eBusiness Weekly
Kudzanai Sharara
The Reserve Bank of Zimbabwe has started issuing out debt instruments to beneficiaries of the legacy debts or blocked funds while some are already getting paid, central bank governor Dr John Mangudya has said.
This comes at a time the apex bank has completed validation of foreign exchange applications submitted under the Blocked Funds Framework announced in the Monetary Policy Statement on February 22, 2019.
Blocked funds are cash flows generated in Zimbabwe by foreign entities that could not be repatriated to foreign suppliers due to foreign exchange shortages — or commonly referred to as foreign exchange legacy liabilities (or debt).
These legacy foreign debts, which were assumed by the central bank in according to Circular 8 of 2019, covers the period between January 2016 and February 2019.
Last week, the central bank called on all those whose blocked funds were approved to transfer the respective local currency to the RBZ by April 30, 2020 through normal banking channels.
“In order to ensure that companies comply with the April 30, 2020 deadline approved by respective regulatory authorities for the finalisation of their audited financial statements, and given the constrained working arrangements as a result of the Covid-19 pandemic, all blocked funds appeals that meet the laid down criteria but are not received by April 30, 2020 will be considered null and void,” reads part of the statement issued by the RBZ on April 17.
Transfer of the said local currency to the central bank, at 1:1 with the foreign obligations, will “facilitate closure of the processing of applications under the Blocked Funds Framework”, the RBZ said.
To date, the apex bank has processed and validated blocked funds amounting to approximately US$1,3 billion, according to Dr Mangudya.
Zimbabwe Stock Exchange Listed entity Delta Beverages says a total of $125 million belonging to its major shareholder AB Inbev is covered by RBZ legacy debts arrangements.
Other Delta creditors and banks have at least $70 million as part of the legacy debts arrangement, according to Delta Corporate Affairs Executive Patricia Murambinda.
Struggling South African Airways was owed roughly US$85 million towards the end of last year.
At the time, SAA regional manager, Winnie Muchanyuka, said the airline would “comply with exchange control regulations of the land and as such the debt will be moved to Reserve Bank as per statute.
“We await instructions from the bank as to how the process will flow,” she said then.
That process has since been completed subject to the transfer of the respective local currency for the approved blocked funds transactions.
The next step, according to Dr Mangudya, is for the central bank to issue debt instruments to validated and processed applications.
“After validation and verification the beneficiaries are supposed to receive debt instruments which we will then expunge by buying back the debt instrument.
He said once an institution is allocated foreign currency, the central bank will then buy back the debt instrument and to date some of the debts are already being serviced.
Dr Mangudya said tenure for the debt instruments will depend on the size and the level of indebtedness of the blocked funds.
One of the debt instrument mentioned by Dr Mangudya is the US dollar denominated savings bond which at some point had interest rate of 7,5 percent per year, a minimum tenure of one year, enjoys tax exemption in line with government policy, has liquid asset status, and is tradable and accepted as collateral for overnight accommodation by the RBZ.
Meanwhile, Dr Mangudya said debt instruments will also be issued to legacy foreign exchange obligations of US$361 million under the RBZ Debt Assumption Act, which was approved in 2015.
“Today’s blocked funds are a combination of the foreign component of the RBZ Debt Assumption Act plus funds that could not be sent out as a result of lack of foreign currency,” Dr Mangudya said.
He said some of the funds that make up the legacy debts were supposed to be paid out to oil companies and maize suppliers.
Last year Nampak Zimbabwe company secretary Keith Nicholson, revealed that the firm had reached an agreement with the central bank with regards a US$57 million legacy debt belonging to Nampak International.
He said the RBZ will pay Nampak International the amount owed by the Nampak Zimbabwe in quarterly instalments over three years.
Market watchers said the move to issue debt instruments is the only viable option as the country is still facing foreign currency shortages, which has had an impact of balance of payments.
“The country does not have capacity to expunge the debts all at once and issuance of debt instruments allows the country to spread its obligations,” said Trigrams Investment analyst Walter Mandeya.
“The Blocked Funds Bonds are very welcome and are a really great gesture towards confidence building as they signal Governments desire to honour debts. The RBZ should set up a formalised secondary market for the trading of these bonds to allow additional exit routes for holders of these bonds using free funds held in our banking (monetary) system,” said Mandeya.
He, however, said there is need to acknowledge the grave policy failures that led to this point and seek to tighten monetary system to ensure it gains the confidence of the economy.
Sidewaos Research Consultancy, however, raised concern that these debt instruments, in exchange for blocked funds, could be a case of history repeating itself.
“Not too far back Treasury Instruments (Treasury Bills) were issued in US dollars only to be settled in Zimbabwe dollars,” the firm said in a note commenting on the issuance of debt instruments for the blocked funds.
Sidewaos believes the settlement of blocked funds may have come out of local pressure particularly from banking institutions whose holding of foreign liabilities coupled with a depreciating local currency was fast eroding solvency.
NMB Bank owes its creditors in excess of US$18 million while First Mutual Holdings Limited (FMHL) owes its creditors US$3 million
“By registering these blocked funds as a foreign currency asset, it will give the illusion of more solvent statements of financial position,” said Sidewaos.
There is also worry the central bank will not be able to service these debts given their size and the central bank’s capacity.
“Corporates would be prudent to not recognise this asset given the track record of blocked funds having being delayed for as much as four years currently. The debt instruments serves to further extend this tenure before settlement,” said Sidewaos.
“For RBZ it’s a positive as it administratively allows them to properly account for blocked funds and allows further time to settle.
“In terms of credit rating the decision to convert blocked funds into a debt instrument will reflect poorly on the country’s credit rating as firms will be forced to accept a debt instrument for a payment they were essentially supposed to receive on demand.”
