Bankers rise up in arms against Finance minister

LOCAL bankers are up in arms against Finance minister Mthuli Ncube following his latest policy intervention to stabilise the economy which has inadvertently left financial institutions facing serious difficulties in servicing their foreign loan obligations and new liquidity challenges, banking sources told The NewsHawks.

BERNARD MPOFU

Ncube issued the controversial measures on 29 May for immediate implementation in a bid to address deteriorating economic problems characterised by currency and exchange rate volatility — with attendant soaring inflation.

Officially, Zimbabwe’s annual consumer price inflation rose to 86.5% in May, up from 75.2% in April, marking a deviation from the downward trend recorded since the beginning of the year.

However, independent economic analysts say in real terms inflation is now 761% for May — the peak it reached in August 2020 in the post-hyperinflation era.

Ncube’s policy interventions are also meant to address a heightened emergency to service the country’s foreign debt and arrears which have been neglected.

The measures which bankers are protesting about include the decision by Treasury to assume responsibility of repaying all foreign currency-denominated loans contracted through the Reserve Bank of Zimbabwe (RBZ).

The latest applicable measures from 1 June which have riled bankers entail:

• Treasury will now fund the Zimbabwe dollar component of the 25% foreign currency surrendered by exporters, in order to eliminate the creation of additional money supply;
• The foreign currency collected from the 25% that is surrendered, will now be collected by Treasury and utilised in servicing the foreign currency loans assumed from the RBZ. Banks will no longer withhold any foreign currency surrendered by exporters, and all the liabilities to the banks will be settled through Treasury;
• Introduce a 1% tax on all foreign payments;
• Maintain the US dollar cash withdrawal tax at 2%; and
• All export proceeds that remain unutilised after 90 days will be liquidated onto the interbank market.

Sources say these measures shocked bankers and jolted them into action. On Wednesday, members of the Bankers’ Association of Zimbabwe met RBZ governor John Mangudya to express their outrage. The RBZ also met the Accountant-General over the issue.

Bankers say by taking over the 25% foreign currency receipts under the surrender policy, the Finance ministry was leaving banks exposed to failure to meet their foreign loan obligations as they are under the RBZ jurisdiction in terms of the law, thus are unable to engage Treasury directly.

“This issue has been hotly-debated in the past few days since last week. Mnangagwa and Ncube discussed the issue of paying debts and arrears in Sharm El-Sheik where there was a day reserved to assess Zimbabwe’s debt resolution and clearance strategy,” an informed source said.

“Ncube and his economic advisers lobbied Mnangagwa in Egypt to charge a new 10% tax on mining exports to pay arrears. Mnangagwa rushed back home to discuss the issue further. He summoned ministry of Finance and RBZ officials to meet him over the issue. That was Thursday last week.

“During the Thursday meeting, there was no consensus on the 10%. So officials met again before going to see Mnangagwa on Sunday. At the Sunday meeting, Mnangagwa took the position that the 10% shouldn’t be implemented. He was supported by the RBZ officials.  

“In reaction, Treasury seized the 25% foreign currency surrender receipts. Ncube went on to issue a statement saying government shall create a debt redemption fund to service other external liabilities in line with the arrears clearance programme. Since Treasury had no budget for this, it said the new arrangement will be funded through new levies and other resource mobilisation initiatives. This means banks can no longer go to the RBZ to get cover and forex to pay their foreign obligations, but to the ministry of Finance even though the issue is under the central bank jurisdiction. This disrupts banks’ foreign loans obligation payment plans and other financial arrangements.”

Bankers say since Treasury does not have the Zimbabwe dollar budget to pay for the 25% forex surrender requirement, it would still go back to the RBZ and commercial banks for funding. Ncube said he would raise the money through new taxes, which means taxing Zimbabweans to the bone.

Another banker said: “Ncube also came up with other supportive policy measures for immediate implementation. Now all export proceeds that remain unutilised after 90 days will be liquidated onto the interbank market. The weekly auction will be limited to a maximum of US$5 million. All public foreign currency debts will be contracted by government and will be the responsibility of Treasury.

“This is unhelpful. The 90 days given to exporters to utilise their forex, for instance means that the money is now transitory. This will fuel liquidity problems. It will also promote financial disintermediation, among other things.”

Mnangagwa is under pressure to service Zimbabwe’s debts and arrears, especially now given the ongoing debt resolution and clearance negotiations and the upcoming general elections on 23 August.

In December last year, the government established a structured dialogue platform with all creditors and development partners to institutionalise talks on economic and governance reforms to underpin the arrears clearance and debt resolution process.

Zimbabwe’s total consolidated debt stands at US$17.5 billion. Debt owed to international creditors is US$14.04 billion, while domestic debt is US$3.4 billion. Debt owed to bilateral creditors is estimated at US$5.75 billion. Multilateral creditors are owed US$2.5 billion.

The country is in arrears for servicing its debt, with arrears to multilateral development banks, including the African Development Bank (AfDB), the World Bank, and the European Investment Bank. Zimbabwe has paid its arrears to the International Monetary Fund.

Zimbabwe’s debt clearance process is being championed by AfDB president Akinumwi Adesina and former Mozambican president Joaquim Chissano, who has been designated as high-level facilitator. The two were in Harare for a high-level debt resolution forum on 15 May led by President Emmerson Mnangagwa.

Mnangagwa appointed Adesina as the champion of the process in July 2022. The debt forum has been focused on three policy reform matrices, presentation of the way forward and a tentative roadmap.

Several meetings have already been held to deal with the issue, including some at the annual AfDB meetings in Sharm El-Sheikh, Egypt.

The theme of the 2023 annual meetings was Mobilising Private Sector Financing for Climate and Green Growth in Africa. It provided a framework for AfDB governors to share experiences on galvanising private financing domestically and internationally and harnessing natural capital to bridge the climate financing gap to promote transition to green growth in Africa.

Zimbabwe featured prominently at the AfDB meetings as delegates discussed its debt resolution and clearance strategy.

On 24 May, Mnangagwa addressed delegates at a roundtable meeting on Zimbabwe’s debt and arrears issue. He also spoke to the media about the issue on Africa Day — 25 May.

Mnangagwa said in February his government is committed to a plan to clear more than US$6 billion external debt arrears which are a drag on the economy and are hindering Zimbabwe’s access to badly needed new funding and lines of credit.

Zimbabwe, whose foreign debt is over US$14 billion, has not been able to secure financing from international financial institutions, including the International Monetary Fund, World Bank and AfDB, in more than two decades due to its arrears and Western financial restrictions.

While in Sharm El-Sheikh, Mnangagwa and Ncube had discussed how to service the country’s debts and arrears. Ncube had suggested imposing a new 10% tax on mining exports to raise money to repay foreign obligations.

When Mnangagwa returned he urgently convened meetings, starting Thursday last week.
The emergency meetings were attended by Mnangagwa, Ncube and Treasury officials, including permanent secretary George Guvamatanga, and Reserve Bank of Zimbabwe (RBZ) authorities led by governor John Mangudya.

Four critical meetings were held to deal with the problem between Thursday and Sunday last week.

Mnangagwa had come back home rushing from the AfDB annual meetings in Sharm El-Sheikh, Egypt, which ran from 22-26 May, to address urgent economic issues, including the matter of paying arrears.

After his 10% tax on mining exports proposal was shot down by Mnangagwa following guidance from some of his economic advisers who had warned that the move would be tantamount to sabotaging exports and fuel a foreign currency liquidity crunch, Ncube issued urgent policy interventions to address the debt and arrears crisis, while also trying to shore up a fast-deteriorating economy.

In a bid to calm the markets, Mangudya issued a statement on 31 May saying despite Ncube seizing control of the 25% surrender portion of export proceeds, the RBZ would still play a “pivotal statutory role of intermediation between banks and the Exchequer”.

Diplomatically, the RBZ statement suggested the minister had effectively changed statutory requirements, while merging fiscal and monetary policy issues, thus creating confusion.

The statement also dealt with the funding aspect and loans. “Government will alternatively use own foreign exchange resources to settle the said loans,” the RBZ said.

Finance minister Mthuli Ncube’s 29 May statement

Introduction

1. Under the National Development Strategy 1, Government has made considerable progress in fostering domestic macroeconomic stability by implementing a broad range of fiscal and monetary stabilisation measures.

2. In order to continue on the macroeconomic stabilisation front, Government on the 21 of May 2023, introduced the following additional measures to curb the further depreciation of the local currency and increases in prices marked in domestic currency:

• Increasing the retention on domestic foreign currency sales to 100%- This has resulted in domestic businesses accessing more foreign currency from the market and this potentially translating into additional US dollar deposits in the banking system;
• Adoption of all external loans by Treasury — This process is well under way and will result in all external liabilities being funded transparently through the National Budget;
• Increasing Consumers’ Access to Basic Commodities- Lifting all restrictions on importation of basic goods which has promoted competition thereby resulting in a reduction in prices; and
• Promotion of use of domestic currency by Government Agencies which is expected to further increase the demand for the local currency.
  
  Following on the decision for adoption by Treasury, conferring full responsibility on it, of repaying all foreign currency denominated loans contracted through the Reserve Bank of Zimbabwe, Government announces supportive measures as follows:
• Government will implement the following measures as from 01 June 2023:

• Treasury will now fund the Zimbabwe Dollar component of the 25% foreign currency surrendered by exporters, in order to eliminate the creation of additional money supply. The foreign currency collected from the 25% that is surrendered, will now be collected by Treasury and utilised in servicing the foreign currency loans assumed from the Reserve Bank of Zimbabwe. Banks will no longer withhold any foreign currency surrendered by exporters, and all the liabilities to the banks will be settled through Treasury.
• Introduce a 1% tax on all foreign payments.
• Maintain the USD Cash withdrawal tax at 2%.
• Through Fidelity Gold Refinery, introduce a system to manage traceability of gold from its origin, both commercial and small scale, in line with international standards.
•  All excise duty on fuel will now be paid for in foreign currency.
  
  3. In order to encourage banking of foreign currency, which is mainly in the informal sector, while promoting use of the local currency Government will:

• Reduce the local interbank foreign transactions IMT tax to 1% ;
• Reduce the POS IMT tax in foreign currency to 1%;
• Promotion of use of the domestic currency:

i. All Government Agencies including Parastatals will substantially now collect their fees in local currency;

ii. Payments to ZESA by non-exporters will be made in the local currency; and

iii. All Customs Duty to be payable in local currency, with the exception of designated or luxury goods. and where the importer opts to pay in foreign currency.

4. Treasury will assume all foreign currency debts from the Reserve Bank of Zimbabwe on 01 June 2023.

5. Government shall create a debt redemption fund to service other external liabilities in line with the arrears clearance program. These will be funded through new levies and other resource mobilisation initiatives.

Other Supportive Policy Measures for Immediate Implementation

6. The above will be supported by the following policy measures:

•  All export proceeds that remain unutilised after 90 days will be liquidated onto the interbank market.
• The weekly auction will be limited to a maximum of US$5 million. • As from 1 June 2023, winning bids at the auction will be paid within 24 hours of award.
• All public foreign currency debts will be contracted by Government and will be the responsibility of Treasury.
• There will be tightening of monetary policy in order to reduce lending and hence money creation by banks.
• All manufacturers selling general goods, such as cement, milk, soft drinks, etc for the export market, will now be required to charge VAT, which is refundable by ZIMRA after exporting.

7. Government will continue to sterilise excess liquidity already injected into the economy through issuance of Treasury bills, whilst the Reserve Bank will also continue to sterilise through appropriate monetary policy tools.

8. With regards to externalisation of funds and transfer pricing, Government will strengthen surveillance and monitoring, complemented by a robust foreign currency payment system and information sharing system between financial institutions and ZIMRA.

9. Government will continue to review Civil Servants salaries and allowances in line with the above developments and policy measures, including increasing the threshold of the local currency IMT tax.

Conclusion

The assumption of the external obligations by Treasury and implementation of non-inflationary financing of the liabilities, coupled by sourcing of additional resources. will go a long way in reducing money supply growth and its impact on exchange rate depreciation and price increases.

Government remains firmly committed to the maintenance of macro-economic stability, the preservation of the purchasing power of the Zimbabwe dollar and the restoration of trust and confidence in the economy.