It was just yesterday I felt it necessary to publish an article on how the chopping and changing of rules since the introduction of Statutory Instrument 142 of 2019 which brought the end of the multicurrency era and the return of the Zimbabwean dollar in name at least. Well those who work at 80 Samora Machel Avenue, the Reserve Bank of Zimbabwe, had an exchange control directive in the pipeline that was released yesterday, the 24th of July. Exactly one month on from SI 142. It brings with it a host of changes, some rare good news and an idea of where we are headed.
Business to person remittances
The remittance of foreign currency from businesses outside the country to individuals within the country have been rubber-stamped. However, these critically exclude export proceeds, income that is not salary and other earned income.
Banks and BDC allowed selling in earnest
In the analysis of the previous exchange control directive, I was critical of how the Reserve Bank gave no clear criteria for foreign currency sale and withdrawals meaning it was left at the banks’ discretion to find a reason to decline your request. I’m glad they focused on this area in detail and there’s a lot of good news for small business there.
The banks and bureau de changes are allowed to openly sell foreign currency to individuals and businesses with different requirements applied to different bands. Any amount below US$500 can be sold no questions asked. Anyone requiring between US$500 and US$2000 will have to adhere to know your customer (KYC) rules an individual or business requiring more than US$2000 must have a Nostro account with the same institution as the dealer banks with (or is). The amounts below US$2000 can be sold as cash with anything above being credited to Nostro accounts. This is surely a welcome development and goes a long way to make the interbank market useful to businesses.
Bureau de changes have also been given permission to sell foreign currency for travel purposes. Business travellers will be allowed to purchase US$400 per day of travel, in advance, to a maximum of 7 days. Those travelling for personal reasons will be allowed to purchase US$300 per day for a maximum of 7 days at a time with an annual cap of US$10000 (33 days equivalent). The requirements are contained in the table below.
Medical costs and tuition fees have also been added to the list of allowable foreign currency sales. However, money for these purposes cannot be purchased as cash the recipients will have to have Nostro accounts which these can be transferred to. It has not been stated here but this should be accompanied by banks facilitating the transfer of these funds to the relevant places.
On the administrative side, the Bureau de changes are to buy local currency directly from the Reserve Bank in exchange for foreign currency. However foreign currency sales between institutions are not allowed and this makes the Central Bank the epicentre of foreign currency trade but more on this later. The daily reporting requirements of bureau de changes have been updated to reflect the new accommodations
As has become the case with policies there are clear winners and losers in this one too. If individuals and small businesses are winners then insurance companies and by extension, their customers are definitely losers. The Reserve Bank reiterated that insurance premiums cannot be charged in foreign currency. In cases where premiums had previously been paid in foreign currency a portion of the payable would be in foreign currency. The Reserve Bank did however green light the externalising of risks that could not be reasonably covered in local currency. This means a local insurer can act as a broker for an international insurer on a specific risk. Arrangements like this are quite common in insurance but the loss is in terms of the premium going to a third party instead of the insurer directly.
Fuel and Chrome get the nod
Finally, direct fuel imports have been greenlit for those who wish to pay for fuel directly in foreign currency. The finer details were not laid out clearly but with fuel companies being required to open Nostro accounts for this purpose we are likely headed back to the fuel coupon system in full force. Chrome miners also got a foreign currency nod allowing large scale chrome miners to pay small scale chrome miners in foreign currency via Nostro transfers
What does it all mean?
There’s always a risk with trying to analyse policy and forecast the future because you don’t always have all the information. The outlook on the measures announced is somewhat positive. We should expect increased activity in the interbank market with a gradual uptake and we can reasonably expect a rate increase on that front as they move towards the openness of the parallel market. Their ability to sell foreign currency in cash will be crucial to uptake. The increased volume of activity should reduce the spread between buying and selling rates. Meanwhile, the parallel market may witness a sudden crackdown to push people to the interbank market. We should reasonably expect an improvement in the fuel supply situation for those who can pay in foreign currency and a further Zimbabwe Dollar price adjustment if the rate shifts upward.
The biggest criticism of the interbank market since inception has been its lack of being an actual market with only foreign currency sale for individuals but no buying. This directive changes that. However, experience tells us that in practice these plans don’t always work out and it really depends on if their interpretation of the new rules matches our understanding of them.