By Stephen Chandisareva
HARARE – The International Monetary Fund (IMF) has joined local industrialists in calling for ditching the use of the official exchange rate with a capped margin of 10% for formal retailers, as it is affecting the going concern of several companies.
Policymakers had also recommended the removal of the 10% margin cap on the in-store exchange rate and the removal of the intermediate money transfer tax on card transactions for customers.
For formal retail, OK Zimbabwe said in its financials for the half year ended 30 September 2023 (HY24), that the mandated use of the official exchange rate with a 10% limited margin resulted in a large loss of volume to the informal sector, which had greater exchange rate freedom.
“However, ZWL instability intensified: the official exchange rate has depreciated by about 95 percent since the beginning of December 2023; the gap to the parallel market rate remains wide and ZWL inflation is still very high.
“This instability weighs on sentiment, while exchange rate restrictions prescribing retailers to use the official ZWL exchange rate with up to a 10 percent margin—inflating US dollar prices continue to be a burden on the formal sector.
“They promote informality, which erodes the tax base and undermines longer-term growth prospects,” IMF staff team led by Wojciech Maliszewski said in a statement after discussions with the authorities about their request for a Staff Monitored Program (SMP) and the commencement of 2024 Article IV consultation.
The local economy continues to suffer from strong headwinds, which are further compounded by the rapid exchange rate depreciation.
“The mission encourages the authorities to accelerate the FX market reform by promoting a more transparent and market-driven price discovery in the official exchange rate and by removing existing exchange restrictions and distortions,” Maliszewski said.
“In particular, the restriction on the 10 percent allowable trading margin for pricing domestic transactions should be eliminated.”
The IMF Staff recommended that a strong framework for monetary and exchange rate policy should be established in tandem with the FX market reform.
“Establishing such a framework requires careful preparations, including, among other steps, comprehensively addressing underlying sources of fiscal pressures.
“The RBZ Act should be amended, including to narrow its legal mandate to core functions,” Maliszewski said.
IMF indicated that Zimbabwe’s real gross domestic product GDP will grow 5.3% in 2023 on the back of an expansion in agriculture and mining and—buoyed by related foreign currency inflows and by remittances—in highly-dollarized domestic trade and services.
The growth, however, is expected to slow to 3.5% in 2024 due to weaker global demand for minerals and a weather-related slowdown in agriculture.
“Risks remain skewed to the downside, and the outlook will crucially depend on progress towards macroeconomic stabilisation and transformational structural reforms,” Maliszewski added.
The mission discussions covered policies to restore macroeconomic stability and improve growth prospects, focusing on finalising the transfer of the RBZ’s quasi-fiscal operations to the Treasury and addressing other sources of fiscal pressures; liberalising the foreign exchange market and establishing an effective framework for exchange rate and monetary policies; and progressing on reforms to improve economic governance.