Exchange control regulations and export growth

The monetary policy committee for the Reserve Bank of Zimbabwe (RBZ) issued a circular with changes to export surrender requirements on the 7th of January 2021. The changes include immediately removing the compulsory requirement to liquidate all unutilized export earnings after 60 days and increasing the export earnings surrender portion from 30% to 40% on total export receipts. Previously all exporters surrendered 30% of their export earnings to the central bank for liquidation into Zimbabwean Dollar using the prevailing Auction Market Rate. However miners especially primary Gold producers were not happy with the scheme as it impacted on business viability. The committee also maintained the liquidation requirement for domestic foreign exchange sales at 20% net of sales tax, with Authorized Dealers required to remit funds to the central bank in the currency of receipt.

Zimbabwe exports goods worth about US$300 million per month, which means the central bank will now receive at least US$120 million/month (US$1.440 billion/year) before other sources such as foreign loans, grants and domestic sales returns are considered. Consequently money supply will significantly grow in the economy, thereby sustaining the current inflation levels. Last year reserve money grew by over 103% to about ZW$18.76 billion as of 31 December 2020. In terms of other foreign currency receipts in the whole economy, formal diaspora remittances constituted over US$950 million while non-governmental remittances and grants totaled over US$615 million in 2020. Foreign loans (largely mortgaged on export commodities such as Gold and Tobacco) exceeded US$800 million while income receipts were approximately US$56 million. Foreign Direct Investment (FDI) in the first half of 2020 was US$71.2 million, with projections that FDI inflows for 2020 would be below US$150 million. Overall, Zimbabwe received foreign currency receipts of over US$6.2 billion.

Despite this, the economy experiences acute foreign currency shortages especially in the formal sector where exchange control regulations compel foreign currency holders to liquidate their foreign earnings using a soft peg determined by the central bank. In the fourth quarter of 2020, the soft peg on foreign exchange allowed the Zim Dollar to trade between ZW$81 and ZW$82 to US$1. The auction market resumed on 12 January after the central bank had instituted temporary closure for the last 3 weeks.

Positive change in policy
The removal of a statutory requirement that compelled exporters to liquidate all unutilized export earnings within 60 days will have a positive impact to export viability. Key exporters such as miners and tobacco merchants will welcome the move as it supports business planning and longer production cycles. Therefore, exporters can hold on to their foreign currency earnings for an indefinite period to fund importation of critical raw materials, pay foreign obligations when they fall due and support business operations when necessary without offloading earnings at uncompetitive terms within 2 months in order to avoid losses.  

Impact on mining

The mining sector is Zimbabwe's key export earner contributing 75% of the country's export receipts since 2018. Gold export receipts fell 21% from US$972 million to US$770.4 million in the first 11 months of 2020 as compared to the same period in 2019. Overall production declined from 27.6 tonnes to 19 tonnes. The huge drop in export receipts was attributed to payment delays by the central bank. This created room for well-connected buyers to smuggle over 30 tonnes of the yellow metal to South Africa and Dubai, thereby robbing the country millions in potential tax revenues and externalizing millions in the process. Therefore, the increase in export surrender portion from 30% to 40% of total export receipts will rile Gold producers and dent any prospects of recovery in Gold production. Smuggling and money laundering through the yellow metal will undoubtedly increase. Similarly, other miners may conceal their real export earnings to evade taxes in foreign currency and improve viability.

Impact on exchange rate
The latest exchange control directives have a balancing effect on paper as exporters are now cushioned from liquidating their foreign currency in a rush, which ultimately curbs their demand for foreign currency when output declines or when foreign payments are delayed. However the increase in the surrendered portion impacts on business viability considering that exporters already pay their tax obligations, equipment and supplies, power and labour in foreign currency. The impact would have been minimal if the exchange rate was market determined and efficient. Currently there is a ZW$0.35 spread between the formal rate and the parallel market rate. The increase in surrendered portion will lead to increase in money supply and a squeeze on the available foreign currency which will likely push the exchange rate upwards.

Impact on industry competitiveness
Locally manufactured products already face competitiveness challenges on the export market as a result of the high production costs in the economy. Profit margins for local manufacturers (especially consumer goods) are slim and an increase in surrender requirements will undoubtedly eat into the slim profit margins. Selected producers will slowly increase prices and divert produce to the local informal market where they can be paid US Dollar in cash, while evading the stringent foreign exchange and tax obligations.



Zimbabwe Exports in the last 10 years
Experiences from SADC
In South Africa, exporters must surrender 100% of their foreign earnings to the Treasury through an authorized dealer. Proceeds are converted to Rands at the market determined rate if the exporter has no forward cover contract which fixes the rate. All export proceeds must be repatriated back to South Africa within 6 months except for special occasions where the South African Reserve Bank (SARB) approves otherwise. Critically banks play the allocation role and buyers can satisfy commercial banks or dealers with forward demands at market determined rates. In Mozambique (which is enjoying favorable foreign direct investments in gas exploration), export proceeds must be repatriated to Mozambique within 90 days, though the returns can keep 100% in local Foreign Currency Accounts (FCA) for liquidation at market determined rates when need arises. In Angola (with reserves of over US16 billion), oil and gas exports provide bulk of the country's export earnings. The economy is therefore primarily US dollar based and the Banco Nacional de Angola (BNA) conducts the sale of all the retained foreign currency to commercial banks by way of an electronic auction system. Zambia, Botswana and Tanzania have no export controls at the present moment as they seek to improve their investment climate.

The wide gap between the parallel market rate and the formal rate will continue to pose challenges for the country's export growth, pricing and foreign currency supply in the local market. Zimbabwe does not have a foreign currency shortage as its exports compare favorably with other Sub Saharan countries such as Ethiopia, Tanzania and Kenya which actually boast of larger economies. The local economy has a trust and confidence deficit in the local currency and local financial institutions which promotes trading in hard foreign currency. The increase in export surrender requirements does not support export growth considering that the formal auction rate is not market driven and the foreign exchange market is not efficient in the allocation of foreign currency in the economy.

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Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.