‘High taxes threaten financial inclusion drive’

ZIMBABWE’S drive for financial inclusion is being dealt a huge blow by the government’s decision to increase taxes in the financial services sector, experts and business leaders have said.
The Reserve Bank of Zimbabwe (RBZ) has for the past decade pushed for the country’s unbanked population to participate in the formal economy by encouraging innovation in the financial technology sector.

However, the need to promote the local currency has seen the government introducing a number of measures, including increasing taxes on mobile money transactions, a move analysts say goes against the grain of promoting financial inclusion.

Economists say financial exclusion hurts efforts to formalise the informal sector and it reduces the extent of shadow banking.
They say financial inclusion provides an improved framework for monitoring and supervision of financial transactions and, in turn, shields the customer from malpractice and the financial system from unwarranted shocks.

President Emmerson Mnangagwa

“The best way to foster financial inclusion is to remove impediments. You don’t want to put too many taxes on foreign currency, particularly in our situation where we have a large informal sector, which is above 70 to 80 percent.
“Already those people are not banked, the only way to bring the money bank into the formal channels,” said economist Gift Mugano.

This comes after President Emmerson Mnangagwa in May hiked intermediated money transfer tax on domestic remittances to four percent from two percent to reduce the appetite for foreign currency in the country.
But Mugano said the four percent was too much as it discourages people from participating in the formal sector, as they will simply use cash to avoid paying high taxes.

“The four percent transaction tax on foreign currency will discourage people from depositing money in the banks. This policy measure will regrettably result in informalisation of foreign currency.
“Government needs to relook this measure and scrap it because we are receiving over US$1,5 billion from the diaspora, and ideally, we would want to see this money circulating in the formal sector,” he said.

Economist Clemence Machadu said the punitive tax on domestic forex transactions will only succeed in fuelling more informalisation, in an already highly-informalised environment.
“It will deter folks from using the formal domestic remittance channels as they take matters into their own hands. In this low-income economy of ours, no one just wants to part with their hard-earned money when they have other ways of avoiding that.

Gift Mugano

“In my view, this is not a pro-poor policy as it is only coming to cut a chunk of the already low disposable forex incomes of the majority of the citizenry.
“This tax will also affect business in that there will be reduced demand from households and it might also affect lending in foreign currency.”
Machadu noted that the government should therefore, “not be drunk from its strong appetite to promote the use of local currency to the point of shooting itself in the foot”, especially in an environment where confidence is already low.

“Focus should therefore, be on promoting more domestic remittances at lower remittance costs, so that the government can earn its revenue from the already existing methods, prior to the introduction of this tax,” he added.

CEO Africa Roundtable chief executive Kipson Gundani said the four percent tax should be reviewed.
“It encourages informalisation where the bulk of US dollar transactions will happen in the informal sector. Once money moves out of the banks, it is very difficult for that money to go back as people try to avoid such kinds of taxes.

“It simply makes the cost of doing business high. It doesn’t foster financial inclusion as banking becomes expensive. It’s not a smart policy to have as it has more negative connotations than positives,” Gundani said.

Morgan & Company’s Batanai Matsika said authorities should consider encouraging innovation in the financial technology sector instead of imposing more taxes.
“The whole idea of financial inclusion is based more on the appropriate offering for the local market. Of course, there are some monetary pressures in terms of trying to promote the local currency, but I think the focus should be around fostering relevant products for the populace and also educating different sectors on different financial products and how we can also take advantage of different platforms in terms of transacting,” he said.

The Zimbabwe Revenue Authority (Zimra) says it collected $45,29 billion through the intermediated money transfer tax during the year ended December 31, 2021, an increase of 228 percent compared to the $13,78 billion collected in the prior comparative period.
The much-debated levy was introduced in October 2018 when the government launched its austerity programme — the Transitional Stabilisation Programme (TSP).
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