New Zimdollar measures progressive

DESPITE the major successes of the economic, fiscal and monetary reforms of the Second Republic over the last 40 or so months, the creation of an ever-more normal economy is still a process, rather than an event, but one that does mark off the milestones as we progress.

The latest milestone was passed at the end of last week when the Government decided the time had come to collect more taxes in local currency and less in foreign currency, largely in areas relating to exports, although Customs duty on imported vehicles was included.

While many in the general public might be far more excited about being able to pay half the duty on a qualifying imported vehicle in local currency, using the official rate, the prevailing auction weighted average on the day of payment, the major gainers will be exporters, with miners effectively getting two bites.

Half of mineral royalties can now be paid in local currency and exporters in general have now been put on what amounts to an equal footing with those who do all their business in Zimbabwe.

These internal businesses have to keep two sets of accounts, paying taxes in local currency on the share of their business done in local currency and in foreign currency on that share done in foreign currency.

Exporters were expected to pay all tax in foreign currency, for the very simple reason that technically they sold everything in foreign currency. However, in practice this was not the case. A percentage of their payments from foreign customers were converted into Zimbabwe dollars when the money arrived, the percentage varying depending on sector.

So as a matter of practical accounting the export earnings were almost instantly split into local and foreign currency, producing the same effect as if the exporter was partly paid in local currency and partly paid in foreign currency. The new tax system recognises this practical result by splitting the tax currency and so putting those who export into a similar situation as those who do not.

Even the mineral royalties fall conceptually into this division. Even though royalties are an extraction fee payable to the owner of the mineral rights, the State, rather than an export tax, most minerals are exported directly or indirectly; when the customers pay the incoming payments are split into two accounts.

A mining company might list its taxes in separate columns, but the total is still what it summarises as what it pays to the Government.

Considering the retention percentages for most mining exports, the new system of splitting the royalty currency mirrors the actual split into the businesses currencies, so all businesses, exporters, local businesses and those whose businesses are mixed are now all in the same sort of tax box.

The measures announced last week are thus marking the milestone that so far as taxes are concerned all businesses can start treating their local currency and foreign currency a lot more equally, and that gives more importance than has been the case to local currency. It becomes more important since another chunk of the local bills can now be paid in local currency.

The concession for vehicles, or to be more precise for the designated vehicles and the details are still awaited, falls outside this general split in business currencies but tends to follow the systems for other imports. Some imports are so essential that taxes are both low and local currency. Others require the tax to be paid in foreign currency.

Vehicles are now in an interesting middle area, counted as partly essential and partly a luxury. If the system works, and Zimra will need to be alert for the continual attempts at cheating in this particular area, as we have seen in the recent clamp down on registration, it might be possible to add more items to this middle group, things that are important but not life or death.

Again this marks wider use of local currency and so upgrades the local currency, continuing the move to making it more useful and more valuable.

The odd dual economy in Zimbabwe is not a permanent resting place, but rather a stage. We used to do all business in local currency and keep all accounts in local currency although UDI and the resultant effects did create a line between foreign and local business, a line that is still there.

The hyperinflation of the 1990s and the 2000s eventually destroyed the local currency. Dollarisation was short-term relief, and gave a currency to do business in, but rapidly created huge constraints on growth, from a dramatic shortage of liquidity, the collapse of local industry in favour of imports and the underground messing around as the old dispensation showed its continued indiscipline, this time by creating what amounted to fake US dollars with eventually the disparity between real and fake became too large to ignore or hide.

The Second Republic installed the discipline, with President Mnangagwa hiring some top class technocrats and then backing them with the authority of his office to fix the mess.

So in that space created by the President the long lasting reforms that had been delayed for so many decades could finally be implemented so as to create economic growth, and that move from trying to stabilise an economy to growing an economy was vital if we are ever to move from survival to a decent life.

And it is. Last week’s policy changes were simply the next milestone on that journey and were only possible because so much other progress had been made in combating inflation and stabilising the local currency that the Government could itself use local currency more.

We need to remember that the Government now lives within the budget, rather than filling the gaps with mechanical or digital presses, and so needs real money from taxpayers.

The new treatment for exporters and for the importers of cars is another signal from the Government that its own currency is now a real currency.

Letting exporters use it more helps grow the economy, but is also a sign that we are doing the right things economically, and that our reforms are working.

This should accelerate the progress.