The World Bank has confirmed economic growth in Zimbabwe for the year 2021 but with subdued flows of Foreign Direct Investment (FDI), influenced by export retention policies.
Reserve Bank of Zimbabwe governor John Mangudya revealed the Monetary Policy early this year with a number of decisions including that of increasing the export surrender requirement to 40% from 30% on all export receipts.
Through export retention, exporters retain 60 percent of their foreign currency receipts while 40 percent of receipts are compulsorily paid in local currency. Since August 2020, firms operating in the domestic market have been subject to foreign currency retention of 80 percent of their US dollar transactions.
The Zimbabwe Economic Update (ZEU) from the World Bank has shown that an increased in export retention threshold is expected to keep productivity and competitiveness low in some sectors of the economy.
“Domestic demand is also projected to remain low as income remain subdued and limited flows of Foreign Direct Investment (FDI), influenced by export retention policies and other factors, are expected to keep productivity and competitiveness low in some sectors of the economy,” reads the update.
Major sectors towards economic growth sectors like agriculture and mining have decried the decision by the central bank to increase the export retention threshold to 40% as it will affect production targets of manufacturers at a time the government is prioritising productivity.
Speaking to the BusinessMail, one key player in the agricultural sector Jeremiah Gwanzura said the export retention system by the government was a positive move but not enough to resuscitate the agricultural industry.
“Government must take cognizance of the idea that the cost of production especially labour is being paid in USD currency and improve the foreign currency retention of at least 80% to 20% local currency for it will become viable for agro-business.
If prices are going to be low this can cause farmers to change the farming enterprises so a lot of positive systems and policies need to be put in place to support this golden leaf to earn more foreign currency for our country and improve the standard of living of our farmers, ” he said.
In January, after the introduction of the 60:40 percent in January, the Chamber of Mines, which represents the country’s biggest mine producers, warned the central bank that this may create “a viability crisis” in mining as companies already face increased demand for payment in hard currency from various government agencies, suppliers and service providers.
“On average, 60 percent of gross export proceeds are now taken by government departments and agencies, leaving inadequate forex resources for the mining firms to sustain operations,” the Chamber of Mines of Zimbabwe wrote to RBZ on January 19.
The miners say forcing them to surrender more of their forex earnings will leave them with less money to sustain operations, and unable to fund exploration, maintenance and expansion, including for critical power projects.
In line with this, World Bank in its recent Zimbabwe Economic Update urged regulators to discontinue forex retention policies to support economic activity.
“To stabilise the economy and ensure growth, policy makers must reduce the regulatory burden and policy inconsistencies, reduce barriers to regional trade and strengthen trade facilitation, privatize key SOEs in the medium term and discontinue forex retention policies to support economic activity,” reads the update.
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