‘2% IMTT will drive USD out of banking system’

Nyashadzashe Ndoro

CHIEF REPORTER

Some analysts have said that government's recent move to standardise the Intermediated Money Transfer Tax on Zimbabwe Gold and US dollar transactions, will lead to flight of money out of the formal systems as businesses and individuals avoid punitive costs.

Statutory Instrument (80 of 2024) has created a flat rate of 2% IMMT to all ZiG, US dollar, and gold-backed digital token transactions up to US$100 or its equivalent in local currency with transactions of US$500 000 or more attracting a flat fee of US$10 150.

In an interview with this publication economist Zvikomborero Sibanda warns that the 2% tax will translate to higher business expenses, leading to reduced investment and hiring. He also anticipates businesses passing on this expense to consumers, fueling inflation and impacting disposable incomes.

“The impact of this move, number one being that this IMTT tax will increase transaction costs in business because we are saying whenever the business wants to make payments for goods and services supplied, 2% of that value goes to the government.

“So, it’s an expense. So, an increase in transaction costs is tantamount to an increase in expenses, which will significantly impact their profitability. As the business costs increase, it will reduce the amount available for investment as well as hiring,” Sibanda said.

“This move is also going to feed into inflation because businesses will try to, you know what we call the ‘incidences of taxes’, where businesses will try to shift this expense to the final consumer. So, it will feed into inflation.

“And we know the implications of inflation in the economy. It reduces disposable incomes, which then reduces consumer spending. Also, you have to look around that if prices are high, what is the impact in terms of widening inequalities within our societies.”

Sibanda further expresses concern that the tax will push Zimbabwe back towards a cash-based economy. With a large informal sector estimated at 70%, the 2% tax on ZiG transactions could incentivise the use of cash, a move that hinders financial inclusion efforts and promotes corruption and money laundering.

“Also, while the RBZ is pursuing a cash-lite economy under its Second National Financial Inclusion Strategy, which is characterised by low use of cash,” he said.

“So now, considering the fact that we are largely informal with some estimates pointing out that at least 70%, the move by the treasury to set 2% tax IMTT tax on ZiG will actually push us as a nation into a cash economy.

“And we all know the impact of having a heavy cash transaction. Number one being issues around it promotes corruption because we are dealing in cash, and there is nothing being recorded. It also increases things like money laundering, etc.”

Chenayi Mutambasere, a UK-based Zimbabwean economist, echoes these concerns. She terms the new tax regime “punitive” and highlights the reliance on electronic transfers in Zimbabwe’s current economic climate.

She predicts the tax will exacerbate inflationary pressures and destabilise prices due to businesses incorporating the additional cost into their pricing models.

The sudden policy change has also drawn criticism for its lack of planning, making it difficult for businesses to forecast liquidity and hindering their ability to make strategic decisions. Mutambasere calls for the need for comprehensive planning to avoid constant policy fluctuations that negatively impact businesses.

“The punitive tax regime is exacerbating the challenges within the domestic market, especially as electronic transfers have become the primary mode of payment for businesses in Zimbabwe. The persistent currency liquidity crisis since 2016 has necessitated the reliance on electronic transfers, making them not just acceptable but essential.

“However, this tax imposition will likely lead to inflationary pressures on prices in both USD and the local currency. Moreover, the sudden and critical policy changes reflect a lack of comprehensive planning, resulting in constant fluctuations that hinder businesses' ability to make accurate liquidity projections. To mitigate this uncertainty, businesses may incorporate provisions, ultimately passing on increased costs to consumers.

“Consequently, this cycle fuels price instability and hyperinflation, exacerbating the economic challenges faced by Zimbabwe,” she said.

While the government seeks to boost its coffers, businesses and economists warn of potential downsides, including reduced investment, rising inflation, and a return to a cash-based economy.

Speaking in Parliament on Wednesday, Deputy Finance Minister, Kudakwashe Mnangagwa acknowledged that increasing transaction costs may discourage people from using electronic transactions, but the government has had to balance this against the need to collect revenue.

He said that for now, the government prioritises revenue collection but will continue to monitor the impact on financial inclusion and electronic transactions, with the possibility of reviewing the policy if necessary.

“I think that is a fair comment. Increasing the transaction cost does indeed dissuade the general populace from transacting electronically, but this is something we have had to deeply introspect upon trying to balance the need to collect revenue versus the effort of allowing everybody to be financially included.

“At this juncture Mr. Speaker, we are still leaning towards the revenue collection necessity and we will continue to monitor as we go along, whether this skew hinders people from entering the realm of financial inclusion and electronic transactions upon which we can review,” he said.