RBZ tightens screws on externalisation

Source: RBZ tightens screws on externalisation – Sunday News Jul 1, 2018

Dumisani Nsingo, Senior Business Reporter
THE Reserve Bank of Zimbabwe has put in place stringent measures aimed at plucking out externalisation of funds, which has seen close to US$1 billion being siphoned out of the country since the dollarisation of the country’s economy.

In a wide ranging telephone interview with Sunday Business, RBZ Governor Dr John Mangudya said the Central Bank has made great strides in ensuring that both the country’s financial institutions and the transacting public’s compliance issues are strictly monitored to guard against externalisation of funds.

“We have improved our compliance parameters to ensure that when people are remitting funds there should be bona fide transactions and invoices. The money should go to the CDD (Customer Due Diligence), banks should exercise their CDD and KYC (Know Your Customer) principles to see that the money is taken out of the country and the goods are coming back . . . before, people were just going to the bank and make a wire transfer, open an account but no goods were coming in,” he said.

KYC is a process by which banks obtain information about the identity and address of the customers. The KYC procedure is to be completed by the banks while opening accounts. Banks are also required to periodically update their customers’ KYC details. The CDD requires the bank to obtain information to verify the customer’s identity and assess the risk. If the CDD inquiry leads to a high risk determination, the bank has to conduct an Enhanced Due Diligence.

“We are now saying banks need to ensure that they comply and need to enforce compliance to their customers. Throughout the whole world there is no bank where you say you want to send money to Zimbabwe without being given an invoice. So we are removing that laxity on the part of the banking public and with the bank themselves complying . . . so we need to monitor them and supervise them and them (banks) supervising their customers,” said Dr Mangudya.

He said the Central Bank has also introduced a Letter of Credit for the payment of goods purchased outside the country.

A Letter of Credit is a letter issued by a bank to another bank (especially one in a different country) to serve as a guarantee for payments made to a specified person under specified conditions.

Early this year, the Government published a list of more than 1 800 companies and individuals alleged to have externalised more than $800 million. Finance and Economic Planning Deputy Minister Terrence Mukupe said the huge amount of foreign currency that the country has lost due to externalisation has contributed the challenges the country was facing.

“Zimbabwe is suffering from a foreign currency problem and can you imagine what $800 million will do for us. Zimbabwe needs about $2 billion for its yearly essentials — for example cooking oil, fuel and power. So based on that $800 million, it would make a remarkable impact in as far as our essentials are concerned. That’s why you find that there is so much pressure when it comes to demand for foreign currency. If only that $800 million had not been externalised Zimbabwe would be in a different situation right now,” said Dep Minister Mukupe.

Dep Minister Mukupe said Dr Mangudya was solely responsible for putting in place measures aimed at curbing externalisation of funds.

“Dr (John) Mangudya is the overseer when it comes to issues to do with externalisation. He is the retaining officer in as far as making sure that mistakes of the past are not repeated. A past where we had an overly liberalised environment, also making sure that the police or law enforcement agencies are equipped when it comes to dealing with those issues (of externalisation of funds),” he said.

Externalisation of funds in Zimbabwe is an offence prescribed in terms of Section 4(c) of the Exchange Control Act (Chapter 22:05). The Reserve Bank of Zimbabwe, an Exchange Control Authority in relation to all the provisions of the 1996 Exchange Control Regulations, regulates exchange controls in Zimbabwe.

In the event of a conviction, the courts can impose a fine not exceeding the value of the currency or a sentence of imprisonment not exceeding 10 years, the whole of which can be suspended on condition that the currency is repatriated to Zimbabwe within a specified period.

The statutes also allow the courts to impose harsher penalties unless the convicted person satisfies the court that there are special reasons in the particular case, which shall be recorded by the court, why a lesser fine should be imposed.
According to Statutory Instrument 145 of 2017, the RBZ governor is empowered to “do anything necessary for the efficient and effective application or implementation of the schedule” while compliance will be enforced by the RBZ’s Exchange Control Inspectorate Department.

Economist Dr Bongani Ngwenya said the introduction of the bond notes into the country’s financial space accelerated the rate of externalisation stating that it led to the Gresham’s law. In economics the Gresham’s law is a monetary principle stating that “bad money drives out good”.

“The US dollar is naturally good money that easily finds home in any country in the world especially where it can be respected. Once our Government decided to introduce the bond note it created bad money in the economy. Unfortunately and naturally bad money would always chase away good money. When that happened we saw the US dollar disappearing from the market very fast. In other words it withdrew from circulation. Those of us who had it and access to it started hording it and some foreigners extensively externalised it in their country,” said Dr Ngwenya.

He also said the dependence on the US dollar has weighed down the country’s economy.

“The bottom line is that externalisation of the US dollar in Zimbabwe has got worse implications than in countries that are having their own domestic money and are not solely depending on the US dollar. For them the US dollar is mainly a reserve currency unlike in Zimbabwe where the US dollar is both a reserve currency and a legal tender. So as a result its externalisation has affected the capacity of the country’s economy to preserve the US and have it abundant enough for both legal tender as well transactional purposes and for foreign currency reserve purposes,” said Dr Ngwenya.

Anything necessary for the efficient and effective application or implementation of the schedule” while compliance will be enforced by the RBZ’s Exchange Control Inspectorate Department.

Economist Dr Bongani Ngwenya said the introduction of the bond notes into the country’s financial space accelerated the rate of externalisation, stating that it led to the Gresham’s law. In economics the Gresham’s law is a monetary principle stating that “bad money drives out good”.

“The US dollar is naturally good money that easily finds home in any country in the world especially where it can be respected. Once our Government decided to introduce the bond note it created bad money in the economy. Unfortunately and naturally bad money would always chase away good money. When that happened we saw the US dollar disappearing from the market very fast. In other words it withdrew from circulation. Those of us who had it and access to it started hoarding it and some foreigners extensively externalised it in their country,” said Dr Ngwenya.

He also said the dependence on the US dollar has weighed down the country’s economy.

“The bottom line is that externalisation of the US dollar in Zimbabwe has got worse implications than in countries that have their own domestic money and are not solely depending on the US dollar. For them the US dollar is mainly a reserve currency unlike in Zimbabwe where the US dollar is both a reserve currency and a legal tender. So as a result its externalisation has affected the capacity of the country’s economy to preserve the US and have it abundant enough for both legal tender as well transactional purposes and for foreign currency reserve purposes,” said Dr Ngwenya.