Finance Minister Herbert Murerwa caused a stampede from the Zimbabwe Stock Exchange when he announced a 10 percent withholding tax two weeks before it became effective.
Murerwa announced the tax in his 16-August 2005 mid-term fiscal policy review but said it would be effective on 1 September.
The tax was in addition to existing taxes such as a 10 percent capital gains tax, two percent stamp duty, and a 20percent tax on dividends.
Investors immediately started shifting their shares out of the market into treasury bills.
The treasury bill yield shot up from 191 percent to 265 percent beating inflation of 254.8 percent.
Full cable:
Viewing cable 05HARARE1175, ZIMBABWE STOCK MARKET PARALYZED
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This record is a partial extract of the original cable. The full text of the original cable is not available.
241532Z Aug 05
C O N F I D E N T I A L SECTION 01 OF 02 HARARE 001175
SIPDIS
AF/S FOR BNEULING
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE
USDOC FOR ROBERT TELCHIN
TREASURY FOR JOHN RALYEA
PASS USTR FOR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON
E.O. 12958: DECL: 12/31/2009
SUBJECT: ZIMBABWE STOCK MARKET PARALYZED
REF: HARARE 1158
Classified By: Charge d’affaires Eric T. Schultz a.i. for reason 1.4 b/
d
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Summary
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¶1. (C) The Zimbabwe Stock Exchange (ZSE) has virtually ground
to a halt in reaction to GOZ stopgap measures to help close
the budget shortfall and finance the burgeoning domestic
debt. The introduction of a withholding tax on the sale of
securities, and stricter enforcement of requirements for
institutional investors to buy government securities sparked
a selling frenzy. A sharp increase in short-term T-bill
rates further spurred the rush to unload stocks in a market
without buyers, thus paralyzing the Exchange. The ZSE, which
quickly entered into talks with the Ministry of Finance,
expects that trading, once it resumes, will be very thin,
whatever the outcome of discussions. The state,s
heavy-handed measures to bring the budget under control
without addressing fundamental economic reform are taking a
toll on the investment climate and the economy in general.
End Summary
——————————————-
A New Witholding Tax on Securities Sales…
——————————————-
¶2. (SBU) In his August 16 Mid-Term Fiscal Policy Review
(reftel), Finance Minister Herbert Murerwa announced that,
effective September 2005, the GOZ would assess a ten percent
withholding tax on the sale of securities in addition to the
pre-existing ten percent capital gains tax, two percent stamp
duty, and 20 percent taxation of dividends. Following the
announcement, and with the subsequent upward revision of the
official inflation rate to 254.8 percent, the 91-day Treasury
bill yield shot to 265 percent from 191 percent.
——————–
…Triggers Sell-Off
——————–
¶3. (SBU) Investors immediately began shifting their shares
out of the market and into Treasury bills to take profits and
to avoid the withholding tax. The stock market had been one
of the few legally available investments in Zimbabwe that
could compete with inflation. By announcing the withholding
tax two weeks prior to its implementation, the GOZ created an
incentive for an immediate sell off. The measures brought
the ZSE,s bull run (260 percent nominal increase in value
since January 2005) to an end and are threatening to cause a
stock market crash. The key industrial index closed on
August 19 down 12.64 percent on the previous week; the mining
index closed down 21.94 percent.
——————————————— ——-
Institutional Investors Compelled to Buy Government
Securities…
——————————————— ——-
¶4. (SBU) The supplemental budget also signaled stricter
enforcement of the prescribed proportion of pension and
insurance funds to be allocated to GOZ securities. Until
now, fund managers and the National Social Security
Authority, which make up 90 percent of the market, had
ignored the requirement to allocate fixed percentages of
their portfolios to government securities. The allocation
requirement for short-term and long-term insurance
investments is 25 percent and 30 percent respectively; for
private pension funds and for the National Social Security
Authority it is 35 percent. Furthermore, insurance and
pension funds previously had valued their assets at their
original purchase price rather than at the current market
value, as is now required under the supplemental budget.
——————————–
…to Finance the Budget Deficit
——————————–
¶5. (SBU) According to one leading analyst, the GOZ had not
enforced the 35 percent prescribed asset ratio until now for
lack of treasury bills on the market. The GOZ,s failure to
attract foreign financing of public debt, however, has
compelled the Reserve Bank to issue more paper, and the GOZ
to enforce the higher asset allocation requirement to ensure
a market. With Murerwa,s statement, fund managers began
unloading securities (which had increased in value much
faster than the prescribed assets) to meet the 35 percent
requirement. The announcements fuelled the rush to sell in a
market lacking buyers, exacerbating the market,s paralysis.
—————————————-
GOZ/Zimbabwe Stock Exchange Negotiations
—————————————-
¶6. (SBU) The ZSE, in hastily convened talks with the Ministry
of Finance over the new rules, does not predict a market
crash, but expects trading, once it resumes, to be very thin,
whatever the outcome of discussions. A well-placed broker
told PolAsst that these negotiations centered on combining
the announced withholding tax and the pre-existing capital
gains tax into a new ten percent capital gains tax taken at
the point of sale either by the stock brokerage or by the
Zimbabwe Revenue Authority (ZIMRA). In the past, individual
taxpayers were left to declare their stock market profits in
their tax returns, which many investors failed to do.
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Comment
——–
¶7. (C) The end effect of the GOZ,s heavy hand on the
securities market will likely be to reduce rather than
increase tax revenue as the market becomes increasingly thin
and shallow. Murerwa,s fiscal measures are the latest in a
long line of GOZ attempts to avoid fundamental economic
reform and maintain the government,s vise-grip on the
economy. Like all those that have gone before, they will
also fail to stem the country,s accelerating economic
decline.
SCHULTZ
(18 VIEWS)