By Rajib Naran
A SPIKE in the Zimbabwe dollar exchange following the liberalisation of the foreign exchange (forex) market in February last year is symptomatic of the country’s unhealthy balance of trade whereby our imports far outstrip exports, thus creating the prevailing forex shortages that are fomenting currency instability.
The National Industrial Development Policy (2019-2023) immediately comes to mind as one of the policy measures seeking to stimulate production, and so is the US$12 billion mining sector roadmap being spearheaded by the Minister of Mines and Mining Development, Hon Winston Chitando, until 2023.
In the agricultural sector, the Ministry of Lands, Agriculture and Rural Resettlement is in the midst of implementing programmes and projects whose objective is to revive an industry that used to be the engine driving Zimbabwe’s economy.
Even as the country is in the throes of fighting COVID-19, these and other policy initiatives mustn’t suffer a miscarriage as happened with other promising policy measures which were discarded before they could even be implemented.
It suffices to say, henceforth, emphasis must be on export-oriented production, with our bureaucrats assisting with investor-friendly policies that are capable of attracting elusive foreign direct investment (FDI) which can get moribund industries in Belmont, Workington, Southerton and Graniteside to work again, while also giving rise to new businesses.
In good time, Zimbabwe should be able to achieve a trade surplus to end the forex shortages militating against production and stabilise the local unit, which has lost significant value ever since the foreign exchange market was liberalised.
In the intervening period, it would be premature, reckless or both to engage in debate about the relaxation of surrender requirements as that would create even more complex challenges for the country’s economy. This is not to dismiss the valid but somewhat exaggerated concerns of our exporters who are arguing that their operations have been rendered unviable because of the current retention thresholds.
Far from it, retention thresholds – coupled with other stability-inducing measures being implemented by the Reserve Bank of Zimbabwe (RBZ) – should be able to create efficiencies in the allocation of forex between the public and private sectors. Therefore, to push for the complete removal of surrender requirements in the hope of retaining funds for working capital and expansion as well as trying to avoid the hustles that come with queuing for foreign currency on the official market is at best selfish and unpatriotic, at worst, because it completely ignores the big picture.
To start with, there is no empirical evidence, nor study linking the relaxation in surrender requirements or even their complete removal with growth in exports. What is, however, apparent is that falling for such self-serving arguments would have the effect of drastically reducing the amount of foreign currency available to non-exporters.
This will obviously pose a huge risk to non-exporters whose operations are also depended on imported spares and consumables. Perhaps the biggest loser would be government which has the constitutional responsibility to provide essential services such as drugs and hospital equipment for public hospitals, water and electricity.
Because of their impact on economic agents, exchange controls regulations are hated and loved in the same measure. Hated because they are an extension of the bureaucracy that seeks to regulate markets but loved because the broader objective behind their enforcement is to protect national interests. That there is heated debate over existing surrender does not come as a surprise.
Exchange controls in Zimbabwe date back to the pre-independence era. In fact, a tight and stringent exchange control system was introduced during the Unilateral Declaration of Independence (UDI) period to alleviate possible balance of payments problems due to economic sanctions.
Exchange controls are government-imposed limitations on the purchase and/or sale of currencies. These controls allow countries to better stabilize their economies by limiting in-flows and out-flows of currency, which can create exchange rate volatility.
Not every nation may employ the measures, at least legitimately; the 14th article of the International Monetary Fund’s Articles of Agreement allows only countries with so-called transitional economies to employ exchange controls, of which Zimbabwe is one of them.
Many western European countries implemented exchange controls in the years immediately following World War II. The measures were gradually phased out, however, as the post-war economies on the continent steadily strengthened; the United Kingdom, for example, removed the last of its restrictions in October 1979.
Countries with weak and/or developing economies such as Zimbabwe generally use foreign exchange controls to limit speculation against their currencies. They often simultaneously introduce capital controls, which limit the amount of foreign investment in the country.
Here in Africa, a number of countries have this system in place, some for far much longer period than Zimbabwe. In the case of Burundi, forex earned by traditional exporters is surrendered in full, while non-traditional exports surrender half their foreign currency earnings.
The Comoros and Namibia follows a more or less similar arrangement as in Burundi, while in Malawi there is a 60 percent surrender requirement for all exporters.
In Malawi there is 60 percent surrender requirement.
Recently, the National Bank of Ethiopia issued a directive for banks to surrender 30 percent of their forex inflows to the government to support critical public sector imports.
Earlier, the Bank of Ghana (BoG) had amended its surrender and repatriation of export receipts as part of measures to deepen the foreign exchange markets and promote greater transparency in the determination of the exchange rate.
In terms of the amendment, the portion of forex receipts from the export of minerals and cocoa (other than the proceeds of the cocoa syndicated loan) that was subject to surrender would no longer have to be surrendered to the BoG. Exporters are now required to sell the surrender portion of their exports receipts directly to the (commercial) banks.
Also, all exporters, except exporters who operate in accordance with retention agreements and who have been permitted to operate accounts offshore, are now required to repatriate in full all their export receipts to banks in Ghana, for the credit of their foreign exchange accounts or to be converted into cedis on need basis.
At this junction, it would be unwise to undo the surrender requirements because Zimbabwe’s economy is in the intensive care and requires heavy dosages of policy measures to sustain it.
Among the many items that require forex sourced through the surrender route are loan repayments for contracted offshore facilities; forex payment for non-exporters and the need to sustain government’s five-year long de-dollarisation agenda that entails encouraging the use of the local currency.
Zimbabwe’s economy is also fraught with structural rigidities which are largely a result of the misaligned macroeconomic governance framework, which means that the debate on surrender requirement is tantamount to tinkering with the symptoms in the absence of massive structural reforms to get the country back on the rails.
For now, I would argue that the prescription to our problems is production, production and more production, especially that which is focused on exports.
Rajib Naran is an ex-banker-cum-trade consultant. This opinion piece represents his personal views. For feedback, write to firstname.lastname@example.org