INDUSTRY experts have decried the decision by the central bank to increase the export retention threshold to 40% as it will affect production targets of manufacturers at a time the government is prioritising productivity.
Reserve Bank of Zimbabwe governor John Mangudya revealed that in the (RBZ) Monetary Policy Committee meeting on January 7, a number of decisions were made including that of increasing the export surrender requirement to 40% from 30% on all export receipts.
And while the RBZ, simultaneously, scrapped the compulsory requirement to liquidate all unutilised export proceeds after 60 days, the increased export retention threshold is expected to hurt businesses production plans.
The RBZ announcement to increase the export retention threshold is also an admission that the foreign currency auction, implemented last June, is failing to adequately supply the greenback to manufacturers.
“I think it’s an admission that the auction was unsustainable as it is. In other words, they were not getting the cheaper option of ZW$82 (official forex rate of between the ZWL and greenback). They have gone back to pegging the rate although they deny it,” economist Tony Hawkins said.
“They are using the control of imports to do that while they do not have enough money to maintain that so they are going to take more money from the exporters.”
Hawkins said increasing the export retention will not enhance productivity.
“You cannot increase productivity by starving imports. Firms need to buy imports from the cheapest source they can get them. Of course, government policy is to try and force firms to try to buy and source products in Zimbabwe if they can, so it’s really that they have got an import control strategy,” Hawkins said.
“That might work, but it’s not very good for productivity because it reduces efficiency. At the same time, it shows how keen you are about the African Continental Free Trade Area. You are shutting out imports and saying lets have more trade? Really it makes no sense.”
Hawkins said the solution was an external cash bailout to improve foreign currency in the country, but pointed out that this bailout hinges on the government implementing credible reforms.
He did however commend the decision to scrap the 60 day requirement.
The move to increase the export retention threshold is a threat to productivity as it would mean money that had been designated for increasing production will now be surrendered to the central bank.
As a result, government plans of a 6,5% growth in manufacturing may be hindered considering how that growth is based on “fiscal and monetary reforms and enhanced availability of foreign currency from the foreign exchange auction system”.
Already, companies are complaining that they are not getting adequate foreign currency from the forex auction which was already affecting production. Thus, relinquishing more foreign currency will negatively affect manufacturers even more.
Economic analyst and CEO Africa Roundtable chairman, Oswell Binha, said in the last three weeks of trading on the forex auction last year, many businesses were not getting their money timeously and had to wait causing delays in production.
“I am not a proponent of any surrender requirement however you want to call them and I have said that to the central bank governor (John Mangudya). If the government wants to attract any foreign currency exchange into the system it’s not an issue of waiting for exporters to export and then against their will, take away their foreign exchange proceeds, no,” he said.
“Exporters must surrender their foreign currency exchange proceeds in line with their business models. So, what the central bank must seize themselves with, is stabilising our currency. They must be very honest with themselves whether our currency alongside the US dollar will continue to give you the confidence levels you need because the conversation of the re-dollarisation and the de-dollarisation has been overly politicised.
“So for me, the surrender requirements are not on. We want companies that do exports to finance five-year business plans. You can’t do that if you are periodically or at any given time losing parts of your production. What then motivates you to increase your production? You won’t be motivated to.”
Binha said that the continued tweaking and changing of policy intermittently was giving the government a bad image in the market.
Confederation of Zimbabwe Industries president Henry Ruzvidzo told businessdigest that his organisation was evaluating the potential effects of recent central bank measures.
“The auction has been a welcome development, it’s sustainability is very important. The impact of the recent measures is still being evaluated in the context of continuing currency reform,” he said.
Also, the move requiring more export proceeds to be surrendered is also threatening to increase external debt further, estimated at close to US$14 billion based on available documentation from the central bank and Parliament’s Budget Office.
This external debt includes loans taken from Afreximbank.
“Increasing the surrender requirement is expected to improve liquidity on the currency auction. The solution to the problem of forex availability is sorting out the exchange rate,” an industry insider, who asked for anonymity, told businessdigest.
“The black market premium is widening and exporters may feel hard done by liquidating their export earnings at the official rate when there is a lucrative rate elsewhere. The issue is the overvalued exchange rate.”
When asked whether this increased threshold will hurt manufacturers’ plans to increase productivity, the industry insider said:
“Yes. And it also encourages underground activities such as externalisation.”
In 2019, to avoid the collapse of the private sector, the RBZ assumed the legacy debt of private players.
This was due to the central bank’s years of export retention thresholds that led to private players being unable to pay for raw materials, leading to suppliers asking for upfront payments causing the RBZ to intervene.
“If the RBZ had not done that, companies would have collapsed… The government had to pay as there was no foreign currency for companies to pay that legacy debt,” a central bank official said.