The Fiscal Costs of Monetary and Exchange Rate Policy Distortions in Zimbabwe

This paper uses a multi-methodological approach to measure the fiscal costs of monetary and exchange rate policy distortions in Zimbabwe. It identifies three channels through which these policy distortions affect tax revenue: the Olivera-Tanzi Effect (inflation-related tax payment lags), an overvalued official exchange rate affecting customs duty on imports, and informalization undermining overall revenue collection. It then measures the fiscal costs of each of these three channels. The paper shows that although inflation tax increases government revenue through seigniorage, its negative impact on tax revenue outweighs its benefit. High inflation and exchange rate distortions have costed Zimbabwe Treasury over three billion US dollars between 2020 and 2023. Policies that remove exchange rate distortions and stabilize prices can substantially improve government revenue and help close the fiscal financing gap