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
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 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.
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
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
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
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
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
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.
of new provisions on the offence of dealing in currency
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.
Mthokozisi Tshuma, Associate at
Gill, Godlonton & Gerrans