-performing tax category in terms of overall contribution. Choosing such a tax to boost demand for ZiG is unlikely to be effective.
- The government should consider using a more effective tax, like PAYE, for the requirement to pay 50% in local currency.
- Inflationary pressures are expected to persist unless measures to increase demand for the local currency extend beyond the current quarterly payment dates, as many businesses are already in loss positions.
PAYE is the system used to calculate the income tax deductions from gross earnings paid to the Zimbabwe Revenue Authority (ZIMRA).
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ZIMRA’s data for the first half of the year shows that corporate tax collections fell 14% short of targets, attributed to competition from the informal sector, which dominates about 72% of the economy. The CZI added:
- While requiring payments in local currency is a positive move, many firms find that the ZiG obtained from surrender requirements is sufficient to cover their obligations due to reduced profitability.
- The depreciating ZiG on the parallel market poses a risk of long-term inflation unless managed properly.
- Controlling the parallel market exchange rate requires improved access to foreign currency for a broader market, but current shortages necessitate policies prioritizing demand for the local currency.
CZI urged the central bank to strengthen its efforts to tackle the parallel market premium, which contributes to rising prices and threatens economic stability. They stated:
- The RBZ should focus on containing the parallel market premium as a critical variable.
- The August 30 monetary policy did not address the widening parallel market premium, despite its significant role in destabilizing prices and causing inflation.
- The assumption of a stable exchange rate could undermine monetary policy, as the parallel market rate is influencing market behavior.
- The disparity in US dollar pricing between formal and informal retail sectors indicates that exchange rate distortions are already affecting the market.
- The RBZ should aim for alignment between parallel and official exchange rates by allowing banks to set exchange rates based on market expectations.
- Strategic intervention by the RBZ can help maintain market stability and orderly trading conditions.
- Confederation of Zimbabwe Industries