As the three-month moratorium extended to individuals and companies that illegally externalised funds to return them expires, the government has to strengthen fiscal agencies, including the Reserve Bank of Zimbabwe (RBZ).
It is clear that the country lost billions of dollars through illegal externalisation which contributed to the chronic cash and foreign currency shortages. Illegal externalisation of funds is economic sabotage. It deprives the country of the much-needed foreign exchange and undermines the country’s ability to build foreign reserves. As the three month deadline to individuals and corporates that illegally externalised funds to return them on a no question asked basis or charges preferred against them comes to an end, it is critical that the government empower fiscal agencies including the RBZ such that they may fully monitor and control all financial transactions.
Externalising foreign exchange illegally, tax evasion, money laundering and financing terrorism are serious crimes which require swift action and only an empowered institution can fully act. Commendably, the country already has robust financial legislation such as the Money Laundering and Proceeds of Crime Act, Exchange Control Act, Banking Act and Reserve Bank Act among others which should be used effectively to deal with all forms of financial crimes. There is now need for fiscal agencies to develop stringent requirements and effective monitoring tools for business transactions to make financial crimes more difficult. Given the current currency regime, the country is prone to all forms of financial crimes including illegal externalisation.
Externalisation has been one of the chief causes of the cash shortages that have rocked the economy since 2014. RBZ which was tasked with dealing with those willing to comply with the Presidential moratorium announced that significant amounts had been returned to the country since last December. Economic agents are eagerly awaiting for the exact amount of funds that have been recovered as the moratorium period expired.
African countries have been mostly affected by illegal externalisation due to relatively weaker fiscal regulatory agencies and weak monitoring tools. Malawi for example also lost millions of dollars last year due to illegal externalisation and transfer pricing manipulation. Transfer pricing involves the pricing of goods and services between parties that control one another whether directly or indirectly. While transfer pricing is not entirely illegal, transfer pricing manipulation may be considered illegal. In Malawi, the majority of the funds that were illegally externalised was done by companies involved in the exports of goods and services. These companies quoted lower prices for exports and hence proceeds remitted back into the country will be lower than actual proceeds. Some overvalued imports such that the forex that goes out of the country is much higher than the value of the imports. This is likely to be the same in Zimbabwe and the RBZ has to shade more light as the moratorium period ends. To reduce the case of illicit flows, Malawi’s central bank established a transfer pricing section unit specifically to deal with issues of transfer pricing. This has assisted to some extent in lowering illicit financial flows cases. Zimbabwe implemented measures to curb illicit financial flows which include ceilings on amounts that an individual can carry out of the country, getting rid of the concept of free funds, reporting of suspicious transactions, bond notes and use of plastic money.
However, continuous strengthening of fiscal regulatory bodies such as Zimra and RBZ is essential to fight illicit financial flows. If the leakages continue, the country will not have capacity to create a capital base locally. There is need therefore to put further controls and to tighten border control. The central bank should consider utilising the methods used in the past under the old Exchange Control Act. Under this Act, many expatriate companies were required to register locally and the retention of all their revenue had a hothouse effect that created huge capacity for capital, which was then invested towards developing the economy.
Kaduwo is an economist at Econometer Global Capital. — firstname.lastname@example.org or email@example.com