Is this what the market wanted?

THE Zimbabwe dollar eventually ceased to exist on April 5, 2024, but in the period leading up to its demise, the government and financial institutions made every effort to save it.

Their actions ranged from identifying who had poisoned it to seeking a remedy for its ailment. The efforts leaned more heavily toward the former, resulting in a long list of suspects.

One thing that appeared on the list of was the stock market, and the argument raised was that the speculative behaviour on the market was undermining the local currency.

Whether this argument was substantiated can be an entire thesis on its own and an interesting one, considering that the stock market was suspended not once, but twice since the turn of the century for reasons related to this.

In fact, on one instance when the market was experiencing a bull run, the exchange found itself implementing measures to curb the volatility. They implemented measures such as reducing the circuit breakers and introducing a cooling-off period if a certain change to the index was experienced.

Despite all this, in 2022 under S.I. 103A the authorities increased the transactional costs to curb speculative behaviour on the Zimbabwe Stock Exchange (ZSE).

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The Withholding Capital Gains Tax (WCGT) was increased to 4% for anyone holding marketable securities for less than 270 days initially, and the number was reduced to 180 days later.

After holding the securities for the stipulated period, one could then attract a 1,5% tax instead of the initial 2%.

Essentially this meant that the market became very inefficient. The total roundtrip costs of trading in listed securities grew from 5,136% to 7,126% for short-term traders. This meant that if new negative information was availed on a security that one holds and wants to dispose of before the stipulated date, she would incur the high tax, and this would likely dissuade her from acting.

Liquidity then started to dwindle in the market, according to the presentation by the ZSE boss at the Capital Markets Conference the trades fell from the 1 000 per day average to 80 per day.

A comparison of volumes would have been a clearer picture, had it not been distorted by companies that migrated to the Victoria Falls Stock Exchange (VFEX).

When there is very little activity on the bourse, the markets seize to serve their purpose and it almost becomes a lose-lose scenario. The tax authorities will suffer from decreased collections, and so will the market intermediaries.

The traders themselves exit the market since it will not be able to provide a platform to execute their strategy. The potential listing will not find any reason to come to the market as well. This was lobbied to the authorities by various market stakeholders in various fora and perhaps they got the message.

A few months after the Zimbabwe dollar was gone, the authorities are back and happy to test a new proposal. Statutory Instrument 110 of 2024 is scrapping the vesting period on invested marketable securities and is also proposing a six-month period where the withholding capital gains tax on listed marketable securities will be a flat 2% and 5% for the unlisted ones.

Scrapping the vesting period is a no-brainer good move and allows markets to be efficient. This comes at a time when the market is also pushing for intra-day trading and reducing the trading cycle to T+2.

This means that one should be able to purchase securities and sell them the same day, should she require and once she sells, she should wait for two days, instead of three days before her money hits her account.

Although scrapping the vesting period is a welcome move, the flat tax might need to be interrogated. Before S.I. 110 most of the institutional investors effectively paid a 1,5% tax, and this is because they already had portfolios with securities held for more than the vesting period, so they could qualify for the lower tax.

Considering that from a value perspective, these fund managers are the bigger players on the market, there might be an issue caused by that 50bps increase in their effective tax obligations. Although the investors who were paying 4% might be happy, the majority will not.

This then raises the question of whether the new law will actually perpetuate the problem it aims to solve.

The S.I. was also very clear that the withholding tax would be the final tax. The idea of a withholding tax is usually for the tax authorities to be able to tax the non-tax compliant market, such that should someone who has paid a withholding tax wish to reconcile will do so.

This means that if the actual tax obligation is lower than what has been withheld, you should be compensated, but the new law is making the withholding tax the final tax. This leaves one asking about the actual motives of the authorities.

The statutory instrument also makes a distinction between the tax paid on listed marketable securities and those that are not listed.

This three-percentage points difference can be viewed in one of two ways, either as a punishment for the unlisted marketable securities or an incentive for them to be listed.

If it is the latter, then perhaps one might need to interrogate how effective that will be as a strategy.

The positive aspect of the statutory instrument is its trial period. I hope that the market reactions during this time will inform and shape the final decision.

I am of the view that since the vesting period was scrapped, the WCGT should be left at 1,5% so that the institutional investors’ effective tax is not raised.

I am also of the opinion that the WCGT should not be the final tax, if one makes his capital gains tax computations and realise that she overpaid in her WCGT, she should be able to reconcile with the taxman.

Making the WCGT the final tax makes one assumption that the market always goes up or that one always sells at a higher price than the one they purchased. Although this might be the case in most instances, especially with a volatile trading currency, it is not always the case, and more so with a stable currency.

• Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.