On 25 June 2019, the Government of Zimbabwe issued Exchange Control Directive RU102/2019. The purpose of the directive is to provide rules regarding the operation of the foreign currency exchange market. This follows the dramatic reintroduction of the Zimbabwe dollar the previous day, via Statutory Instrument 142 of 2019.
I examined the meaning and implications of SI142/19 on the day it was published. It is important to follow it up with an examination of the Exchange Control Directive ()hereafter, “the directive” with the object of answering a very simple but important question: What does the Exchange Control Directive it mean for the proverbial man on the street?
Most ordinary people are concerned with this question. Regrettably, the government’s communications department remains slow, weak and incapable of explaining basic things to people when time is of the essence. It leaves people confused and affects confidence in the policy. The announcement of such major policy changes requires the preparation of a set of what are likely to be “Frequently Asked Questions”. Policy-makers simply need to imagine what people are likely to ask regarding their policy and to provide simple and straightforward answers at the same time that the policy is announced.
Zimbabwe dollar as legal tender
The directive reaffirms the end of the multi-currency regime and the return of the Zimbabwe dollar as the sole legal tender in the country. It confirms that all “domestic transactions” shall be settled in Zimbabwe Dollars. For the avoidance of doubt, it prohibits the use of foreign currency to settle domestic transactions. The only exceptions are where foreign currency is used to settle international transactions or the limited instances listed in SI142/19 such as payment of taxes for imported luxury goods (see previous BSR).
What about prices in shops or contracts? Can they be denominated in foreign currency?
The directive requires all contracts to be quoted in Zimbabwe dollars. All prices of goods in shops must be displayed in Zimbabwe dollars. Therefore, if X is selling a house to Y, the price must be quoted in Zimbabwe dollars just as when A is buying a packet of biscuits from B. All transactions must be in Zimbabwe dollars.
Whether this will be obeyed depends on the market and the ability of the government to enforce it. When people started quoting contracts and prices of goods in foreign currency in 2008, it was not because there were no rules prohibiting it. Such rules existed but the market chose a different path. That is because market players generally make rational decisions and it was not rational to continue using a worthless Zimbabwe dollar even though it was legal tender. Much will, therefore, depend on how the market trusts the Zimbabwe dollar to hold its value in the long run and this will also depend on the government’s trustworthiness and consistency.
What is the situation with Nostro Foreign Currency Accounts (Nostro FCA)?
These accounts were introduced in October 2018 in order to separate accounts for foreign currency and accounts for local currency (RTGS/bond notes). These accounts were meant to give comfort to foreign currency holders; to reassure them that their money was safe. Many are concerned that the currency changes affect their foreign currency holdings in these accounts. What does the directive say on these accounts?
First, the government wants to reassure the public that these accounts will continue but this is qualified by the fact that this will be for the purpose of “receiving offshore funds” and “to facilitate foreign payments”. In other words, these accounts are essentially limited to international transactions. They cannot be used for local transactions unless the customer agrees to trade their foreign currency at the Interbank Market rate.
This is why the Nostro FCA (Domestic) which according to the government was meant to receive foreign currency for local transactions will effectively be rendered moribund for most customers after 30 June 2019. The only customers who will have some use for Nostro FCA (Domestic) are those who receive foreign currency from international sources for services rendered locally or tobacco farmers and gold producers whose export proceeds are placed in such accounts. But can the foreign currency in these accounts be used to settle domestic transactions? Not unless they have been converted to the Zimbabwe dollar at the Interbank Market rate, according to the directive.
Effectively, foreign currency in Nostro FCAs is available for international transactions but where domestic transactions are concerned, it must first be converted to the Zimbabwe dollar. Whether or not this is fair depends on how the Zimbabwe dollar performs on the foreign currency exchange market. Concerns arise if the difference in the Interbank Market exchange rate and the parallel market persists and the former is unfavourable. If the rates of exchange are fair and within the expected range, there shouldn’t be much of a problem.
For most since the days of hyperinflation, the USD has not just been a medium of exchange. It has been seen as an asset, capable of storing value in a highly volatile currency market. When people say they feel robbed it is because they see themselves being forced to dispose of their property on a market (formal) which provides fewer returns compared to another (parallel) market from which they are barred by law.
Can you withdraw foreign currency from the Nostro FCA?
The directive makes a distinction between individual and corporate customers.
The situation for individuals has not changed. An individual can still withdraw foreign currency from their Nostro FCAs as they have been doing since these accounts were introduced but banks are required to comply with rules to combat money laundering and terrorist financing.
This means the bank may refuse to pay if they suspect their customer to be dabbling in money laundering. Since trading in foreign currency without authorisation is a crime, if a bank suspects the customer is involved in the parallel market, they might refuse to pay. In this case, the role of financial institutions in fighting the parallel market might prove critical a case of non-state actors assisting the state to achieve its objects. Much will depend upon their cooperation.
However, corporate customers no longer have the privilege of unconditionally withdrawing foreign currency from their Nostro FCAs. This is because unconditional authorisation of withdrawals of foreign currency for them has been removed. Instead, the banks will deal with requests for withdrawal “on a case by case” basis and only “deserving cases” will be permitted to withdraw foreign currency. Again banks will be required to look closely at compliance with anti-money laundering rules.
Overall, while the rules appear more relaxed for individual customers, they have become stricter for corporates given the limitations in freedom to withdraw funds in foreign currency.
Why is there are a difference in the treatment of individuals and corporates? Most probably because corporates have larger holdings and the authorities have already disclosed that large corporates have been using their muscle to drive the parallel market. Starving them of access to foreign currency might be seen as one way to curb the alleged mischief.
However, there appears to be an apparent conflict which needs clarification. While the directive allows individuals to withdraw foreign currency from their Nostro FCAs, the same directive restricts freedom to use foreign currency in FCAs to settle domestic obligations - for example, when settling domestic obligations, the customer is required to convert their foreign currency into the Zimbabwe dollar. Faced with that situation, a customer would find it more preferable to withdraw foreign currency, get a better exchange rate for the Zimbabwe dollar outside the formal system if it exists and settle their domestic obligations. This would appear to defeat the purpose sought by the government. To close this loophole, the government might end up frustrating the withdrawal facility for individuals which would result in a further crisis of confidence.
Is there still a limit to the amount of foreign currency one can take out of the country?
The limit on the amount of foreign currency that one can take out of the country in cash still exists and is pegged at $US2,000. This limit was imposed by the Exchange Control Directive RS119 of 2017. This is part of the measures to control the flow of foreign currency from the country.
What about Remittances from the Diaspora?
Remittances will continue to be received in foreign currency. The recipient has three options: first, they can receive it in cash. Second, they can sell them to the Bureau de Change on a willing buyer willing seller basis. Third, they can deposit them into individual Nostro FCA accounts.
Most people will probably prefer the cash option. It provides more freedom without the uncertainty and unpredictability of the formal system which policies are constantly shifting, often in conflicting ways.
The second option will be viable only if the Interbank Market rate competes favourably with the parallel market rate.
The third option is the least preferable given the practical challenges of withdrawing cash from the banking system and the risk of locking your money in the unpredictable formal system. When people are faced with an inconsistent administrative system they are more likely to retreat to the informal system where they have more freedom and control.
So to be more direct: if you send money from the Diaspora, the recipient should be able to get it in foreign currency in Zimbabwe. Much will depend on how the government stays true to its word. It’s a matter of trust.
Retention of export proceeds
When businesses export goods, the government retains a portion of the proceeds in foreign currency. This is the money that should be used to import essential goods and services that the country needs. So for example, gold producers get 55% of the foreign currency from the export of gold while the government holds on to 45% which is then paid in domestic currency. The 55% due to the gold producer is held in a Nostro FCA.
A few months ago the government issued a directive that the exporter would have to make use of their foreign currency within 30 days failing which it would be converted into local currency at the Interbank Market rate. This “use it or offload it” approach was designed to incentivise exporters to circulate their export proceeds in the Interbank Market and drive it forward.
The new Exchange Control Directive does not change this approach. However, the good news for small-scale gold producers is that the 30 days use it or lose it period still doesn’t apply to them. In other words, a small-scale gold producer can still keep their foreign currency in the Nostro FCA for more than 30 days.
If you are a tobacco farmer, you will still get 50% of the sale proceeds of your crop but as usual they will be deposited into the Nostro FCA. The catch is that if you wish to settle any domestic obligations, you will first have to convert it to Zimbabwe dollars at the prevailing Interbank Market rate.
The provisions do not make it clear but presumably since the tobacco farmer or small-scale gold producer is usually an individual rather than a corporate, they can still use the window allowed for withdrawal from Nostro FCA by individuals. Whether this obtains in practice is another question but they would have a legitimate argument that they have the right to withdraw.
Liberating Bureau de Changes
The limits formerly placed on Bureau de Changes have been removed. Previously they could only trade in transactions of up to $US10,000. The cap has been removed which there is no limit on the amount they can trade per day. There is also an additional measure of removing the 2,5% margin for Interbank Market transactions.
This move to liberate the formal foreign currency exchange system is presumably designed to provide competition to the parallel market. Bureau de Changes provide safety and security and the only question is whether they can match the parallel market rates. Zimbabwe is not the only country with a parallel market but the relative safety and security offered by the formal system mean people tend to gravitate towards it and away from the parallel market.
What about the stock market?
There has long been a concern that speculators are exploiting the arbitrage opportunities offered by companies that are listed on the Zimbabwe Stock Exchange and another exchange such as the JSE or LSE. The argument is that the parallel market rate often tracks the Ol Mutual Implied Rate which is derived from the difference between the share price of Old Mutual on the ZSE and LSE.
The directive attempts to minimise speculative activity on such shares by placing a 90-day requirement between trades in the shares. So if one buys an Ild Mutual share on the ZSE, they can only sell that share on the ZSE or the other exchange after 90 days. The downside is that this intervention affects the liquidity of the market in respect of such shares and might have repercussions for the ZSE.
Overall, the directive is designed to give effect to the fundamental step taken on Monday, that is, to bring back the Zimbabwe dollar as the sole legal tender and to end the multi-currency system.
This is the state intervening strongly in order to support a currency which suffers a severe trust and confidence deficit in the market. It tries to support the preferred currency in various ways including:
• Pushing the market to use the Zimbabwe dollar in all domestic transactions
• Prohibiting the use of foreign currency for domestic transactions
• Restricting the use of foreign currency to international transactions
• Pushing market players to convert foreign currency holdings into the Zimbabwe dollar for domestic transactions
• Severe restrictions on foreign currency withdrawals by corporate customers while retaining some freedom for individuals
• Restricting/Controlling trades in shares of dual-listed companies on the ZSE
• Giving freedom to Bureau de Changes and removing the cap on margins on the Interbank Market to promote the formal foreign currency exchange market
• Allowing Diaspora remittances to be received in foreign currency to promote the flow of foreign currency
It is important to remember that this is not a new chapter in Zimbabwe's economic history. We have been on this road before. We had exchange control rules. But those rules did not stop the parallel market in 2008. If anything, it flourished because of the restrictive rules from which market players were running away.
The parallel market is the free market that is asserting its freedom from controlling authorities. The formal system will work if money "feels" safe and secure. Otherwise, money will constantly try to escape from the clutches of the formal system to find greater freedom to express itself. When it escapes, it manifests as the parallel market. Can a market which 10 years ago forced the government to abandon exchange controls surrender and submit to the dictates of state via similar exchange controls this time around? That is the question. Much depends on whether the causal factors back then no longer exist.
Finally, a cautionary word: those who casually compare Zimbabwe to other countries and say this is what happens in all countries tend to miss an essential distinction: the countries they refer to as benchmarks are normal economies and have generally played by normal rules of the game. Ours, on the other hand, is a freak economy where normal rules sit with great unease. But more fundamental is an unedifying refusal to respect the weight of history; some of it very recent history. This nonchalant and careless attitude towards history suggests we have learnt nothing from it.
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