STOCKBROKING firm IH Securities says a cut in Intermediate Money Transfer Tax (IMTT) is expected to ease the liquidity situation in the economy.
Debt-ridden Zimbabwe has been primarily relying on domestic resources such as taxes and grants to finance some of its key capital projects as the economy continues to wobble.
Finance minister Mthuli Ncube last week reduced IMTT in foreign currency to 1% from 2% to ameliorate transactional costs which had been blamed to pushing up prices.
Analysts say the the month of May saw further destabilisation of the local currency despite liquidity management tools that had been deployed in the prior month such as the gold-backed digital coins.
The official rate on the official auction fell by 85% to the dollar, while the interbank rate weakened by 87% during the month of April, as monetary authorities rapidly devalued the local currency to close a widening gap with the parallel rate.
At peak, the parallel market premium within the month was 135%, then closing the month at 91% at the commencement of a refined Dutch auction system.
“The reduction of USD IMTT will hopefully encourage some return of USD deposits into the banking sector, potentially resulting in some uptick in liquidity,” reads IH’s research note for May.
“To prevent a complete slide into dollarisation, it was critical that government shows conviction in the ZWL by creating the demand for it. By allowing all customs duty to be payable in ZWL, we expect demand for the local currency to increase. Theoretically this should trigger private sector participation on the supply side of hard currency as companies sell to meet obligations.”
Treasury, which has in recent times faced sharp criticism for overlapping in traditional central banks roles, is also hinting at a sharp increase in short-term interest rates of tenors up to six months to stamp out speculative borrowing and reduce the velocity of the local unit.
The government has also said that it will promote the growing and committed use of the local currency for domestic transactions by ensuring levies and fees charged by its affiliated offices are payable in Zimdollars.
The government continues to strengthen its tight monetary policy stance.
With Treasury now handling external loans, IH says money supply is expected to remain on a leash as the 25% United States dollar retentions will be settled using tax revenue.