Capital Controls in Zimbabwe currently combines the very worst in people government is the classic example of how badly a nation can be governed under the guise of Capitalism and Democracy.   

In Shona, the language of the governing tribe in Zimbabwe and of Mugabe, a cry of a victory is “Bamba Zonke” – “Take all”.   No words better describe what happened to the old Rhodesia and the new Zimbabwe, previously the breadbasket of Africa.

It is appropriate to look at Zimbabwe just after another devaluation has occurred, this time of 45%.

In this article we look at the history of the country from the point of view of Capital and Commercial Controls as the country decayed down to this day.   We then look at the present system of controls and the future of mining and its foreign Investors as a conclusion.

Background and History

The nation of Rhodesia received its initial thrust into success after the second world, when returning British soldiers were offered a “golden bowler” by way of seed money for their future businesses or a parcel of land in the British Colony known as Rhodesia.   Many British families took up this award and turned this pleasant African nation into a most successful agricultural land.   So successful was it that it fed its African neighbours as well as itself, with ease.   Then Britain’s shrinking Empire required it be jettisoned from the Empire, so as it was about to be handed back to its indigenous people. The new Colonists objected, in the belief that all their hard work would be lost with its independence from Britain.   The Colonists declared a Unilateral Declaration of Independence, and the country became the pariah of the Western world.   Immediately, the monetary system of the country came under threat of a massive outflow of capital.  

Earlier Exchange Control systems

Externally, sanctions were imposed on the country, in an attempt to prevent international trade with Rhodesia.   The new government immediately imposed Exchange Controls to prevent this.   The new government under Ian Smith set up a Draconian Exchange Control system to manage money movements at every level.   International Trade was watched through a magnifying glass with every cent being monitored.   Even the foreign shares of the ex-U.K. residents were brought under the control of the Reserve Bank of Zimbabwe.   Each resident was required to place his foreign shares into a Nominee name under the control of the Banks and sign “Form C”, a form requiring him to commit himself to selling his shares when required by the government and to bringing the proceeds of any sales of these shares back to Rhodesia.  

Capital inside the system was blocked with all transactions being filtered through the South African “Financial Rand” system.   This forced the capital values of foreign shares to be traded at a discount when bought, but regaining that discount when the shares were sold and the proceeds repatriated to Rhodesia/Zimbabwe.   It must be said that this rebellion had the full support of those with money in Rhodesia, even during the war with Zanu PF and Zapu.   Few of these [white] people sought to leave the country until the eventual handover of power to Mugabe.  

Once this surrender was complete the massive exodus of most white residents began in earnest.   So firm were the exchange controls that even ex-Rhodesians and ex-Zimbabweans living in South Africa could not access their capital invested in South Africa, without either ingenious, or illegal schemes to get their money out.   Upon their departure their bank accounts were frozen and their ability to make any transactions with their assets was halted.   The banks worked closely with the government on imposing these controls as they do and will do, if any financial decay in any country should occur along these lines.

Basic financial rules controlling any nation are:

q       No country can permit a brutal exit of capital from its system.   Similarly in banking, a bank will close its doors if there is a “run” on its deposits.

q       International trade must continue to be fostered as far as is possible, whilst exchange control must do all to ensure that this route is not used by capital to leak out of the nation, under siege.

What is more difficult to control is the export of second hand luxury assets, which attract a higher value outside the country than in, as the exchange rate deteriorates. [Capital good, bulldozers, cars, etc prices rise in value internally, as the difficulty of importing increases their value].

Thus the capital base of that country was held in a firm grip.   Despite this, the country’s economy remained largely healthy. 

To help us to keep our eye on the mechanics of Capital Controls and not to be distracted by the emotions of the situation [so we can see the impact of future Capital Controls should they appear elsewhere on the globe] we will look at the effects of these, after describing the mechanics of monetary controls in a collapsing economy.

The economy Booms under sanctions!

During the War years, the system held up remarkably well despite the leakage of capital through various routes, including international trade.   No, that is incomplete. The country actually thrived, as it had never done before.   Import replacement took business up to heights never seen before.   Even today cars from the early 1960’s can be seen, still in prime condition, are being driven around there.   The Rhodesian community showed a degree of entrepreneurial skills and innovation that made the country self- sufficient.   It became clear that all levels of community were required to support each other in any innovative compromise solution possible to ease the impact of sanctions and the freezing of capital internally.   This they did with enthusiasm!   The isolation of the country [except for the thriving passage of necessary goods up from South Africa and the sale of food to the African communities and Tobacco internationally] produced a successful internal economy, but one without imported luxuries.  

Controls become tyrannical but largely ineffective.

The Zimbabwe $ held its value remarkably until Mugabe took over and from 1980 onwards, the steady decline of the currency meandered on, taking it from Z1: U.S. $1 to the present and still quickly declining rate of Z$20,000: U.S.1 on the black market.  

When Mugabe, with the support of the British Government, finally took power from Smith and his party, these controls were maintained, but from now on without the support of the moneyed community.   After all, you can’t govern a people that don’t want to be governed.   So the money drain began in earnest.  

Amazingly, despite the steady withdrawal of capital from the country from the late 1970’s to today, initially by the fleeing Colonialists followed by the new African governmental classes, the country maintained a civilised air until the new Millennium, when the descent into starvation, the collapse of the bulk of the economy and the farming community took place under the scything sweep of corrupt, tyrannical, politics that we are seeing today.

With Mugabe in power, those with wealth realised their wealth was becoming a target of government as has been the case in so many African nations.   All who had liquid capital exported it through the following ways:

q       Through the legal use of the system, involving several countries and their Stock Exchanges and Tax havens. 

q       Through ‘weighted Invoicing’ [falsifying or disguising international trade transactions], a system that had been a structural part of ‘sanction-busting’.  

q       Many reputable companies, including legal and accounting firms as well as Stock broking firms, turned a blind eye and even profited from blatant forgery of externally stamped [Non-resident] stock certificates sold in London.

q       Expunging of assets from audited accounts.  

Understand please, that the Zanu PF government had no inkling of the bulk of these activities, nor had the competence to stop them.   They relied completely on those who had officiated under Smith to maintain the system and block their own ‘ilk’ from taking their money from the country.   The new government, in turn, was doing their best to take the wealth to themselves, a process that continues to this day.   They too sought to export much of this capital to other nations [in case of a change of government and to ensure their offspring had internationally based fortunes].  

Time magazine published an article on the enormous wealth that Sally Mugabe had acquired, in the form of hotels in Switzerland and Germany, among other assets.   Mugabe censored this article on its arrival in Zimbabwe.   A popular story after her death was that she left her wealth to her Ghanaian relatives, not to Mugabe, and there was nothing he could do about it.   [He was so angry he is purported to have walked round government house smashing all the windows].   Since then, he has amassed new fortunes overseas as has his government members. 

As always, Exchange Controls are effective on the bulk of a nation, but exceptions to the rules are not uncommon.   It is this facet that justifies the opinion of international monetary authorities that Exchange Controls are an illegal action by any nation and do not receive their support.

As the availability of capital diminished in the early 1980s, Mugabe required more.   He decided that he would go beyond controls, which maintained the financial health of the economy, to measures, which seized the wealth of the economy.   When we use this lesson of history in the future, this turning point in Zimbabwe is one we see as critical gauge of the ability of a nation to recover and maintain the title “civilised.”  Beyond this point, there was no turning back for Mugabe or Zimbabwe.

Misappropriation of overseas assets!

Mugabe’s next step was the confiscation of all foreign shares held in Nominees names.   With a veneer of reasonableness he ordered these shares to be sold to the government.   He paid for the issues with government bonds at a coupon rate of 4%.   With present interest rates in the several hundreds of a percent, and the exchange rate where it is, they have less value than a piece of blank A4 paper, were it to be imported to Zimbabwe today.

And what did the institutions do that had committed them in law, to hold these shares only to the order of the beneficial owner?   For a couple of hours, the Banks resisted this theft, but capitulated under the threat of imprisonment in the capital’s jail, Chikarubi.   Do not underestimate this action in the future instances of such pressure.   The Banks will ALWAYS obey their governments even if the command is an illegal one, should pressure be brought to bear.   

For those puzzled of gold’s value “in extremis”, contemplate the above situation if you had gold in your hands at home.   The decision as to what should be done to it would remain yours.   No so-called responsible intermediary would be able to hand over your wealth, in the first place.  

This happened at a time at which the bulk of the middle and upper classes had already left the country and only those who were clinging to their homes, or felt a strong sense of nationalism, stayed.   For the purpose of this article, it must be noted that such a measure is only undertaken when a certain ‘siege’ mentality takes hold and the consequences of such actions, including international relations, cease to be important.  

You are all no doubt aware of the takeover of the White Farms that has taken place over the last few years.   What is not so well known is that this was accompanied by the attempted takeover of the White owned businesses, seeing the virtual collapse of the business sector.   Inflation is running at nearly 200%, having improved from the level a year ago of 600%.   These are government figures, so take them from whence they come.   The exchange rate paints a much more accurate figure!

By 1990, the capital of the country that could be made liquid had gone from Zimbabwe.   The value of fixed assets has also collapsed despite their ability to produce income.   Evidence of this is that farmers who are still there are receiving less than the price of a low cost house in the U.K. for their entire farms.  Those left remain there because they have nowhere else to go.  

The Present Financial System!

Capital Controls: Travel allowances are given to residents for holiday and business purposes, which cover their expenses, little more.   All other capital payments outside the country require the permission of the Reserve Bank of Zimbabwe.

Commercial Transactions: As the bulk of money movements are tied to commercial transactions, Zimbabwe has four different exchange rates for the Zimbabwe $:

These figures were those that persisted prior to the 45% devaluation which affected all exporters.   [Please adjust these rates down by 45% - increase the number of Z$ per U.S.$.   Of course the Z$ continues to decline so each day these numbers should be revised down].

1.      The “Official” exchange rate presently Z$824 to the U.S. $.   This is a rate used to allow the government to skim off foreign exchange from Commercial operators, in addition to other taxes and duties.

2.      The public “auction” rate, where foreign exchange released by the Reserve Bank, is auctioned to Zimbabweans presently around Z$6,000: $U.S.1 (see chart below).   [This has been moved down to around Z$9,000 post the 45% devaluation].   As the foreign exchange tightens, there have been times when Oil supplies have been delayed until the government pays for them with foreign exchange, not Zimbabwe $.   As we say below, there is a dire shortage even of this foreign exchange. Each week less than 5% of bids are successful in obtaining any foreign exchange, whatsoever!  The only place to turn to is the “Black” Market.

3.      The “Diaspora” rate, which applies to people who remit money to Zimbabwe, presently Z$6,200: U.S.$1 [this has also been dropped to just above Z$9,000].   Not only do those who have spent the bulk of their lives in Zimbabwe /Rhodesia want to return home to live out the rest of their lives there, but relatives send money in to support their relatives still there.   This way they can receive gifts allowances and pensions on which to survive.   As this rate rises as the currency decays, they are able to pay for the necessary items they survive on and that are still available in the shops.

4.      The “Black Market” rate currently around Z$20,000: $U.S.1 and climbing! [It was 12,500 when the research on this article began]   When you have to have imported goods to maintain machinery, companies, etcetera, you have to have it.   Hence, this is a rate paid for foreign currency that is not otherwise available.   Most needed imports are paid for this way.

Here is an extract from government regulations on the incoming foreign exchange to Zimbabwe:

16.3.6 Supply of Foreign Exchange to the Currency Exchange

(a) Supply of foreign exchange to the Currency Exchange will be from the following sources:

(i) Exporters' liquidation of F.C.A. s. Initially, there might be need to identify a critical mass of exporters, who would be ready to supply foreign exchange continuously.

The current 60-day period after which exporters are required to liquidate their F.C.A. s into the market is reduced to 21 days, effective 19^th January 2004.

(ii) Receipts from tourists, sales by NGOs, Embassies and individuals are to be immediately forwarded to the Reserve Bank at the ruling auction rate.

(iii) Remittance from non-resident Zimbabweans will also be channelled to the Reserve Bank through Authorised Dealers at the ruling auction rate.

(iv) Other foreign exchange receipts from trade finance facilities and other capital inflows will also be sold to the Reserve Bank at the obtaining auction rate.

(b) Non-liquidation of F.C.A. s in the early stages of the auction system would result in a premium on foreign exchange, which would be reflected in a higher auction rate. This would represent an extra cost the country would need to pay in order to instil confidence in the foreign exchange market.

16.3.7 Auction Market Participants

(a) The participants in the auction system are the bidders or users of foreign exchange, which would mostly be importers, authorised dealers and the Reserve Bank.

Authorised Dealers would act on the currency exchange as brokers and would also ensure that bids are made for approved Exchange Control transactions. Authorised Dealers should ensure that the bidder has adequate domestic currency equivalent to the bid.

(b) Bidders should tender their bids through authorised dealers stating the amount of foreign exchange required, the exchange rate they are willing to pay as well as the purpose of the request.

Small bids of below US$5 000 are to be aggregated and presented to the currency exchange by authorised dealers. All foreign exchange bids would be for approved foreign exchange transactions, in accordance with Exchange Control requirements.

(c) Ideally, however, all legitimate current account transactions would need to be approved in order to avoid the emergence of yet another parallel market of foreign exchange.

(d) The intervals for auction will range from daily, twice weekly or weekly, depending on the circumstances.

The ultimate decision on the frequency will lie with the Currency Exchange.

(e) Foreign exchange is offered at each bidder's own bid rate starting from the highest bid rate.

This continues until all the foreign exchange supplied is exhausted.

Foreign exchange would be allocated on pro rata basis for those whose bid rate is equal to the minimum auction market-clearing rate.

(f) Table 1 below illustrates how the auction system would operate given an amount on offer of US$10 million. Table 1 Determination of Auction Exchange Rate

The weighted average exchange rate would be:

(0.1*3 500) + (0.2*3 000) + (0.4*2 500) + (0.3 * 2000) = Z$2 550 per US dollar

Exporters would, therefore, be paid at the weighted average exchange rate.

(g) After the auction, the auction exchange rate, the total number of bids received, and the number of successful bids will be announced.

The Auction rate weighted exchange rate applies until the next auction date to all foreign exchange transactions, including customs and intra auction purchases by the Reserve Bank.

Although the highest bid will be at the most depreciated rate, the weighted average auction rate will be lower.

Cross rates with other international currencies will be derived and published after each auction.

(h) Excess supply of foreign exchange in the auction market will taken up by the Reserve Bank at the auction exchange rate.

(i) A comprehensive set on the modalities of this scheme will be issued by Exchange Control within 24 hours of the delivery of this Statement.

The government describes the system, covering the handling of foreign exchange in Zimbabwe as [We quote the government regulations on this]: -

16.3. THE CONTROLLED AUCTION APPROACH

16.3.1 under this system, foreign exchange will be auctioned through a CURRENCY EXCHANGE - an independent body that will operate under the supervision of the Reserve Bank.

16.3.2 Foreign Exchange Management Under the Auction System

(a) Exporters will discharge CD1 forms on the basis of gross export proceeds and 50% of their foreign exchange earnings can be retained in FCA accounts.

Of the remaining 50%, 25% would immediately be sold to the auction market at the ruling auction rate.

The remaining 25% will be surrendered to the Reserve Bank, at the current exchange rate of Z$800 per US dollar for critical imports and other Government requirements.

External loan repayments will, thus, be met from the exporter's 50% share and other purchases from the auction.

16.3.3 DIAGRAMATIC REPRESENTATION OF THE SYSTEM

These rates are applied in the following way:

§         Exports: - (except gold and tobacco) are paid for at a "blend" rate.                          i.e. 80% at Z$6,000 [now Z$9,000]: $U.S.1 and 20% at Z$824: $U.S.1 – approx. Z$4965: $U.S.1 today [now around Z$7400 today].                         Of this the 80% “auction” purchased foreign exchange may be retained in a Foreign         Currency Account [FDA] for 21 days during which time it may be used to import any inputs [spare parts, supplies only available outside the country for business.     -   If not utilised the 80% is surrendered to the Reserve Bank at the "auction" rate.                -   The 20% is surrendered at 824: 1U.S.$.

§         Gold miners: - are currently receiving approx.  Z$9,000: $U.S.1 today

      This is the government regulation governing their foreign exchange income:

         16.3.4 GOLD PRODUCERS

(a) Gold producers will continue to receive 50% of their foreign exchange earnings and the other 50% will be surrendered to the Reserve Bank.

Of the 50% surrendered to the Reserve Bank, 25% will be bought at the auction rate. The balance of 25% will, however, be bought at Z$800 per US dollar.

§         Tobacco farmers: - will get  +Z$7,500: $U.S.1 [now around Z$10,875 today.

This is the government regulation governing their foreign exchange income:

16.3.5 TOBACCO AND OTHER EXPORTABLES

(a) With respect to tobacco, the Reserve Bank will buy 75% of all the foreign exchange from tobacco sold on the auction floors at the ruling foreign exchange auction rate.

This amount will be sold to the market for exchange. The remaining 25% will be bought at an exchange rate of Z$800 per US dollar for critical imports and other Government requirements.

This arrangement will result in a blend exchange rate, which ensures that tobacco growers are viable.

The Tobacco Growers Trust (TGT), thus, falls away since the constituency it was set up to look after i.e. the Tobacco Growers will be sufficiently rewarded and can also access foreign exchange from the auction.

On the other side:

§         Importers: [are supposed to] buy foreign exchange on the "auction".  

This is not available in sufficient quantities, indeed, this week less than 5% of bids were successful in obtaining any foreign exchange.   The rate recently was approx. Z$6,050: $U.S.1 [now above Z$9,000]. 

§         Most imports are via “black market” rates, impacting heavily on margins, hence the declining exports

As one can see, the commercial operators have to be able to gauge all their possible wants ahead of time and buy them during the 21 days permitted.   The level of ingenuity required to survive in this regime is remarkable.  As such, the entrepreneurs of Southern Africa are amongst the most, hard working and innovative in the world!   But the battles do not end there.   The government buys the exportable maize crop to sell on the world markets.   They are given a price for their crop, which can be as low as half the price the government achieves when selling to neighbours like Zambia.   Of course, this was in the days when the country had maize to export.  

The present disaster 

Right now, for the first time, the government has admitted to a food shortage.   There has been starvation for more than a year, which six months ago had cost the lives of 300,000 people then.   But food aid is arriving, largely under the control of the government.   With elections only a few days away, the food is being distributed to government supporters [ZANU PF] only.   Unless others change their allegiance, they face starvation!   Such is tyranny today.

The Future of Mining! 

The media has published the policy of Mugabe that they will be taking ownership of the mining industry, purportedly along the lines of the South African B.E.E. wherein Zimbabweans will buy a percentage of the company.   At first, Mugabe himself talked of a level of 50% of the mines, but one of his Ministers talked that figure down to stop the panic amongst foreign Investors.   Before one makes a comment on the situation, it is well to dwell for a time on the past.   The conclusion we draw is that if it has value internationally it will be the subject of continual acquisition by the present government.   If Mr Mugabe dies and he is old now, will his successor be any different?   As to payment for these shares, with what will he pay?   He used worthless government stock to pay for foreign shares, and he paid nothing for the farms, so on what basis can he be expected to pay for shares in Zimbabwean mining?

With the belief that Zimbabwean assets belong to Zimbabweans Mugabe is unlikely to change his established policies.   This becomes important when one considers the future of Zimplats, a major Platinum Producer contemplating a massive U.S. $750 million expansion there.  

On February 18^th the Reserve Bank of Zimbabwe laid down new rules governing foreign exchange in which miners were told to close offshore accounts and deposit their money in local foreign currency accounts by February 28, according to Zimplats. The accounts were to be held by Zimbabwean banks and the Reserve Bank of Zimbabwe.   It has now been reported that the government has given a verbal concession that they need not comply with this new legislation.    The company, according to its advisor, is now reported to be going ahead with its capital development work, implying that foreign financiers have approved the go-ahead.

We can only point to this article and wonder, at what point does greed, overcome fear?

To all future Investors in the country we think this story may have its place:

“A scorpion wanted to cross the river, as he usually did, but found it was in flood.   He waited until he saw a turtle come by and asked the turtle if he could have a lift to the other side.   The turtle was reluctant saying, if I give you a lift you will sting me and I will drown.   The scorpion said no I won’t because if I did I would drown too.   Placated, the Turtle said OK; on you get and began to swim across the river.   Half way across the scorpion stung the turtle and they both died in the water.

As the degeneration in Zimbabwe is occurring so quickly we give you the figures from there, [provided by the Reserve Bank of Zimbabwe – assess them from whence they come!] of the situation at the time of posting this article:

Weighted Average Auction rate:                          Z$7,355.82

Note:  Please note that the objective of the devaluation was to allow the farmers to earn an approximately 20% return on their crops.   This is eaten away during the year as the situation decays further.   Quite what their CPI number really is I do not know, but I guess it is around 500% per annum.

By: Julian D. W. Phillips, Gold-Authentic Money: Authenticmoney.com, GoldForecaster.com