The Exchange Control regimes in any country are critical to the managing and maintenance of money onshore i.e., within that jurisdiction. It is imperative that an economy has sufficient cash as this aids in stabilizing its trading capabilities as well as avoid over liberalization of flow of funds which is a key disruptor of local currency stability, foreign investment, and the operation of local industry. For developing countries which often are characterized with high political and economic risk, exchange controls tend to be more restrictive as compared to developed nations. This is a series of discussions on what an SME should expect in managing the compliance around foreign payments. 

In Zimbabwe the exchange control regulations are instituted through just to mention some of the key legislations over the years:

Legislative Piece	Function
Exchange Control Act 22:05	Key piece of legislation which “confer powers (to the President) and impose duties and restrictions in relation to gold, currency, securities, exchange transactions, payments and debts, and the import, export, transfer and settlement of property, and for purposes connected with the matters aforesaid.”
SI 109 of 1996 Exchange Control Regulations, 1996	Provides the general framework for exchange control and defines key terms and concepts.
SI 110 of 1996 Exchange Control (General) Order, 1996,	Outlines the permissible transactions and limits for individuals and businesses in relation to foreign currency or assets.
SI 104 of 2015 Exchange Control (Authorized Dealers with Limited Authority) Order, 2015,	Regulates the operations of money transfer agencies and bureaux de change that are licensed by the RBZ to deal in foreign currency.
SI 93 of 2017	Prescribes cash amounts that can be exported out of the country.
SI 122A of 2017 Exchange Control (Amendment) Regulations, 2017 (No. 5),	Introduces a new currency called bond notes and coins that are pegged at par with the US dollar and are legal tender in Zimbabwe.
SI 245 of 2018 Exchange Control (Amendment) Regulations, 2018 (No. 6),	Further prescribes who is allowed to deal with currency currency and where such trades should take place.
SI 32 of 2019 Exchange Control (Amendment) Regulations, 2019 (No. 6),	Extends the definition of currency to include Zimbabwe notes and coins, bond notes and coins, electronic currency and bill of exchange, promissory note, traveler’s cheque etc.
SI 212 of 2019 Exchange Control (Exclusive Use of Zimbabwe Dollar for Domestic Transactions) Regulations, 2019,	Prohibits the use of foreign currencies in settling prescribed domestic currency transactions.
SI 61 of 2020 Exchange Control (Exclusive Use of Zimbabwe Dollar for Domestic Transactions) (Amendment) Regulations, 2020 (No. 1),	Increases the scope of transactions excluded from exclusive use of domestic currency.
SI 85 of 2020 Exchange Control (Exclusive Use of Zimbabwe Dollar for Domestic Transactions) (Amendment) Regulations, 2020 (No. 2),	Allows for the payment for goods and services using free funds.
SI 185 of 2020 Exchange Control (Exclusive Use of Zimbabwe Dollar for Domestic Transactions) (Amendment) Regulations, 2020 (No. 3),	Prescribes dual pricing and displaying, quoting, and offering of prices for goods and services.
SI 127 of 2021 Presidential Powers (Temporary Measures) (Financial Laws Amendment) Regulations, 2021,	Prescribes the penalties for contravening exchange control regulations.
SI 57 of 2022	Prescribes cash amounts that can be exported out of the country.

Further to the exchange control regulations, the Reserve Bank of Zimbabwe under the authority conferred upon it under section 35 of SI 109 of 1996 often offers supplementary instructions and/or guidance through exchange control circulars and directives.

The hyper-inflationary economic environment coupled with exchange rate volatility has necessitated the reactionary approach demonstrated by the regulator. As much as these exchange control regulation changes increase both compliance and currency risk, a robust compliance regime within a business mitigates these risks.

There are two types of exchange controls that impact SMEs business operations; being exchange controls on current international transactions (current payments and transfers) and controls on capital accounts. The regime has specific regulations per transaction type and in this article, we look at current international payments using free funds and how to satisfy compliance.

Current international transactions

These are international transactions which are not of capital in nature. These include receipts of foreign currency through trade (exports) and payments in foreign currency for goods and services to be consumed during the day-to-day operation of the business (imports). A broad description of what may be imported includes goods used in consumption or capital goods (equipment, machinery) as well as intermediate goods (semi processed goods). A similar type of description is available for services which are grouped as professional and technical services. Not everything can be imported as we have import substitution policies that limit imports to items that cannot be produced within the local economy. 

b. Goods payment using free funds.

SI 109 of 196 as read with SI 85 of 2020 define free funds as ‘’money which is lawfully held outside Zimbabwe by a Zimbabwean resident, and which was acquired by him otherwise than as the proceeds of any trade, business or other gainful occupation or activity carried on by him in Zimbabwe’’ and ‘’ includes funds lawfully held or earned in foreign currency by any person.’’ 

i. Advance payments cycle

These are payments made in advance i.e., before receipt of the goods. 

The transaction starts with the SME identifying and ordering goods from their foreign supplier which leads to the generation of the proforma invoice by the supplier. With the proforma invoice, the SME extracts trade terms and information required to process payment from their Foreign Currency Account (FCA) held with an authorized dealer (bank). A declaration to RBZ that the payment will not be repeated using “copy documents’’ nor will it be submitted with another authorized dealer is appended together with the relevant documents for payment processing submission.  

Once payment is processed the 90-day acquittal lead-time kicks in. This is the expected time in which goods purchased should be received in Zimbabwe. Receipt of the goods is proved by the bill of entry which form part of the acquittal documents submitted through the authorized dealer that processed the transaction. 

Acquittal extensions are allowed in cases where there are proven delivery delays from the supplier i.e., manufacturing of the goods is longer than 90 days, unexpected supply chain shocks etc. In case where the extensions are not approved by the RBZ a penalty equivalent to 5% of the outstanding acquittal paid in local currency at the prevailing bank rate. Effective management of extensions becomes critical since failure to do so results in the SME losing cash through penalty payments per foreign payment. 

This type of payment has a direct cash impact since it has an immediate cash outlay. This makes advance payments appropriate when transaction finance is from retained operational cash inflow, designated customer receipts for that specific purchase or some form of inventory purchase financing. 

ii. Consignment payment cycle

Payments made on goods received from suppliers on consignment basis. Consignment terms are normally entered into where a local SME receives goods only triggering payment obligation the moment they are sold i.e., when they change custody from the local seller to a local buyer. These are normal transactions in franchise, dealership, and agent relationships.

The payment cycle for delayed payments requires the submission of the commercial invoice with the trade terms and the bills of entry relating to the consignment to which the sold goods belong to. These documents justify the payment and allow for its acquittal as well.

SMEs that incorporate this into their business model have a relief on their cash flow i.e., payment is not immediately required and whatever cash is available is utilized elsewhere. While this carries some resemblance to credit terms, consignment stock still belongs to the consignor and can be recalled which further reduces the commercial risk involved in operating as a consignee.

iii. Credit terms

Goods supplied on credit or those that require payment per stage of production completed necessitate the need for part payments. Part-payments used to pay for goods require that the trade terms are communicated to the authorized dealers with a declaration being made to RBZ as is required on the previous payment types. For subsequent payments copies of the previous payment(s) should be attached to the payment.

Credit terms on delivered goods are deals that are not common in the marketplace (due to perceived country risk) unless credit is being run instead of consignment arrangements in a franchise or dealer setup. 

b. Services payments using free funds.

Service level agreements pertaining to the service should be registered with the central bank before such payment may be made. Services pose greater risk of exchange control manipulation since their acquittal cannot be traced further than the certificate of completion or progress reports. This characteristic of services brings about a carefully curated registration process. The registration requirements include the following:

i. Details of the relationship between the companies, that is, between applicant and the service provider.

ii. Consolidated service agreements and payments

Details of other service contracts already registered/renewed under the new dispensation and their contract values (list all contracts registered with Exchange Control per authorized dealer within the last 12 Months)

iii. Revenue Limit

• Audited revenue figure for the previous year and projected revenue figure for the current year 
• Financial year dates of the applicant
• Declaration that the payments under the agreement submitted for registration will not make the consolidated service payments exceed the 3% of annual gross revenue threshold.

iv. Applicable invoices showing the amounts applicable in the current financial year if determinable and indicate total amount applicable under the agreement or estimate total cost per year.

v. Signed Addendum to the Agreement

Once registration is approved an exchange control approval number is issued for the service and reference of this number shall be made on all payments.  

Compliance to exchange control regulations affecting current foreign currency payment is critical for satisfying these obligations. The impact of non-compliance and/or abuse as described in SI 127 of 2021 cripple a business making the risk not worth the assumed reward. 

Next article, we look at current international payments using the RBZ Auction. 

The thoughts and views presented in this article are those of the author and are for information purposes only.