The maths behind Ncube’s 2% electronic transaction tax

Zimbabwe economy
Finance Minister Mthuli Ncube: Softening his big bang?

AFTER his surprise appointment last month, Finance Minister Mthuli Ncube arrived at a Treasury which had just put out a grim first half report showing a $1.34 billion budget deficit, domestic debt approaching $10 billion, an unrelenting Treasury Bill binge and a deleterious tendency to raid the central bank for cash.

Once the African Development Bank’s vice president and chief economist, Ncube would have known about Zimbabwe’s parlous economic fundamentals, but nothing would have prepared him for how bad things were.

Days after his appointment, Ncube told journalists at an investor conference in New York that Zimbabwe needed a ‘big bang’ programme of economic reforms.

Ncube will provide details of his economic plan on Friday, but gave a dose of the bitter medicine Zimbabweans can expect to take over the next few years.

In a brief statement following Reserve Bank of Zimbabwe governor John Mangudya’s monetary policy statement, Ncube announced a major change in the money transfer tax structure.

Currently charged at 5 cents per transaction, the tax, on the books since January 2003, will now be levied at 2 cents for every dollar transferred electronically.


The tax came as a shock to many, but it is one of the key proposals Ncube circulated in August, before his appointment as finance minister.

In a series of interviews and write-ups, Ncube proposed “clever, technological ways to collect revenue” from the informal sector.

“I advocate that we look at technological solutions, which is that, maybe, we start collecting taxes through mobile and airtime usage. So, find a point of collection, which is easy to collect through. So, through mobile phones, you start collecting taxes, you agree what makes sense in  the informal sector,” Ncube said in an August interview.

In his first major policy gambit, Ncube tweaked the money transfer tax in a bid to expand the tax base and to ensure government taps into the largely untaxed informal sector as well as foreign currency traders.

Electronic transfers have expanded rapidly over the past three years, as stocks of the country’s adopted currency – the United States dollar – dwindled.

In the first half of 2018, $65 billion worth of transactions – a 217% increase on the same period last year – were carried on the various electronic platforms that Ncube now seeks to tax more deeply. Over the same period last year, $20.5 billion transactions were recorded.

On a tax by transaction basis, the 856 million electronic transactions recorded in the first half of 2018 would have yielded about $43 million for the fiscus.

By comparison, if Ncube’s proposed tax had been in effect since January, government would have collected some $1.3 billion – equal to the government’s budget deficit in the first half. This assumes the same level of transactions, although it is a reasonable expectation that the level of business would be lower on account of the higher transaction costs caused by the tax.

Former MDC lawmaker Eddie Cross proposed a 5% tax on electronic payments in February


The proposal to tax mobile money transactions was, interestingly, first broached in Parliament by former opposition lawmaker Eddie Cross in February this year.

During a debate on the 2018 national budget, Cross, for a long time an MDC-T policy advisor, urged government to widen its revenue sources by taxing electronic transfers.

“I believe that we can cover the shortfall in our revenues. We can provide more money for our health sector, we can fund the Parliament of Zimbabwe properly if we put a small tax on electronic transfers. If we put 5%, five cents in a dollar on that, it is $9 billion of new revenue,” Cross said, noting the unease of his colleagues on the finance committee who he said were skeptical and had asked him to raise the issue in the committee later.

“However, I think this is an urgent matter because we must resolve this question of our deficit and the only way to resolve it is to tax the people in the informal sector. If you put a tax on electronic transfers, it is easy and cheap to collect and everybody pays.”

The electronic transfer tax appears to target informal foreign currency dealers


Along with the central bank’s decision to restore foreign currency accounts and ring-fence them from local electronic balances, the money transfer tax generated the most interest – and opprobrium – of all the policy measures announced by the RBZ and Treasury on Monday.

The money transfer tax controversy is not peculiar to Zimbabwe.

Kenya, lauded for its well advanced mobile money transfer system, is currently grappling with a fallout from the government’s proposals to tax bank transfers and increase mobile money tax from 10% to 12%.

Making his case on Monday, Ncube noted the explosion in electronic payments in Zimbabwe since 2014.

Ncube’s move provides clues into his strategy; increase revenue, cut spending. He has clearly targeted enhanced revenue collection as he seeks to reduce excessive government expenditure, funded mostly through domestic borrowing and overreliance on the central bank overdraft. He is also targeting foreign currency traders.


But business has already voiced concern over the tax measure, with former Confederation of Zimbabwe Industries (CZI) president Busisa Moyo raising alarm.

“While the 2 cents per dollar transaction is good for lower income levels, it will destroy our margins,” Moyo said on Twitter.

“In the food sector, we work on 6% margins. This is a 33% reduction in profits. Please re-check!”   

The finance minister would be acutely aware that a public disgruntled by a tax increase would most certainly want to see government curbing its own penchant to overspend.

In the first half of 2018, government ran up a budget deficit of $1.34 billion, more than 400% above the target of $266 million and 7.5% of the 2017 GDP.

Government borrowing to plug the deficit has seen its domestic debt vaulting from $275.8 million in 2012 to current levels of $9.5 billion.

There has also been an explosion in Treasury Bill issuances, from $2.1 billion in 2016 to a cumulative $7.6 billion at the end of August 2018. The government’s overdraft with the RBZ bank stood at $2.3 billion at end of August 2018, well above the statutory limit of $763 million.

Ncube’s Friday statement is expected to lay out details of how government intends to cut spending, as well as the planned fire sale of some of its parastatals.