- Govt mandated corporates to pay June taxes, 50% in Zimbabwe dollars
- This is a measure taken to create ZWL demand
- However, will it work?
Harare- The Zimbabwean government has implemented measures to address the country's ongoing financial crisis, which has resulted in the failure of the Zimbabwean dollar to serve as a reliable store of value and medium of exchange.
In an effort to boost demand for the struggling currency, the government has mandated that businesses pay 50% of their corporate taxes in Zimbabwean dollars, rather than in US dollars or other foreign currencies for June.
In a statement published on the 23rd of June, government urged tax payers to settle 50% of their June foreign currency corporate tax obligations in local currency. Government said it will not accept any 100% tax obligations in US dollars for or any other foreign currency for the corporate income tax due in local currency for the June Quarterly Payment Date.
“Tax payers without adequate Zimbabwe dollars to meet the local currency tax obligation should urgently approach the Reserve Bank of Zimbabwe through their banks to facilitate disposal of their USD holdings in order to access the requisite Zimbabwe dollars,” read the statement.
This move is not a double-edged sword that could either strengthen or weaken the Zimbabwean dollar, despite depending on whether businesses comply with the formal channel of obtaining the currency through the Reserve Bank of Zimbabwe (RBZ) or turn to the parallel market, where the exchange rate is significantly higher. However, it has short legs.
If businesses choose to follow the formal channel, demand for the Zimbabwean dollar will increase, leading to a stronger currency. This will also increase the US dollar units of the RBZ.
However, if businesses opt for the parallel market, the RBZ will continue to face a shortage of US dollars, which are needed to support the Zimbabwean dollar but the Zimbabwe dollar will continue firming due to increased demand.
The problem with the measure is that it will only cater for June. What about July, August September? This measure should have a long-life, throughout the year to ensure that there is no volatility in policy making. Also, for effective demand, the government should also consider 100%, or at least 75% of tax payments in Zimbabwe dollars.
Lack of that means the government itself does not trust its own currency. Tax payments in Zimbabwe dollars will create an overhaul demand of the embattled currency. However, due to the confidence deficit of the currency, government is unlikely to do that, as doing that will be unwise too.
To achieve long-term stability for the Zimbabwean dollar, the government must address the confidence deficit problem, fiscal indiscipline, and the country's debt crisis. A lack of confidence in the currency has led to its depreciation, which has in turn fuelled inflation and budget deficits.
Furthermore, until the government resolves its international debt, it will continue to create money to fill budget deficits, exacerbating inflationary pressures and perpetuating the cycle of economic instability.
Overall, the government's current policy of mandating that businesses pay taxes in Zimbabwean dollars may help to boost demand for the currency in the short term, but long-term stability will require more comprehensive reforms.
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