Businesses Fight Rule That Cuts Profits

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Global Press Journal

TOBACCO grower Shava Manomano fumes as he sits on a bale of yellow-gold leaves, watching buyers move along an auction floor in Harare, Zimbabwe’s capital. The buyers, wearing face masks, partially fill the cavernous, well-lit space. The aroma of tobacco bathes the room.

Manomano sold his tobacco for United States dollars. But he’s angry because the Zimbabwean government converts 40% of that foreign income into local currency.

“My tobacco is bought and paid for in U.S. dollars,” he says, “but then I get a portion of that payment in local currency, which is heavily affected by inflation. At the end of the day, I incur losses.”

To stretch his foreign currency, the farmer from Chiweshe, in northern Zimbabwe, turns to the unofficial parallel, or black, market. But “the prices that you get on the parallel market are ridiculous.”

In January, the Reserve Bank of Zimbabwe, the country’s central bank, raised from 30% to 40% the portion of foreign earnings that is automatically changed into local currency — known as the export surrender. Officially, the increase affects all sectors involved in exports, including agriculture, mining, manufacturing and transport.

It has pinched the profits and growth of small enterprises in particular. It also threatens to undermine President Emmerson Mnangagwa’s mantra that the country is “open for business.”

For two decades, corruption, hyperinflation, government overspending and uneven application of reforms have stunted Zimbabwe’s economic growth, and this latest policy has drained the confidence of potential foreign investors.

Zimbabwe already was scuffling to attract investors, according to the United Nations Conference on Trade and Development. Between 2018 and 2019, the country saw foreign investment collapse from $745 million to $280 million.

“The huge factors that scare away investors include toxic politics and policy inconsistency,” says Ithiel Mavesere, an economics lecturer at the University of Zimbabwe in Harare. “To ensure confidence among the people, we need to come up with credible policies, be consistent in policy and have credible institutions.”

In an analysis of Zimbabwe on its website, the U.S. International Trade Administration notes: “Foreign currency retention requirements have challenged exporters, particularly when this gap has grown to such extremes, and international firms have faced challenges repatriating profits.”

And during a virtual event in May, Chris Hunnicutt, senior economic officer at the U.S. Embassy in Zimbabwe, noted challenges that affect investment in the country include “policy flip-flopping where things change unexpectedly.”

By increasing the export surrender, the government hoped to raise funds for the Foreign Exchange Auction Trading System, launched last year to bring stability, efficiency and transparency to foreign transactions.

“The huge factors that scare away investors include toxic politics and policy inconsistency,” says Ithiel Mavesere, an economics lecturer at the University of Zimbabwe

The Reserve Bank’s governor and deputy governor didn’t respond to interview requests.

A higher export surrender bloats business costs and “also encourages practices where people bank their money offshore to try and evade these policies,” economist Prosper Chitambara says.

Kudakwashe is one of those people. Kudakwashe, who asked to be identified only by his first name for fear of arrest, started a trucking business in December 2020 but skirts the new policy by slipping his foreign earnings into an offshore account.

“I realized that it was better to keep my money elsewhere, where I know I can withdraw it, as it is without a portion being converted into local currency,” he says. “If such policies were not in place, I would have had foreign currency accounts locally. But such policies will hinder growth, especially for startups like me.”