ECONOMIC GOVERNANCE WATCH 6/2022
[9th July 2022]
New Economic Measures
On the 27th June, barely seven weeks after the President announced a raft of measures [link] to reduce inflation and stabilise the economy, the Minister of Finance and Economic Development announced a fresh set of measures to do the same thing. The Minister’s press statement can be accessed on the Veritas website [link]. On the same day the President published a statutory instrument – the Presidential Powers (Temporary Measures) (Amendment of Exchange Control Act) Regulations, 2022 (SI 118A of 2022) in an attempt to give some of the Minister’s measures at least a semblance of legality. The SI can also be accessed on the Veritas website [link].
In this bulletin we shall not go into the effectiveness of the new measures, beyond noting that economists have given them mixed reviews; instead we shall assess the legality of some of them.
First however we should repeat what we have said before: neither the President nor his Ministers, nor any government officials, can create laws simply by making public announcements. In other words, public announcements are not legally binding unless they are embodied into law, either by the passing of an Act of Parliament or the issuing of a valid statutory instrument.
In this instance the Minister’s announcements were followed up by a statutory instrument so in this bulletin we shall see how far the instrument legalises the measures announced by the Minister.
Legalising the Multi-Currency System
The Minister said that in order to eliminate speculation and arbitrage, the Government had decided “to embed the multi-currency system and the continued use of the US dollar into law for a period of 5 years.”
The provisions of the new SI
SI 118A of 2022 will amend the Exchange Control Act to state that, until the 31st December 2025 [i.e. for a period of 3½ years, not five]:
· Anyone who borrows foreign currency from a bank or financial institution, or who gets credit denominated in foreign currency from a bank or financial institution, will have to repay it in the same foreign currency.
· Similarly, a bank or financial institution that lends an amount denominated in foreign currency must get repayment in that foreign currency.
· Traders must offer their goods and services at an exchange rate of no more than 10 per cent above the prevailing interbank rate published by the Reserve Bank [This is not easy to understand, but it seems to mean that when traders work out the price in Zimbabwe dollars of goods and services that are priced in a foreign currency, they must use the interbank rate and must not exceed that rate by more than 10 per cent].
Anyone who contravenes these provisions, according to the SI, will be liable to draconian civil penalties imposed by the Reserve Bank.
Legal effect of the SI
Does the SI embed the multi-currency system and use of the US dollar into law for five years?
No it doesn’t. In the first place, the SI is made under the Presidential Powers (Temporary Measures) Act, which Veritas contends is unconstitutional on the ground that it gives the President legislative powers that go beyond the limits set by section 134 of the Constitution. Hence the SI is arguably invalid. Even if it is valid, SIs made under the Act expire after six months so the SI cannot embed anything into the law for as long as five years.
Furthermore, all the SI does is to say that certain loans denominated in foreign currency must be repaid in the same currency, and (if we have understood it correctly) that certain goods must be priced according to an official rate of exchange. It goes no further than that, and does not permit the use of foreign currencies for more general purposes.
Another point is that the SI must be read in the light of section 23 of the Finance (No. 2) Act of 2019 [link], which reads:
“(1) For the avoidance of doubt … it is declared that with effect from the second effective date [i.e. the 24th June 2019], the British pound, United States dollar, South African rand, Botswana pula and any other foreign currency whatsoever are no longer legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe.
(2) Accordingly, the Zimbabwe dollar shall, with effect from the second effective date … be the sole legal tender in Zimbabwe in all transactions.”
The section provides for some exceptions: certain duties must be paid in foreign currency, and certain bank accounts can be denominated in a foreign currency, but otherwise the law is that Zimbabwe dollars are the sole legal tender in Zimbabwe. The section has not been repealed by SI 118A of 2022. Even if we assume here that the Presidential Powers Act is valid, which is doubtful, SI 118A does not even purport to amend or repeal section 23.
Note: Normally of course SIs cannot amend or repeal Acts of Parliament, but SIs made under the Presidential Powers (Temporary Measures) Act can do so temporarily.
So for the time being, US dollars are not legal tender in Zimbabwe except for very limited purposes. The multi-currency system is not embedded in our law.
Legalising the Interbank Rate of Exchange
The Minister also announced that “in all economic transactions” it was now mandatory to use the interbank market exchange rate, determined by banks on a willing-seller willing-buyer basis.
Is this legal?
We have already cited the provision in SI 118A of 2022, which states that traders must offer goods and services at a rate of no more than 10 per cent above the prevailing interbank rate published by the Reserve Bank. To that extent, the interbank has been legalised. There is also section 22(1)(e) of the Finance (No. 2) Act of 2019, which provides for exchange rates to be fixed at the interbank rate on a willing-seller willing-buyer basis. There are other provisions too: for example section 14(2)(a) of the Finance Act, which requires the interbank rate to be used in calculating taxable income which is wholly or partly denominated in foreign currency.
So while it is certainly true that for some purposes exchange rates between the Zimbabwe dollar and foreign currency have to be determined by the inter-bank rate, it is not true to say that that rate has been mandated for use in all economic transactions.
Following a resolution of its monetary policy committee, the Reserve Bank announced that from the 25th July it would be issuing 1-ounce gold coins into the market as a store of value. In a press statement the Governor of the Bank said that the coins:
o will have liquid asset status and will be tradable locally and internationally
o will count as prescribed investments to be used by institutional investors such as banks and insurance companies to meet regulatory requirements
o will be usable as security for loans and credit facilities, and
o will be available for sale from the Reserve Bank at a price based on the prevailing price of gold on the international market.
Will the coins be legal?
Section 43 of the Reserve Bank of Zimbabwe Act gives the Reserve Bank power to issue coins after the Minister of Finance has published an SI setting out their denominations, designs and mass (weight) as determined by the President. If the coins are to be issued under section 43, therefore, they will be legal only if an SI is published. It is probable however that the Reserve Bank will not be relying on section 43 as its legal authority to issue the coins, because:
· Coins issued under section 43 must have denominations – one cent, five cents, ten cents and so on – and the new coins will not: they cannot, because their value will depend on the fluctuating price of gold.
· Though the Act does not say so specifically, coins issued under section 43 are supposed to be legal tender, i.e. used to make payments, and the new coins will be unsuitable for that purpose. The value of the gold in them – one troy ounce – is currently about US $1 800 or Z$682 000 at the official rate of exchange, far too high for them to be used in ordinary transactions. And, as we have said, the value of the coins will fluctuate which also renders them unsuitable as legal tender.
If the coins are not to be legal tender then the Reserve Bank or its subsidiary companies can mint and sell the coins without statutory authority. [They are not prohibited from doing so by the Gold Trade Act, which applies to unwrought gold and not to gold coins.]
What will the coins be used for?
Although the coins will be unsuitable as currency, the Minister said they could be traded nationally and internationally, held as liquid assets and used as security for loans. This suggests that investors who buy the coins will be able to keep possession of them, but there is a suggestion in the Minister’s announcement that they may not be allowed to do so. According to the Minister, buyers or holders of the coins may opt to place them in the custody of bankers of their own choice. There would be no need to say this if buyers are going to have physical possession of the coins: in that event they will be able to keep their coins at their bank, or in a safe, or under their mattresses – wherever they wish. It is to be hoped that buyers will be given physical possession, otherwise the coins will lose much of their attraction to investors.
Like the economic measures announced in early May, which we reviewed in Economic Governance Watch 4/2022 of the 16th May [link], these measures appear to have been formulated with less regard for the law than they should have been. The way they were announced – at a press conference – is also open to criticism. The Minister should have announced them in the National Assembly, giving parliamentarians an opportunity to criticise them and make suggestions for their improvement. Parliament, with its responsibility for overseeing State revenues and expenditure, has an important role in ensuring good economic governance. Parliament should therefore be involved, or at least consulted, in the formulation of economic policy.