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Tawanda Musarurwa

Regulations that allow insurance companies and pension funds to carry out business in foreign currency have been promulgated, a move that will help these entities hedge contributions, investments, and assets against inflationary pressures.

Statutory Instrument 280 of 2020 amends Exchange Control (Exclusive Use of Zimbabwe Dollar for Domestic Transactions) Regulations, through the addition of Section 6, which reads:

“Notwithstanding these regulations, it shall be permissible to charge and to tender foreign currency in payment for the following transactions — international travel insurance; motor insurance for vehicles in transit; customs bond insurance; bank cash in transit; third party motor insurance payments for foreign-registered vehicles; safari operators insurance; export credit insurance; importers and exporters on cost, insurance, and freight; exporters’ insurance, including mining houses and tobacco merchants;  special insurance policies for strategic national assets,  including electricity equipment and stations, and aircraft equipment.”

Part of the amendments allows for payment of insurance premiums by any individual or entity holding free funds, which effectively means all insurance businesses can now be traded in foreign currency.

Earlier in March, the monetary authorities moved to allow the use of free funds ostensibly to ease transacting for the general public.

That decision put paid to the mandatory exclusive use of the local currency alone in domestic transactions adopted since the return to Zimbabwe dollar in June 2019.

SI 280 also allows foreign currency transactions for “payments of pension or provident funds contributions to pensions or provident funds, by any entity approved by a legal instrument to settle local contracts or pay local employee remuneration in foreign currency.”

And to the extent that a key component of the pensions value chain is investments, Government will also require pension and provident funds to “invest the contributions in investment instruments denominated in the same currency the contributions are made; and in respect of fund members whose contributions have been paid in foreign currency, through Nostro Accounts, pay such member’s benefits in the currency in which the contribution has been paid.”

Insurance companies are now also required to meet their obligations in foreign currency if premiums were paid in that currency.

Due to inflationary pressures that re-emerged following the currency conversion process, the sector had been lobbying Government to be allowed to do business in foreign currency so as to protect contributions and investments.

Both Government and the regulator are eager to avoid the pitfalls of the first hyperinflation period of circa 2008.

The Justice Smith Commission of Inquiry came to the conclusion that “there was a huge loss of value to insurance policyholders and pensioners owing to failure by Government, the Insurance and Pensions Commission (IPEC) and the industry to set up a fair and equitable process of converting insurance and pension values from Zimbabwe dollars to US dollars”.

SI 280 was largely expected after earlier this month Government moved to empower the Insurance and Pensions Commission (IPEC) to collect levies in foreign currency through Statutory Instrument 268 of 2020. Earlier this year, IPEC commissioner Dr Grace Muradzikwa said the Commission was being inundated with requests from companies and pension funds to issue United States dollar-denominated policies.

“We have seen a high demand for US dollar-denominated policies. Almost on a daily basis, the Commission is having to review and assess applications for US dollar policies,” said Dr Muradzikwa recently.

“And this is really speaking to product relevance and the low confidence levels that the industry is currently experiencing.”

The local pensions and insurance industry, like most businesses in the country, has been struggling with the attendant effects of a raft of monetary and fiscal policy changes over the last couple of years, but particularly from last year.

The country reverted to the exclusive use of the Zimbabwe dollar last June from a multi-currency system that had been adopted in 2009.

The Zimbabwe dollar was re-introduced through Finance Act No.2 of 2019 and Statutory Instrument 212 of 2019, which provides for exclusive use of the Zimbabwean dollar to settle all domestic transactions as well as penalties for failure to do so.

But adjustments have since been made to allow for US dollar transactions, alongside the Zimbabwe dollar, through Statutory Instruments 85, 185, 196, and now 280 for the insurance and pensions sector.