- Reserve Bank of Zimbabwe has made it mandatory for exporting companies to settle a portion of their power bills in hard currency
- Exporters in Zimbabwe are already inundated with operating costs in hard currency while charging local currency prices for their goods and services
- Reserve Bank of Zimbabwe has through this regulation entrenched the use of hard currency in the Zimbabwean Zimbabwe
he Reserve Bank of Zimbabwe has directed that all exporters and partial exporter settle their bills to the power utility the Zimbabwe Electricity Supply Authority (ZESA) in hard currency namely in United States dollars and other currencies.
This latest policy pronouncement was made on the 13 of July through Statutory Instrument 131 of 2022. The policy pronouncement mandates the national power utility to collect bills from so-called exporters in hard currency for the next six months.
ZESA the power utility has been making impassioned pleas for the authority to collect bills in hard currency because it bills its customers in free-falling Zimbabwe dollars but incurs operating expenses in hard currency.
The utility requires foreign exchange to import spares and electricity from other power utilities in the region. The utility has warned of power cuts if it is not able to access foreign exchange which is scarce in the southern African country. Zimbabwe experiences some of the worst power outages in the region where rolling blackouts can go for as long as 10 hours at a time. Recognizing this problem, the central bank in its wisdom has decided to direct exporters to pay for the electricity that they use in hard currency. This begs questions over the sustainability of this policy directive and its impact on the broader economy. This policy position is not new. It was first mooted in 2019 at the height of the foreign exchange shortage.
This latest directive sees the government directing what they describe as exporters and partial exporters to settle no more than 35% of their power bills in hard currency, that is the United States dollar or its equivalent in Euros or any other currency at the prevailing exchange cross rate.
The remainder of the bill will be settled by exporters and partial exporters in Zimbabwe dollars at the prevailing interbank rate on the day of settlement. Scholars of policy will recall that seldom will a government implement a policy whose effect will be isolated to where it is directed. The case is the same in this instance. The Statutory Instrument describes exporters as “a business organization which exports on average eighty per centum or more per quarter of its total output of goods or services produced or provided by it in Zimbabwe, for which it lawfully receives any foreign currency”, and a partial exporter as “a business organization which exports on average less than eighty per centum per quarter of its total output of goods or services produced or provided by it in Zimbabwe, for which it lawfully receives any foreign currency”.
The definition of an exporter within the context of this statutory instrument refers to businesses that generate at least 80% of their income from export proceeds. This definition reveals the targets of the policy. It is directed at the mining companies that are based in and operate from Zimbabwe. There are few companies that draw their income from exports, especially at the threshold set by the government at 80%. The mining companies especially those that mine platinum and gold are the only entities which one can reasonably expect to generate revenues of such magnitude from exports. On the face of it, it seems logical for the authorities to require these entities to settle their power bills in foreign exchange because the processes that they employ to extract and beneficiate minerals are energy intensive. If this was the only premise for the regulation it would be sufficient and fair however, in the specific case of Zimbabwe there tends to be more than meets the eye.
This policy position is not sustainable for several reasons. Zimbabwe is in the throes of a currency crisis since the reintroduction of the Zimbabwe dollar in 2019 and the introduction of the surrogate currency in 2016 called the Zimbabwe bond note. Right from its inception, the local currency has lost ground against other currencies. Mainly because of a lack of confidence by economic agents but predominantly because Zimbabwe is import reliant and there is little foreign exchange to go around.
For businesspeople to operate their businesses sustainably they have had to price their goods and services in foreign exchange, especially in United States dollars. This was illegal in 2019 when the local currency was reintroduced. The government, however, did an about turn when it reintroduced the United States dollar in 2020 at the onset of the COVID pandemic. Towards the end of June 2022, the government capitulated its policy position of de-dollarization when it legalized the use of the United States dollar which will circulate in the economy alongside the Zimbabwe dollar.
- The central bank has mulled this position before and it proved to be unsustainable in the past. What will be different this time?
Among Zimbabweans, there is a clear preference for the use of the United States dollar over the local currency. This is to the extent that there are some government services which cannot be accessed without United States dollars.
There are also some basic household commodities and goods that one will need to pay for using hard currency and will not be able to purchase if they have the local currency. Following on the issue of the currency crisis is the fact that exporters are already heavily burdened with operating costs in United States dollars.
Regardless of whether it is an exporter or partial exporter, 40 per cent of all export proceeds generated by Zimbabwean-based exporters must be surrendered to the central bank. This is how the central bank has been funding its auction system to allocate foreign exchange to importers.
To be fair, the surrender requirements are not uniformly or universally applied. The central bank has introduced some concessionary measures. For instance, the tourism and agricultural sectors have been exempted from all foreign exchange surrender requirements. In the mining sector, players are allowed to retain up to eighty per cent of their export proceeds and only must surrender twenty per cent of their export proceeds.
There is also an incentive to those that increase their export proceeds. These get to retain eighty per cent of the incremental portion of their export income. Notwithstanding the concessions made by the central bank to exporters, the foreign exchange requirements are a pain point for businesses that generate their income from exports.
This policy is so problematic that listed crocodile skins and gold mining company Padenga Holdings lamented when it reported its earnings in June that it would have met and exceeded its revenue targets for the year were it allowed to retain its foreign exchange. The surrender requirements leave most companies unable to meet their own needs. In the worst of cases, there are companies that have incurred offshore loan and credit obligations hoping to service them from the export earnings. The surrender requirement regime incapacitates them. Some companies that have borrowed from offshore have started to default on their obligations. Additional pressure in the form of this new directive from the central bank will not give businesses reprieve. It will make it more difficult for them to operate.
This policy directive will have the effect of further entrenching the United States dollar as the preferred medium of exchange in Zimbabwe. The United States dollar will further eclipse the Zimbabwe dollar in terms of being a store of value, unit of account, and medium of exchange. If exporting companies are mandated to pay their utility bill in hard currency, they will pass on that additional cost to the consumer. It will not be surprising to find these exporting companies asking for hard currency in exchange for their goods and service. This trend has already begun and will grow.
If these exporting companies are not able to pass on the US dollar cost to consumers, they will charge their goods and services at an exchange rate that is prevalent on the parallel market especially given a scenario where they cannot access foreign exchange through formal channels. This has tended to be the case in most instances and is the reason why parallel market activities have been burgeoning and the reason for the stubbornly high inflation. Whatever outcome becomes reality in the future remains to be seen however, what this new regulation has done is to ring the death knell for the local currency.