Legacy Debt Resolution under the Finance Act No. 7 of 2021
During the period of Zimbabwe’s multi-currency regime that was ushered in November 2008 by the then Acting Minister of Finance Hon. Chinamasa and continued for close to a decade, public and private entities procured goods and services from entities outside the country that required payment in foreign currency. Some companies with foreign investors incurred obligations to remit dividends in foreign currency to these investors. As the country began to experience foreign currency shortages in 2016, the ability to make foreign currency payments or remit dividends outside the country became challenging.
In February 2019, the Governor of the Reserve Bank of Zimbabwe announced in the Monetary Policy Statement that it would establish an Inter-bank foreign exchange market to formalise the buying and selling of US$ using bond notes and RTGS balances through banks and bureaux de change. One of the safeguards introduced by the Monetary Policy Statement to maintain stability in the foreign currency market was that all foreign liabilities or legacy debts due to suppliers and service providers, as well as declared dividends would be treated separately. These foreign liabilities or legacy debts transactions would be registered with the Exchange Control Division for the purposes of providing the Reserve Bank sufficient information to determine the roadmap to expunge them in an orderly manner. In order to operationalise the Monetary Policy Statement, the Reserve Bank issued Exchange Control Directive RU28/2019 which provided the Blocked Funds Framework that contained guidelines to be followed in the registration of foreign liabilities or legacy debts. Exchange Control Directive RU102/2019 published in September directed banking institutions to transfer all RTGS$ balances in relation to registered legacy debts to the Reserve Bank
In February 2020, Reserve Bank advised in its Monetary Policy Statement that the Government was committed to the settlement of the foreign exchange legacy liabilities or blocked funds, and had processed and validated applications valued at US$1.2 billion from 730 applicants. In April 2020, the Reserve Bank of Zimbabwe announced in a press statement that the process of validating the applications submitted under the 2019 Blocked Funds Framework had been completed, and requested that the outstanding respective local currency for all approved blocked funds transactions be transferred to the Reserve Bank by 30 April through normal banking channels.
Recently, in January 2022, the Finance Act No. 7 of 2021 was gazetted. Section 52 of the Act states that the Minister of Finance and Economic Development shall, on behalf of the State, assume responsibility for the discharge of the outstanding blocked funds, subject to the validation and reconciliation of the relevant claims.
This article seeks to analyse the steps taken by the Government in the process of settling the blocked funds, and the validation and reconciliation process set out in the Finance Act No. 7 of 2021.
THE ORIGINS OF BLOCKED FUNDS
Blocked funds or legacy debts constitute debts/funds that Zimbabwean entities incurred from foreign entities for goods, services and dividends and were unable to pay due to a shortage of foreign currency. The shortage of foreign currency can be attributed to the various currency reforms introduced by the Government from May 2016 when the bond notes were first mooted, to June 2019 when the country abolished the multi-currency regime. Some of the currency reforms created disparities between the bond notes or RTGS$ balances and the US$, which resulted in loopholes that fueled the foreign currency parallel market, leading to a higher demand of foreign currency than was available in the market.
Important to note that in February 2019, in addition to the Monetary Policy Statement and the Exchange Control Directives, the Reserve Bank of Zimbabwe Act (Chapter 22:15) was amended by the insertion of a new Section 44C which stated that outstanding foreign loans and obligations denominated in any foreign currency would continue to be payable in foreign currency. This is because the same amendment stated that for accounting and other purposes, all assets and liabilities that were valued and expressed in US$ before February 2019, excluding those denominated in foreign currency, would be deemed to be values in RTGS$ at a rate of 1:1 to the US$. This amendment thus protected the foreign liabilities or legacy debts from being deemed to be values in RTGS$.
PROCESSING AND VALIDATION OF BLOCKED FUNDS
The Exchange Control Division in the Reserve Bank was tasked with the processing and validating blocked funds. Exchange Control Directive RU28/2019 which established the Blocked Funds Framework provided that all foreign liabilities and legacy debts which included external loans, dividends, disinvestments from direct and portfolio investments, amounts owed to international airlines and outstanding payments for goods and services provided by external suppliers, would continue to be settled in foreign currency in line with agreed terms. It was a requirement however that all such obligations be registered with the Exchange Control Division, through the banking institutions.
Banking institutions were tasked with requesting various documents from their clients to confirm the existence of the legacy debts, and ensuring sufficiency of these documents prior to submission of the legacy debts for registration with the Exchange Control Division. The Directive provided a list of documents for different types of transactions, namely, imports of goods, imports of services, external loans, dividends, disinvestments from foreign direct investment, disinvestments from portfolio investment, outstanding remittances to international airlines, non-resident RTGS$ balances and other debts. Banking institutions were also required to submit details of any part payments made for the outstanding amounts. The processing and validation of the blocked funds was completed by the Exchange Control Division in February 2020, and in April 2020, the Reserve Bank requested that the remainder of the respective local currency for all approved blocked funds transactions be transferred to the Reserve Bank of Zimbabwe by 30 April through normal banking channels.
In the Statement of Public Debt tabled by the Hon. Prof. Ncube Minister of Finance and Economic Development in November 2021 to the Parliament of Zimbabwe, the blocked funds were estimated at US$3.3 billion. These comprised of Private Sector blocked funds of US$2.5 billion, where commercial banks applied on behalf of their clients, and Reserve Bank blocked funds of US$836.6 million being agreements/ contracts/ commitments on fuel, grain, airlines and others. The Hon. Minister reported that the settlement of assumed blocked funds would be done through issuance of long-term Government securities that have the following characteristics: tax exemption, liquid asset status, prescribed asset status and tradable. He added that the settlement arrangements would be done in a gradual phased approach, which is non-inflationary, taking into account availability of resources, fiscal sustainability, maturity profile and debt sustainability.
FINANCE ACT NO. 7 OF 2021: BLOCKED FUNDS RESOLUTION
In January 2022, the Finance Act No. 7 of 2021 was gazetted, and legislated the “Blocked Funds Resolution” in Part XIII, from Section 50 to Section 55.
This Part XIII reads very much like the Reserve Bank of Zimbabwe Debt Assumption Act 2 of 2015. This Act was promulgated to provide a mechanism for the settlement of US$1.3 billion in liabilities incurred by the Reserve Bank before 31 December 2008, particularly foreign currency debts arising from funds transferred to the Reserve Bank by banking institutions in October 2007, in compliance with a directive to do so by the Reserve Bank.
Section 50: Interpretation in Part XIII
Section 50 provides several definitions that are to be used in Part XIII, namely the definition of “blocked funds”, “creditor”, “Debt Management Office”, “Minister”, “reconcile”, “Reserve Bank of Zimbabwe”, “settle” and “validate”. The definitions provide the contextual meaning of the words as they are used specifically in Part XIII.
“Creditor” is defined to mean a person or their successor in title who is a foreign counterparty and provided a loan or advance or goods or services to a person resident in Zimbabwe and was entitled to payment for goods and services or dividend or return on investment in foreign currency, which foreign currency, however, could not be repatriated from Zimbabwe. This means that local counterparties do not qualify. The term “reconcile” means to establish the amount of such claim by comparing and harmonising the amounts reflected in the records of the Reserve Bank and in records of the creditor in relation to reconciling a claim arising from blocked funds. The word “settle” is defined to include the liquidation of such debts in accordance with Section 52(3) in relation to the settling of prior debts by the State. Finally, “validate”, is defined to mean to establish the existence of such claim in relation to validating a claim arising from blocked funds.
The Finance Act No. 7 has Annex 1, which lists the “Blocked Funds on the Reserve Bank Balance Sheet as at 31 December 2020”, and Annex 2 which lists the “Private Sector Blocked Funds as at 25 September 2021”. It is these listed blocked funds that are the subject of these provisions, as these are the same foreign liabilities and legacy debts that were registered at the Exchange Control Division in the Reserve Bank between February 2019 and April 2020. As stated in the Statement of Public Debt tabled by the Minister of Finance and Economic Development in November 2021 to Parliament, the blocked funds estimated at US$3.3 billion comprised of Private Sector blocked funds of US$2.5 billion, and Reserve Bank of Zimbabwe blocked funds of US$836.6 million.
Section 51: Qualifying blocked funds
This Section states that any liability payable in foreign currency that was incurred by the persons listed in the Annexes (“Scheduled person”) before 22 February 2019, and the foreign currency could not be repatriated from Zimbabwe, shall constitute blocked funds qualifying for relief in terms of Part XIII.
The Section specifies that the scheduled persons must have submitted their claims on or before 30 April 2020, for validation by the Reserve Bank. Scheduled persons must also have remitted the equivalent in Zimbabwe dollars, of the blocked funds forming the basis of the claim.
It is essential that in order to qualify for relief, the liability must be listed in the Annexes to the Act. This could mean that any liabilities not listed do not qualify for relief, because these liabilities would not have gone through the validation process at the Reserve Bank. What is not stated is the treatment of legacy debts that were processed and validated by the Exchange Control Division at the Reserve Bank but were erroneously omitted in the Annexes, and if these would also qualify for relief in terms of the Act. It is likely that entities that find themselves in this predicament will have to approach the Debt Management Office with all documentation.
Section 52: Assumption of obligations by the State
By this Section, the Minister assumes responsibility for the discharge of the outstanding blocked funds on behalf of the State, subject to the validation and reconciliation of the relevant claims. The Section goes further to provide that the Minister shall fix the terms and conditions under which he assumes responsibility for the discharge of any obligation with respect to the blocked funds.
The Section provides that outstanding blocked funds may be liquidated through the issuance of Government-backed zero coupon or non-interest-bearing foreign exchange savings bonds or such other debt instruments denominated in foreign currency.
It states that no action or proceeding shall be commenced or continued against the Reserve Bank or any other banking institution in respect of liabilities arising from blocked funds assumed by the Minister on behalf of the State, or any other obligation or claim in connection therewith or arising therefrom.
These provisions give the Minister some measure of control to determine the best approach on how to settle the blocked funds. The Minister may do so by issuing Government-backed foreign exchange savings bonds that have zero coupon or in other words are non-interest-bearing, or issuing of other debt instruments denominated in foreign currency.
The major difference of these provisions with the Reserve Bank of Zimbabwe Debt Assumption Act is that the instruments that were subsequently issued by the Government in 2015 known as Treasury Bills had interest coupons depending on their tenure of either two years or three years or five years. Also, all prior debts assumed by the Reserve Bank through that Act attracted interest of 5% per year from the date that the debt was contracted (pre-2008) until the date of final payment. It is likely because these funds were transferred in 2007, and the Act was passed in 2015, thus 8 years had lapsed prior to the debt assumption, hence justifying historical interest. When issued, the Treasury Bills had varying interest coupons. The country was operating under a multi-currency regime, and the Government was able to settle the interest on the Treasury Bills.
For the current blocked funds, there is no mention of historical interest on the outstanding amounts, and the Government instruments will be non-interest bearing. This is likely because the genesis of the legacy debts was the shortage of foreign currency, and the Government is attempting to contain these liabilities by excluding historical interest as well as interest on the instrument to be issued.
The moratorium against litigation on blocked funds protects the Reserve Bank or banking institutions from being pursued in court for the blocked funds, as the Government is taking full responsibility for the discharge of the blocked funds on behalf of the State.
Section 53: Proof of claims arising from prior debts and notification of validated and reconciled claims
The Section begins by stating unequivocally that no claim arising from blocked funds shall be assumed by the State and settled, unless the claim is validated and reconciled in accordance with the Section. The Section emphasises this by declaring that for the avoidance of doubt, any claim arising from blocked funds that is not validated and reconciled by the Debt Management Office in accordance with this Section shall not be assumed by the State in terms of Section 52.
The Section provides that all claims arising from blocked funds must be validated and reconciled by the Debt Management Office. This Office is empowered to demand certain information or documents from the creditor as may be appropriate to the claim. The Office may demand authenticated copies of the relevant loan agreement, or contract, or declaration in the case of dividends. It may demand any other documentation in support of the creditor’s claim, including shipment schedules showing commodities supplied and quantity and price per shipment, and creditor statements indicating initial balances, disbursements made, payments effected and the dates of these, or creditor statements indicating the principal amount of the claim and the interest thereon. The Debt Management Office may also demand a court judgment.
These provisions are identical to those in the Reserve Bank of Zimbabwe Debt Assumption Act. Therefore, the Debt Management Office is sufficiently qualified and experienced to validate and reconcile the blocked funds, as it successfully conducted this exercise pursuant to the Reserve Bank of Zimbabwe Debt Assumption Act in 2015. The Debt Management Office is empowered to request documents from the creditor, who is the foreign counterparty, and this may be in addition to documents that will be submitted by the scheduled persons listed in Annex 1 and Annex 2.
Section 54: Application of Part VI of Cap. 22:19
This Section incorporates by reference Part VI of the Public Finance Management Act (Chapter 22:19) titled “Loans, Guarantees and Other Commitments” which runs from Section 52 to Section 78, to apply with the necessary changes, in respect of any obligation assumed in terms of Section 52 as if the obligation was a State loan borrowed in terms of that Act.
Part VI of the Public Finance Management Act begins in Section 52 by empowering the Minister to borrow money for any purpose considered necessary or expedient by the President. The Minister’s powers to borrow in any financial year are however limited to not exceed 30% of the general revenues of the country in the previous financial year. This limit may be exceeded if the Minister obtains authority by a resolution of the House of Assembly to so exceed.
Section 53 of the Public Finance Management Act lists the purposes for which the Minister may borrow, to include to obtain foreign currency for any Government undertaking, which addresses the financing of the foreign liabilities and legacy debts.
Section 54 provides for the manner in which the Minister may raise the State loans, namely, by issuing bonds or stock, by issuing Treasury Bills or by an advance or bank overdraft. The other Sections of Part VI provide the Minister with various powers, duties and responsibilities to enable the effective use of his borrowing powers for loans, guarantees and other commitments.
By incorporating Sections 52 to 78 of the Public Finance Management Act, the Finance Act No. 7 of 2021 avoids creating new processes in the resolution of blocked funds, by using existing parameters within which the State can operate, given that the blocked funds are in fact debts owed to the foreign counterparties that the State has assumed.
Section 55: Exemption from stamp duty
The Section provides that no stamp duty or other duty or tax and no fees or other charges shall be payable in respect of anything done under this Part.
What remains after the promulgation of the Finance Act No. 7 of 2021 is for the Government to announce the commencement of the validation and reconciliation exercise of blocked funds at the Debt Management Office. It is likely that this Office will adopt processes that it previously implemented under the era of the Reserve Bank of Zimbabwe Debt Assumption Act. There is no doubt that the Debt Management Office will be able to complete the validation and reconciliation exercise within a reasonable time after it begins, given its prior experience on such an exercise in 2015.
The Government, through the Reserve Bank, will also announce the commencement of issuance of the Government-backed zero coupon or non-interest-bearing foreign exchange savings bonds or similar debt instruments denominated in foreign currency. These will be tax exempt, have liquid asset status, have prescribed asset status and will be tradable. The scheduled persons whose blocked funds are validated and reconciled, together with their creditors will be eagerly waiting to hear the announcement of the tenure of these instruments, so that they may begin making accounting, investment and other financial decisions regarding their treatment on balance sheets and budgeting. The Minister has announced that the settlement arrangements will be done in a gradual phased approach, meaning the tenure of the instruments will vary. As the instruments will be tradable, it is likely that the Government will facilitate the creation of a secondary market for the open trading of the instruments on the Victoria Falls Stock Exchange. This will enable scheduled persons who seek access to liquidity to dispose of the instruments on the Exchange. Given that trades on the Victoria Falls Stock Exchange can be done using offshore foreign currency or free funds, the trades will attract new inflows of foreign currency, particularly from investors with a long-term view and appetite for Government instruments. The new inflows of foreign currency from trades on the secondary market will also improve foreign currency liquidity in the country in the official banking channels, thus easing the pressure of applications submitted in the auction system.
The resolution of the blocked funds or legacy debts is a welcome development by entities that have been unable to remit payments for goods and services or dividends for several years now. Some entities may have been blacklisted by foreign suppliers due to failure to settle their invoices.
The assumption by the State of the legacy debts or blocked funds is a clear indication of the seriousness with which the State is treating this matter. The process of validating and reconciling the blocked funds through the Debt Management Office will be straightforward, as this is not the first time that Office is implementing the process. Once the instruments are issued on the primary market to scheduled persons or creditors, it is hoped that the Government will facilitate the creation of a secondary market as the instruments will be tradable. This tradability will lead to new foreign currency inflows into the country, which will in turn reduce the demand for foreign currency through the auction system.
Reserve Bank of Zimbabwe Monetary Policy Statement February 2019 and February 2020
Reserve Bank of Zimbabwe Exchange Control Directive RU28 February 2019 and RU102 June 2019
Reserve Bank of Zimbabwe Press Statement on the Validation of External Payment Obligations under the Blocked Funds Framework April 2020
Statement of Public Debt tabled in Parliament on 25 November 2021 by Hon. Prof. Ncube, Minister of Finance and Economic Development