Update on currency reform

Tuesday, 12 March 2019
Mthokozisi Tshuma

"For the past 12 months or so, Zimbabwe has had a de-facto dual currency system with funds in local accounts and bonds notes being traded on the black market at a discount to hard currency; this despite the fact that legally our local accounts were denominated in United States Dollars, and bond notes were officially pegged at parity with the United States dollar. However, with the Monetary Statement of 2019, it would seem the law has finally caught up with the reality on the ground."

Update on currency reform

For the past 12 months or so, Zimbabwe has had a de-facto dual currency system with funds in local accounts and bonds notes being traded on the black market at a discount to hard currency; this despite the fact that legally our local accounts were denominated in United States Dollars, and bond notes were officially pegged at parity with the United States dollar.

However, with the Monetary Statement of 2019, it would seem the law has finally caught up with the reality on the ground.

In summary the new statutory instruments giving effect to the Monetary Policy not only create a new currency, the RTGS dollars, but convert all existing local assets and liabilities from US dollars into this new local currency.

Below we will give a more thorough examination of the new provisions.

High Level Summary

Statutory Instrument (SI) 33 of 2019, which derives its power from the Presidential Powers (Temporary Measures) Act [Chapter 10:20] amends the Reserve Bank Act by inserting a new section 44C.  Section 44C inter alia grants the Reserve Bank in consultation with the Minister of Finance, the sole power to issue electronic currency in Zimbabwe, which the Reserve Bank has done.

In terms of SI 33 of 2019, from the date of promulgation of SI 33 of 2019, the Minister of Finance is deemed to have prescribed that the Reserve Bank has issued an electronic currency called RTGS Dollars.

Importantly, the new SI states that all local RTGS balances are, from the date of promulgation of SI 33 of 2019, converted from US Dollars(USD) to RTGS dollars at a rate of 1:1. Thereafter, being immediately after promulgation of SI 33 of 2019, RTGS dollars will be floated against other currencies, with the exchange rate between the RTGS dollar and other foreign currencies being determined by market forces.

The Reserve Bank through the Monetary Policy Statement has indicated that the initial proposed exchange rate between the USD and the RTGS dollar will be USD1: RTGS$2.5.  It is yet to be seen whether the Reserve Bank will indeed allow the RTGS dollar float completely. However, from the monetary policy it is likely that the exchange rate between RTGS dollars and US dollars will both be monitored and controlled by the Reserve Bank.

Frequently Asked Questions

What happens to historic debts denominated in USD?

In terms of section 44C subsection 4 (1) (d) all assets and liabilities that were, immediately before the coming into effect of SI 33 of 2019, valued and expressed in USD, other than ring fenced assets and liabilities (later on this) shall be deemed to be valued as RTGS dollars at a rate of 1:1 with USD.

The effect of the above stated provision is that existing debts cannot upwardly be adjusted to reflect any change in the rate of USD to RTGS. The risk of the de facto devaluation of the RTGS dollar is therefore to be borne by the creditor. 

The above position is reinforced by section 44C subsection 4 (1) (b) which states that upon conversion from USD to RTGS dollars, all opening balances now in RTGS dollars shall be deemed to be at par with USD.

From the framing of SI 33 of 2019, it seems clear that the intention of the President was to pass the risk of any devaluation of the RTGS dollar on to creditors. 

What type of assets and liabilities are ring fenced?

The conversion of USD to RTGS shall not apply to following:

a)  Funds held in ‘Nostro FCA accounts’ which shall continue to be designated in foreign currency;

b)  Foreign loans obligations, which shall continue to be payable in foreign currency.

The above two categories of assets and liabilities are ring fenced and will continue to be denominated in foreign currency. The effect is that the above stated assets will not be converted into RTGS, and therefore holders of these assets and liabilities will not bear the risk of any devaluation of the RTGS dollar. There is however a potentially major impact on a borrower whose debt is a “foreign loan” in that the borrower may be earning RTGS Dollars and having to bear the conversion cost into USD.

In what currency should I pay my taxes in?

In terms of section 4A the Finance Act, the following categories of taxpayers who earn in foreign currency have an obligation to remit tax in the same currency they earned their income in:

a)  a person other than a company, a trust or a pension fund whose taxable income from employment is earned in whole or in part in a foreign currency shall pay tax in the same or another specified foreign currency on so much of that income as is earned in that currency;

b)  a person other than a company, a trust or a pension fund whose taxable income from trade or investment is received or accrued in whole or in part in a foreign currency shall pay tax in the same or another specified foreign currency on so much of that income as is received or accrued in that currency;

c)  a company, trust, pension fund or other juristic person whose taxable income is earned, received or accrued in whole or in part in a foreign currency shall pay tax in the same or another specified foreign currency on so much of that income as is earned, received or accrued in that currency;

d)  a person who is liable to presumptive tax.

Similarly, in terms of section 38 of the VAT Act, where registered operators receive payment of tax for the supply of goods or services in foreign currency, or imports goods into Zimbabwe, that operator will have an obligation to remit tax to ZIMRA in foreign currency.

In addition, section 39A of the Finance Act provides for the payment of Capital Gains Tax in foreign currency to the extent that capital gains are received by or accrue to a person in foreign currency.

Previously, before the introduction of RTGS dollars, all earnings were in foreign currency as Zimbabwe did not have a local currency. Therefore, where a taxpayer earned hard cash, in for example, USD, they were able to settle their tax liabilities using funds from any local account.

However, as we now have a local currency, any person earning foreign currency as defined in the Reserve Bank Act, must remit taxes in that same currency.

Impact of new provisions on the offence of dealing in currency

Dealing is defined in very expansive terms and at first glance may seem to cover all transactions involving currency. This would seem to be the case especially considering that the definition of dealing in the Exchange Control regulations refers to acts done both ‘tangibly or electronically’ where the underlying commodity is currency.

The inclusion of “electronic” in the definition of dealing expands the type of transactions that are captured by section 4 of the Exchange Control Regulations to include circumstances where electronic funds are used to acquire currency which now includes RTGS Dollars. 

A fatal flaw in the Exchange Control regulations prohibiting dealing in currency was that currency was defined to mean the coin and paper money of Zimbabwe. In other words, any electronic transaction which would constitute ‘dealing’ as defined had to involve the acquisition or disposal of corporeal money, namely bank notes or coins. This meant that trading Nostro funds for RTGS funds for a premium/discount was neither an offence nor dealing in currency, as these amounts were neither coin nor paper money. 

However, the definition of currency in the Exchange Control Regulations has specifically been amended to include RTGS Dollars, which is electronic money. This means that persons other than authorised dealers, are now prohibited from trading Nostro funds for RTGS funds for a premium/discount.  Only authorised dealers may engage in such transactions now.

Author:            Mthokozisi Tshuma, Associate at Gill, Godlonton & Gerrans

mtshuma@ggg.co.zw