Why SI 127 is necessary

06 Jun, 2021 - 00:06 0 Views
Why SI 127 is necessary

The Sunday Mail

Finance Deputy Minister Clemence Chiduwa

GOVERNMENT recently promulgated Statutory Instrument 127 of 2021 to deal with, among other things, the rampant abuse of the Reserve Bank of Zimbabwe Foreign Currency Auction System.

Deputy Finance and Economic Development Minister Clemence Chiduwa last week presented a Ministerial Statement on 127 of 2021 in Parliament.

We reproduce the statement and an abridged version of his subsequent responses to questions from legislators.

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My Ministerial Statement provides the policy rationale on the issuance of Statutory Instrument 127 of 2021.

My statement will cover the following critical areas of the SI: background, objectives and advantages.

The Financial Laws Amendment Regulations (SI 127 of 2021) seek to address the gaps identified in the Bank Use Promotion Act (Chapter 24:24) and the Exchange Control Act (Chapter 22:05), to stabilise the exchange rate, promote use of the banking system as well as safeguard the banking system from being abused for illicit activities, by introducing administrative or civil penalties on delinquent individuals and corporate entities.

The President is empowered in terms of Section 2 of the Presidential Powers (Temporary Measures) Act (Chapter 10:20) to make such regulations when a situation arises which he considers needs to be dealt with urgently in the economic interests of Zimbabwe or the general public interest.

Regulations made under Presidential Powers are valid for six months to pave way for amendment of the aforementioned two Acts through the normal process which involves the passage of the amendment Bills through Parliament.

The Statutory Instrument seeks to:

Minimise arbitrage opportunities in the market;

Minimise abuse of the auction system;

To provide a level playing field for business;

To protect consumers; and

To enforce compliance, which is necessary for continued stability.

The Statutory Instrument will empower the RBZ and the Financial Intelligence Unit to impose appropriate penalties on individuals or corporates where there is evidence of the following delinquencies:

Using foreign currency obtained directly or indirectly from a foreign exchange auction or an authorised dealer for a purpose other than that specified in the application;

Refusing to allow a buyer to tender payment for goods in Zimbabwean dollars at the ruling exchange rate;

Failure to verify correctness of customer information by banks;

Charging a price for goods/services above the auction rate or allowing a discount on foreign currency payments;

Issuing of local currency receipts for a foreign currency purchase;

Failure to open a bank account;

Failure to avail to customers electronic means of payment;

Failure to keep records.

It is envisaged that implementation of the regulations will have positive impact through:

Consumer protection from abuse by unscrupulous businesses;

Increased financial inclusion;

Convergence of parallel and formal exchange rates;

Price stability of goods and services;

Customers will be able to settle payments of goods and services in either currency.

The SI promotes market discipline, which is a key anchor of the price and financial stabilisation strategies.

The banning on cross-currency receipt issuances where goods are sold in USD$ would be receipted in ZW$ ensures that vulnerable consumers are protected.

This is in line with standard consumer rights and expectations in the region and elsewhere. The widespread abuse of the auction platform through arbitrage will be eliminated by making sure that banks adhere closely to Know Your Customer and due diligence procedures.

This will ensure that foreign currency is available to genuine importers and not speculators. The implementation of this noble initiative will require the auction system to increase access of forex to more businesses.

After all has been said and done, these regulations have been promulgated to urgently maintain exchange rate stability, enforce compliance and market discipline in financial transactions thereby protecting the consumers.

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Enforcement

In terms of those who are caught on the wrong side of the law, here we are looking at two issues, the first one being violation of the Exchange Control Act and the second one being the one of bank use.

So depending on the infringement, if I am to take the one for violation of exchange rules for those who are accessing funds from the auction, there is going to be a total ban from participating in the auction in addition to the civil and administrative penalties.

If you go through the SI, those who are abusing forex that is obtained from the auction market, the minimum fine is $1 million or whichever is higher depending on the level of infringement, but in addition to that we are also looking at a total ban from participating in the auction market.

The publication of names of those accessing forex from the auction, this we have been doing but what I think is needed is the recommendation which I also got here yesterday that we should name and shame those who are abusing.

Those who are getting we have been publishing, but we should also name and shame those who are involved in illicit activities after obtaining forex from the auction market.

Free Funds

What we are dealing with here is the operation of an underground economy, which has got the potential to totally destabilise the Zimbabwean economy.

The use of free funds; it is something that we allowed as financial authorities but we did not sanction that free funds should be used for illegal activities.

There is no way we can have a country where there are no parallel markets.

However, it is the degree of premium that gets policy makers to be worried.

I remember making a presentation here where I said, “what is critical for Zimbabwe is stability”.

There was stability in the parallel market and there was stability in the official markets.

As long as there is stability, the economy is good to go but the moment we realise that there was a movement from 1:20 in the parallel market to 1:40.

Surely, that movement was not as a result of economic fundamentals.

Therefore, there was a need for us to ensure that there is stability in the exchange rate market.

The parallel market is operating because people are looking for US dollars.

Why would somebody with US dollars now want to go to the market to look for Zimbabwe dollars?

If we are saying they want the US dollars to use them for importation, if they have got free funds, they can use them directly for importation.

Forex allocation criteria

What is guiding us as a country at the moment is the National Development Strategy 1.

The NDS1 has got 14 priorities and what is critical for Zimbabwe at the moment, if you check the pillar on macro-economic development, it speaks to production.

You look at the pillar on infrastructure development and utilities.

These are the pillars that are guiding us in terms of how we allocate forex.

For a country to move forward, what is critical is production.

We do not prioritise consumption.

If you check our list, you will see that the allocations are biased towards production.

So the barometer is the application and request for foreign currency for production.

As long as it is for production, those are the applicants who are getting priority.

This is what we do and we have got a priority list which we use and we are focusing on production.

Impact on prices

In terms of the initial impact of SI 127, I think we should all agree that what is happening at the moment in the market is illegal.

Guided by Vision 2030, we said Zimbabwe is private sector-led, but we only do interventions where there is market failure.

Now, what we have seen is rampant increases in prices both US dollars and Zim dollars, which is not really bordering on production costs.

This is bordering on greed, profiteering and has nothing to do with production fundamentals.

Is this is going to result in shortages?

I would want to assure the House that we are not going to control prices.

We will allow businesses to thrive and come up with their own pricing models but what is very critical in economics is effective demand.

You can increase prices the way you want but what is critical is effective demand. When you have increased your prices, are people going to buy?

You can only buy where there is no choice but look at how the Zimbabwe economy is dichotomised between the informal and formal sector.

Price controls are not going to assist us as a country, they will take us back but as I have mentioned, there is the issue of effective demand and then the issue of import parity.

We are not banning our people from importing. I know this is going to give a strain again on the demand for forex but what I can assure you is that in the medium term, there is going to be sanity because of lack of effective demand.

I can assure you that there are going to be changes. It happened last year and after some two to three weeks, we started to see prices going down and I can assure you that prices will go down.

Forex reserves

At the moment, the banking sector is holding up to US$1,3 billion.

This is real hard US dollars cash but then we look at the other forex which is being generated from say the informal sector and even the other formal channels, it is not being banked because of high charges.

We have engaged the Bankers Association of Zimbabwe.

Again, in the spirit of us not intervening in terms of what charges should be used by the banks, we have been using moral suasion to speak to the banking sector to say the charges are too high; but what they have also explained to us; is they are using outside imported banking platforms which are expensive and they would need to be paid in foreign currency.

What we have also agreed with them is: why can we not have local solutions that will ensure that we do not import software.

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