As Mthuli plots latest currency measures, warning bells ring over falling tax earnings

Needing a haircut: Finance Minister Mthuli Ncube (Pic: PHILIMON BULAWAYO/REUTERS)

As Finance Minister Mthuli Ncube is preparing a new round of measures to save the Zimbabwe dollar, concern grows over dire prospects for government tax earnings and formal businesses.

The Zimbabwe dollar’s decline has gained speed over recent weeks on both the formal and black markets, and Ncube says this is because there is “peak demand” for US dollars.

“Currency volatility is being caused by speculative behaviour in the market and a shortage of foreign currency during this high-demand season,” Ncube told the Sunday Mail. “Government will be taking further fiscal and monetary policy measures, which may include auction redesign in order to deal with the volatility.”

Ncube says he will “increase the supply of foreign currency at a time when demand for it is high”.

Last week, central bank governor John Mangudya said the Zimdollar’s fall was “temporary”, blaming it on demand for supplier payments and bonuses at the end of 2023. However, Mangudya admits to a larger problem that he and Ncube face – the collapse of confidence in the battered currency.

“People think it’s an exchange-rate issue, but it’s largely confidence-related,” Mangudya told Bloomberg. He added: “We have economic stability, but currency instability.”

With the fall of commodity prices, Zimbabwe will earn less from its minerals this year, which will add more pressure on the Zimbabwe dollar. But Mangudya insists: “I don’t share the same perspective. We have new export minerals in the basket such as lithium which weren’t there before. If we earn US$100 million from lithium it can help compensate for decreases in other commodities.”

However, data shows Mangudya’s hopes may be misplaced. Lithium prices fell 80% last year, and the outlook for 2024 remains cloudy. The price of platinum, another key Zimbabwe export, is also falling. This has forced Zimbabwean producers to call time-out on new mines and expansion.

Ncube has another big worry – his forex policies are threatening tax earnings. Forcing formal businesses to use the overvalued formal exchange rate has driven commerce from taxpaying businesses to the informal market. This means the government is earning less from tax, including from VAT, which accounted for 29.3% of tax earnings last year according to the 2024 budget. Ncube’s response to falling tax earnings has been to add new taxes, but analysts say he needs a better plan.

“In 2024, the formal sector is weak. The retailers cannot sell product at prices that make economic sense and so trade goes elsewhere and government receives less VAT than it should,” says John Legat, CEO of Imara Asset Management, the country’s biggest fund manager. “Government’s aim should therefore be to level the playing field with the informal sector rather than punish the formal one.”

If the exchange rate is not fixed, the retail industry will be at risk, and so will government taxes.

“Should that trend continue, we may well see further casualties in the formal retail sector as we began to witness in 2023,” Legat says.