One of the biggest talking points generated from the announcement of the 18 billion dollar stimulus package has been Finance Minister Mthuli Ncube’s tweets that accompanied the packages announcements that talked about the idea of the Victoria Falls Exchange (VFEX). The document that contained details of the package, unfortunately, did not.make things any clearer nor did a public meeting hosted by the CEO Roundtable where attendees posed questions on the matter to him. While we await the document he promised that will give detail we can take time to understand the underpinning concepts of international and Offshore financial centres.
International financial centres are clusters of financial institutions that cater for people and entities outside their own jurisdiction. Examples of well known financial centres include London, Netherlands, Bermuda, Switzerland and HongKong. They offer advantages that vary to users including lower taxation, privacy or secrecy, connection to regional markets and favourable legal systems.
There are four types of financial centres namely global, international, regional and offshore. The distinction between the four can be very small and sometimes arbitrary. While Global, International and Regional Financial centres are self-explanatory offshore financial centres are characterised by handling more foreign transactions than local transactions. Well known Offshore Financial Centres include Switzerland, Cayman Islands, Mauritius, Dublin (Ireland) and Belize.
Advantages to users
Let us use a hypothetical example to explain the advantages to users. Company One is from country A and wants to do business in Country Z, however they are aware that tax conditions in their country are not favourable. In addition to this country Z’s legal system is known to be fairly hostile to foreigners in disputes with locals. Company One has found a partner in Country Z that is Company Two. Country B has a very low tax rate, a neutral and predictable legal system and happens to have a sophisticated financial system. The two Companies from a joint venture, Company OneTwo that they register in Country B. They will then operate the business from Country Z though it is domiciled in country B. The two partners in OneTwo will benefit from reduced tax in Country B. In the event there is a dispute between the two parents, it is settled on neutral ground of country B. This is a simplified explanation but shows why companies would be interested in an international Financial Centre.
Advantages to Hosts
IFCs tend to be located in countries that have high education and literacy rates with predictable legal systems that are largely neutral. In addition to this, they are known for allowing the free flow of capital in and out of the territory. This is something that Zimbabwe has struggled with over the years and especially in recent times. Investors are happy to bring money to the country but not if they cant repatriate profits. Financial Centres tend to be clusters of mass capital and attract a huge amount of it from multinationals, hedge funds and other investors. They also get a very good pick of capital and get to direct it. They experience job growth in high-level occupations such as finance, accounting, legal and consultancy. In fact 3 of the top 10 countries based on GDP per capita are considered Offshore financial centres.
According to Finance Minister, Mthuli Ncube’s tweets and his responses to questions in a webinar held by CEO Roundtable the Victoria Falls Exchange is meant to attract global companies to foreign currency-denominated exchange. Particularly those in mining. This would.likely be done by turning Victoria falls into an international financial centre of some sort. That would mean offering these international companies tax advantages, free flow of capital, privacy about investor information, a dependable legal system or some mixture of those elements. Some of these are very steep hills to climb for a country with a brutal tax system, hostile exchange control regulations and a consistently poor performance in the World Bank Ease of Doing Business report when it comes to enforcing contracts.
However if they were able to pull it off in its pure form the idea would be to attract foreign capital to invest in local projects. The finance minister also clearly indicated that the idea is to attract new foreign investment and not to have the VFEX compete with ZSE for domestic funds in hard currency. This is somewhat baffling. While the minister is very happy to appeal to domestic tourists the same minister may shun domestic investors. Zimbabweans have money to invest but nowhere worth investing it that inflation cannot rear its ugly head.
As we have become.accustomed to with our finance minister and the second republic we may get a Victoria Falls Exchange and International Financial Centre but not the way we think. This was the case when murmurs started about freeing the exchange rate. It behaved freely for a brief moment then was controlled again and most recently set to another peg, 1:25 with the US dollar, which does not reflect the situation on the ground.
Whether or not Zimbabwe will implement this idea fully remains to be seen. What we are certain of right now is that the hurdles are high that must be jumped in order to do so effectively. In the meanwhile, it is best to wait for the policy document explaining the idea and the approach to it. Many good ideas have ended as just such in Zimbabwe.