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ZIMBABWE’S cash-strapped government has been advised to lower the new foreign currency Intermediate Money Transfer Tax (IMTT) to 1%, from 4%, to boost revenue collection.

Last month, as part of measures to promote the usage of local currency, President Emmerson Mnangagwa announced a new 4% IMTT on all domestic foreign currency transfers. The idea was to make transacting in foreign currency expensive so that people opt for the Zimbabwe dollar.

The measure was introduced at a time when the central bank estimated that US$1,5 billion was being transacted in the informal market, far beyond the foreign currency circulating formally.

However, within the informal market, consumers are using hard cash in day-to-day transactions to avoid tax as well as high mobile and banking charges.

“The level of informalisation in the country is now estimated to be between 70-75%. This means that the shadow economy in Zimbabwe transacts billions more than the formal economy,”

economist Victor Bhoroma said in an interview.

The shadow economy weighs heavily on economic recovery efforts as tax revenues dwindle and Treasury is forced to institute more taxes on the compliant few.”

He said Zimbabwe’s complex tax environment was largely to blame for the country’s increased rate of informalisation, thus depriving the government of the much-needed revenue for economic growth.

To manage this, Bhoroma said the government needed to simplify its taxation model and create robust systems that monitor business transactions in real time and enforce tax compliance.

“The government needs to invest in internet-based systems that monitor business transactions to maximise on other taxes affected by informalisation, so that IMTT can be kept at 1%,” he said.

The government introduced the 2% IMTT tax in 2020 owing to increased mobile money and bank transactions.

However, formal businesses have in recent years been calling on the government to scrap some of these taxes arguing that they are unsustainable and increasing production costs.

Bhoroma said the government’s recent decision to hike IMTT on domestic foreign currency transactions would result in massive shortages of United States dollars.

“The latest move stifles deposits to local financial institutions, encourages informalisation and discourages transparency on various businesses and traders.

“Players in the economy will do all they can to avoid IMTT tax and trade in hard currency,” he said.

“This increases demand for and creates shortages of foreign currency in the formal sector, as people would prefer holding on to hard currency, than electronic money,” he said.

The country is once again in the grip of a severe economic crisis characterised by shortages of foreign currency, unemployment of more than 90% low production, and high inflation.

Barely three years after the reintroduction of the Zimbabwe dollar its value has plunged dramatically. From trading at around $210 to US$1 at the beginning of March to $500 to US$1 on the parallel forex market.

The Zimbabwe Coalition on Debt and Development (Zimcodd) said Finance minister Mthuli Ncube should introduce measures that allow for the free flow of foreign currency in the country to tackle the current liquidity crunch, instead of coming up with the 4% IMTT.

“This exerts a disproportionately negative impact on the poor majority with small forex balances which can hardly move the exchange rate.

Increasing the cash withdrawal levy also increases transacting costs thus reducing the real value of earnings, mostly for those on the lower bound of the income distribution scale,” the pressure group said.

“More so, the authorities should be alive to the fact that not all domestic forex transfers are being done to provide liquidity to the black market as some of these forex transactions are done by businesses restocking, settling utility bills or paying for key supplies, like industrial inputs while others are done by households paying for critical services like
healthcare.”

Zimcodd added that the new policy stance would likely trigger US dollar inflation which will feed into Zimbabwe dollar inflation.

“Given the already elevated imported inflation as a result of severe global supply chain disruptions, a looming poor 2021-22 agricultural season, and possibilities of policy slippages ahead of the 2023 general elections, the policy measures exacerbate the suffering of poor citizens as businesses can pass the resultant inflation burden to the consumer, especially on staple food with inelastic demand,” Zimcodd said.

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