Command Economics: Economic Governance Watch 4/2022

On the 7th May the President, flanked by the Minister of Finance and the Governor of the Reserve Bank, announced measures intended to stabilise the economy, reduce inflation and shore up the Zimbabwe dollar. The President’s announcement can be accessed on the Veritas website .

Some of the announced measures are to be implemented in due course: for example, the Government is going to increase the proportion of duties and taxes that exporters can pay in local currency. Other measures, according to the President, are to be implemented “with immediate effect” – and it is with these that problems arise. While some of them can be implemented administratively and others can be implemented through existing law, several will need legislative action before they can be brought into effect. In this bulletin we shall not speculate on the success of the measures; instead we shall look at the legality of those that seem legally questionable. First though we make what should be an obvious point.

The Importance of Legality

All public officers, whatever their rank or title, are bound by the law. In their official capacities they cannot do anything unless a law allows them to do it. Neither the President nor the Minister of Finance nor the Governor of the Reserve Bank can make legally binding announcements unless they are empowered to make them by or under an Act of Parliament or the Constitution. Hence the measures announced by the President on Saturday have no legal effect unless there is a law that allows them to be made through announcement published in the press.

Having made that point, we turn to the measures themselves.

Suspension of Lending by Banks

Perhaps the most controversial measure announced by the President is that, with immediate effect, lending by banks to Government and the private sector is suspended indefinitely.

Is it lawful? No it is not.

In the National Assembly on the 12th May the Minister of Finance sought to justify the ban by suggesting it was not so much a ban as an exercise of “moral suasion” done with the agreement of the banks. This unconvincing explanation is belied by a circular letter which the Reserve Bank’s Director of Bank Supervision sent to all financial institutions on the 9th May, in which he outlined the effect of the suspension and concluded:

“The Reserve Bank will monitor compliance with the above directive and will take appropriate supervisory action against any non-compliant institutions.”

The Minister also sought to justify the ban by suggesting that the President had power to impose it under the Presidential Powers (Temporary Measures) Act and the Exchange Control Act. This justification does not hold water because, to the extent that those Acts give the President powers – and both Acts are constitutionally questionable – the powers must be exercised by regulations, not by public announcement.

The Banking Act does give the Reserve Bank, through the Registrar of Banking Institutions, power to monitor and supervise banks [this power is conferred by sections 17 and 45 and 81 of the Act]. Similarly the Reserve Bank of Zimbabwe Act gives the Bank power to supervise banking institutions and to foster the liquidity, solvency, stability and functioning of the financial system [section 6 of the Act]. These are general powers however and they cannot extend to a blanket prohibition on all forms of bank lending, which forms an essential part of ordinary legitimate banking business. Such a drastic measure would have to be specifically authorised by an Act of Parliament – and even then it might fall foul of section 64 of the Constitution, which gives everyone (including financial institutions) the right to carry on their professions, trades and occupations, or section 134 of the Constitution, which says that Parliament’s primary law-making power may not be delegated.

There is one further point to be made. The letter from the Reserve Bank’s Director of Bank Supervision, which we mentioned earlier, states that the suspension of bank lending extends to undrawn portions of loans that have already been granted by banks; in other words, customers who have already been granted overdraft facilities cannot draw on them while the suspension lasts. Customers who suffer loss through being unable to draw on their overdrafts may have a right to claim damages from their banks, since the suspension is unlawful, and if banks are sued they in turn may have a right of recourse against the Reserve Bank.

Tax Rates

The President announced that, “with immediate effect” there would be changes to the rates of several taxes (and in this bulletin, in line with the Constitution, we are using the term in its broad sense to include duties, royalties, levies, rates and other forms of tax):

  • Intermediated Money Transfer Tax (the tax on electronic money transfers) is doubled, from the current 2 per cent to 4 per cent, on transfers of foreign currency. This is intended to encourage the use of local rather than foreign currency.
  • The withdrawal levy on withdrawals of foreign currency is increased from the current 5 cents per transaction to 2 per cent of the amount withdrawn. The intention here is to discourage withdrawals of foreign currency.
  • Where duties, royalties and other taxes have to be paid in foreign currency, the amount payable is to be calculated at the interbank rate rather than the ZIMRA rate.

Are these measures lawful?

Taxes cannot be imposed by decree: they must be authorised by law. In fact section 298(2) of the Constitution states:

“No taxes may be levied except under the specific authority of this Constitution or an Act of Parliament.”

The same applies to alterations in the rate of a tax: they require legal authorisation in order to be valid.

This applies to all the taxes which are mentioned in the announcement:

  • To alter or increase Intermediated Money Transfer Tax an SI must be published amending section 22G of the Finance Act, and the SI must be confirmed by an Act of Parliament.
  • What the President called “the withdrawal levy” is probably the automated financial transactions tax payable on cash withdrawals from ATMs (automated teller machines). If so, this tax also needs an SI to amend it, and once again the SI must be confirmed by an Act of Parliament.
  • Where amounts of tax are payable in foreign currency, they are calculated according to exchange rates fixed by ZIMRA; legislative action will be needed to change this.

All these measures, therefore, need legislation in order to be implemented. The Ministry of Finance sought to do this on the 13th May, nearly a week after the President’s announcement, by publishing SI 96 of 2022 . The amendments made by that SI are not back-dated however so if banks were deducting the new taxes from their customers before the SI was published they will have to refund them.

Capital Gains Tax on Investments

The President announced that, to encourage long-term holding of stocks and shares, the Government had, “with immediate effect”, reviewed capital gains tax on short-term investments on the Zimbabwe Stock Exchange – i.e. stocks and shares held by an investor for 270 days or less. The tax rate on short-term investments would be doubled to 40 per cent of the selling price of the investments. Six days after the announcement, in SI 96 of 2022, the Minister of Finance increased the rate of capital gains withholding tax on short-term investments in accordance with the President’s announcement.

Is this legal? SI 96 of 2022 is valid on the face of it, though it will have to be confirmed by a Bill which passes its second reading in the National Assembly within 28 sitting days and becomes law within six months thereafter [section 3 of the Finance Act]. The SI is not retrospective however, so capital gains withholding tax at the increased rate is not payable on short-term investments that are sold between the 7th May, when the President made his announcement, and the 13th May, when the SI was published. Stockbrokers who may have withheld the tax at the increased rate from the proceeds of those investments should reimburse their clients.

Restrictions on Stockbrokers

The President announced that with immediate effect – that phrase again – there would be restrictions on the activities of stockbrokers. They are not allowed to transfer funds between their clients’ sub-accounts, or to accept funds from third parties into their clients’ sub-accounts; they may not transfer funds from their clients’ sub-accounts except into their clients’ bank accounts.

Are these measures legal? No, not until they are incorporated into legislation. Section 4 of the Securities and Exchange Commission Act gives the Commission the function of supervising and regulating stockbrokers, but this has to be done through rules published in the Gazette. Until the Commission has taken action, stockbrokers are under no obligation to comply with the President’s announced measures.

Foreign Currency Auctions

The President announced that the Reserve Bank would clear the backlog in foreign currency allotments by the end of this month, that future allotments of foreign currency would be paid to successful bidders within 14 days, and that the Bank would only auction foreign currency that is available. [This last measure implies what many have suspected, that the Reserve Bank has been auctioning foreign currency it does not have]

Are these measures legal? Auctions of foreign currency are arranged administratively by the Reserve Bank under a document signed by the Governor on the 17th June 2020 [link]. If these administrative arrangements are legal then they can be changed administratively without resort to legislation. Their legality is open to doubt, however. Sections 6 and 7 of the Reserve Bank of Zimbabwe Act, which set out the Bank’s functions and powers respectively, do not mention the allocation of foreign currency by auction or otherwise, and although section 2 of the Exchange Control Act states that regulations made by the President under the Act can empower authorities such as the Reserve Bank to make orders, rules and directions, the regulations do not expressly allow orders, rules and directions to provide for the auctioning of foreign currency. Without such express authorisation, the auction system is open to legal challenge.

Compensation for Bank Depositors

The President announced compensation for bank depositors who had been prejudiced in 2019 when the US dollar amounts in their accounts were converted into Zimbabwe dollars at a 1 : 1 rate of exchange. Depositors whose accounts held less than US $1 000 were already being compensated, the President said, and their compensation would continue. A framework was being put in place to compensate individuals whose accounts held up to US $100 000. According to the President:

“The amount required and implementation modalities of this policy will be announced in due course.”

Is this legal? The Government is to be commended for wanting to compensate depositors whose trust in financial institutions was seriously shaken when their US dollar deposits were transformed into rapidly depreciating Zimbabwe dollars without their consent. Some depositors, including pensioners, lost all their savings. At the same time, however, any compensation must be legal.

The compensation announced by the President is presumably going to be paid by the Government, and will have to come ultimately from the Consolidated Revenue Fund. If so, its payment will have to be authorised by an Appropriation Act or some other Act of Parliament [secs 303 and 305 of the Constitution]. Assuming therefore that proper provision is made in next year’s annual budget or in a special supplementary budget this year, future payments of compensation will be legal.

The President, however, said that some compensation had already been paid to small depositors. It is not clear how much has been paid or how it has been funded; there seems to have been no specific provision for it in last year’s Estimates of Expenditure. If it has not been provided for then the payments are illegal and will have to be condoned by Parliament in a Financial Adjustments Act.


Commentators have castigated the measures announced by the President as unsound and illegal. In this bulletin we have shown that many of them – and principally the suspension on bank lending – are indeed illegal. Whether they will turn out to be unsound only time will tell, though the fact that they have been introduced with disregard for the law gives little ground for optimism.

Source: Veritas


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