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Budget to Confirm Full Dollarisation

ACTING Finance minister Patrick Chinamasa will on Thursday announce a budget in which government is making provision for the holding of elections, official sources have said.

The sources yesterday said the budget, which is being formulated with “active input” from the Reserve Bank and the Joint Operations Command, would effectively dollarise the economy.

 

 

 


It will, among other far-reaching measures, make all taxes for individuals and corporates, and all duties, payable in foreign currency. It is also expected to set out modalities for school fees payments in foreign currency  in addition to spelling out new policy directives to operate a dollarised economy.

Government, the sources said, should in the budget introduce special coupons to be used to pay civil servants. The coupons will have US dollar equivalent face values. This is being proposed to mitigate the absence of forex to pay government workers.

The coupons would be redeemable at designated shops.

Information to hand shows that a committee dominated by security personnel, the RBZ, officials from the Ministry of Finance and the Zimbabwe Revenue Authority has since November been working on the budget in which allocations will be set aside for the staging of an election later this year.

Last month at the Zanu PF people’s conference in Bindura, President Mugabe told his supporters to prepare for elections. The opposition has lately also been warming up to the idea of facing Zanu PF in fresh elections.

Details on the amount being reserved for the election could not however be obtained at the time of going to press.

Zimbabwe Electoral Commission spokesman Utoile Silaigwana said the commission was prepared to hold elections at any time that President Mugabe made a proclamation.

“I am sure that you are aware that we have never failed to hold elections. Once a proclamation is made, we know we will get the funding,” he said.

Silaigwana said they would not incur too many expenses as the commission had adequate stationery and manpower to conduct elections.

He however could not give the cost of the elections held in March last year saying he needed to check with the finance department to get the figures.  

The sources said to raise revenue, government would in the budget propose the payment of taxes in foreign currency. This, they said, would effectively dollarise the economy.

A formal agreement is required with the US authorities before a country can formally adopt the greenback as its currency. Zimbabwe however intends to use multiple currencies to transact business.

Officials from the central bank and government have lately been on a foray to Russia and North Africa to raise funding to finance state activities. There is market talk that government has mortgaged mineral reserves to Russian investors for hard currency.

On school fees, government could allow trust schools to collect up to 90% of fees in foreign currency while government urban schools could be given the green light to collect up to half in foreign currency. Rural schools would continue to offer tuition in Zimbabwe dollars.

The drafters of the budget have taken on board proposals from the Confederation of Zimbabwe Industries (CZI) for government to introduce foreign currency-indexed tax bands and a fuel levy in a drive to raise revenue for the cash-strapped government.

The CZI in its contribution to the budget formulation said government should introduce the new measures in order to boost its shrinking revenue base and promote employee retention.

The CZI also recommended the slashing of customs duties levied on luxury goods.

These proposals, the organisation argued, follow an inevitable drive towards the full dollarisation of the country’s battered economy.

However, with independent estimates suggesting that 80% of the economy is now informalised on the back of heightened corruption in government, this proposal could fail to boost the state’s declining revenues.

“Government should set tax bands in US dollars with the threshold at poverty datum line levels and maximum tax rate of 20% for those earning over US$1 000 per month,” read the proposal. “This will enable business to be more competitive on tax payments and help skills retention.”

This has been taken on board by government, a source said.

The confederation said the introduction of a foreign currency-indexed fuel levy would assist in balancing government finances.

“This tax must be set in line with regional practice to ensure that we remain competitive as a nation,” the CZI suggested.

Apart from the proposed tax reforms, the industrial body recommended that the Reserve Bank cease money printing.

The central bank has, however, continued introducing new notes with the latest being last Friday’s issuance of the historic $100 trillion bill.

“The primary mechanism that we are recommending is an interim dollarisation of the economy,” read the CZI proposal. “This is not a straightforward process and needs to be carefully managed. In particular we believe that there are not enough United States dollars in circulation to sustain meaningful economic activity. To that end the Zimbabwe dollar will need to be maintained as a parallel currency.

For the Zimbabwe dollar to fulfil its role as an effective medium of exchange, it is vital that the monetary base is frozen. If this is done then the Zimbabwe dollar will quickly find a level against international currencies and then keep this level.”

The CZI said the country needed to engage “international expertise” in dollarising the economy – a decision the organisation argued would prevent government utilities and private companies from charging “unrealistic” tariffs.

Last year, leading American monetary reformist Professor Steve Hanke advised Zimbabwe to use the South African rand in what he termed the “Randisation” of the economy and the establishment of a currency board to replace the Reserve Bank.

The Reserve Bank, the CZI proposed, should also reduce statutory reserves before freezing the monetary base to reduce the gap between borrowing and lending rates.

In an interview on Wednesday, CZI president Kumbirai Katsande doubted government’s sincerity in implementing fiscal policies that promote manufacturing despite numerous policy submissions by various stakeholders.

The current policy environment, according to the CZI, was “highly penal” to formal businesses and has led to a collapse of formal business activity and a mass informalisation of the economy.

“There is a misunderstanding here over government’s role,” Katsande said. “We are faced with a fluid situation that requires speed. Unfortunately this has not been the case with past policies. Its role should facilitate orderly trading and business growth.”

Turning to the monetary policy, the CZI wants an immediate review of the Reserve Bank of Zimbabwe Act with the view of creating an “orthodox independent central bank” guided by international practice.

Currently some critics blame the central bank for formulating “populist policies” skewed in favour of the ruling Zanu PF party.

BY BERNARD MPOFU

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