The 2% Tax Trap Why Zimbabwe Can’t Let Go

By Newton Mambande

HARARE – AS an economist, I have been following the debate surrounding the 2% Intermediated Money Transfer Tax (IMTT) with great interest. Finance Minister Mthuli Ncube’s refusal to scrap the tax has sparked an intense discussion, and for good reason. The IMTT is a double-edged sword, providing much-needed revenue for the government while simultaneously stifling business activity and encouraging a shift to cash.

Why Mthuli Ncube is Standing Firm

Ncube’s argument is straightforward: the IMTT is a critical source of national revenue, accounting for around 8% of total tax collections in 2024. Removing it would create a significant budget shortfall, forcing the government to either increase other taxes, such as VAT, or cut essential spending. Neither option is palatable in the current economic climate.

The Economic Implications

Retaining the IMTT has several significant implications. First, it ensures a steady stream of fiscal revenue, funding crucial government programs like infrastructure development and social services. Second, from a monetary policy perspective, the tax helps reduce the money supply, thereby curbing inflationary pressures. However, a major downside is its impact on financial inclusion; the tax discourages the use of formal financial services, pushing transactions into the informal sector and undermining broader inclusion efforts.

Impact on Insurance Companies and Banks

The IMTT directly affects financial institutions in multiple ways. It leads to reduced transaction volumes, which impacts bank revenues from processing fees. Furthermore, insurance companies and banks often absorb the cost of the tax, an expense that is frequently passed on to customers, making financial services more expensive. Finally, the tax incentivizes a shift to cash, which increases operational costs and security risks for these institutions.

A Way Forward

Given these complexities, a balanced approach is needed. Possible solutions could include reducing the tax rate gradually to 1% or less, as proposed by the Zimbabwe National Chamber of Commerce. Another option is exempting vulnerable groups, such as low-income individuals, or specific transactions like salary payments. Ultimately, the government should focus on broadening the tax base by implementing measures to increase overall tax compliance, thereby reducing its reliance on the IMTT.

While the 2% IMTT remains a contentious issue, its removal requires careful consideration of alternative revenue sources. A nuanced approach that balances immediate fiscal needs with long-term economic growth is essential for ensuring Zimbabwe’s stability and prosperity.

Newton Mambande is an economist and researcher. He has published scientific research in academic journals. He is reachable via email at newtonmunod@gmail.com, WhatsApp, or Call: +263773411103.