- Easing of foreign exchange trading restraints on exports
- Requirement for fair terms in foreign credit accommodation agreements
- How to register foreign credit accommodations
- Standardized penalties and fines for non-registration of foreign debts
The Foreign Exchange Regulations, GN No. 294 (the Regulations), were issued by the Governor of the Bank of Tanzania in May 2022. The Regulations was a much awaited update of the Foreign Exchange Regulations, 1998 and the Foreign Exchange (Listed Securities) Regulations, 2003, and the Foreign Exchange Circular No. 6000/DEM/EX.REG/58 of 24th September 1998 which regulated foreign exchange in Tanzania before the Regulations. Among other things the regulations provided restrictions on Tanzanian citizens opening or maintaining accounts outside the United Republic of Tanzania, a $10,000 foreign exchange limit on travelers, registration of foreign loans, limitations on outward capital account transactions and outward direct investments as well as outward remittances. Our Corporate Commercial Department prepared an Article analyzing the Regulations, click here to read our analysis of the same.
A year later on 1st September 2023, following stakeholders’ concerns on the drawbacks of the Regulations especially on areas such as penalties for non-compliance with regulations,conditions for foreign exchange and conditions for foreign credit accommodation, the Governor of Bank of Tanzania (BoT) issued the Foreign Exchange (Amendment) Regulations, 2023 (the amendments) amending several provision of the Regulations.
Breakthrough Attorneys’ Corporate Commercial Department has analyzed important changes in the Regulations, hence, we have prepared this Article analyzing the changes and impact brought by the amendments to the Regulations, foreign exchange, financial markets and trade and investment in general.
1.1 Easing of Foreign Exchange Trading Restraints
Before amendments, the Regulations under Regulation 3(7) required exporters to make sale of foreign currency through a bank or financial institution with whom they have an account. Also, Regulation 3(8) prohibited banks or other financial institutions from buying foreign currency from exporters with whom they have no account relationship.
The amendments have removed the above restrictions by allowing exporters to make sales of foreign currency with any bank or financial institution. Likewise, banks or financial institutions are allowed to purchase foreign currency from any exporter with or without account relationship.
We, Breakthrough Attorneys commend this as it will stimulate economic growth by attracting foreign investment and encourage trading of foreign currency in Tanzania. Also, these amendments will increase market efficiency in foreign currency tradingbecause of the available flexibility in foreign exchange trading
1.2 New Requirements for registration of Foreign Credit Accommodation
Regulation 26 of the Regulations covered conditions for foreign credit accommodationand terms of credit accommodation agreements requiring the same to be fair. The amendments have substituted but maintained the requirement of this provision restrictingthe Bank of Tanzania from registering foreign credit accommodations with terms that are considered unfair under the Regulations.
As per the Regulations and amendments, an agreement for foreign credit accommodation providing for interest rates and other fees that do not correspond with the current market rate for the relevant currency of borrowing is considered unfair, hence cannot be registered. This means a foreign currency shouldn’t exceed the current market rates i.ethe prevailing penalty charges range between 3% to 5% per annum, hence any foreign credit accommodation exceeding this rate cannot be registered.
Additionally, if the Agreement for foreign credit accommodation provides a condition precedent that a borrower is required to open a foreign account outside of the United Republic, the Bank of Tanzania will not register that foreign credit accommodations.These requirement are set to regulate the market ensuring the local market rates are not distorted by foreign market conditions hence protect both local Borrowers and Lenders.
1.3 New Penalties and Fines
Before amendments, the regulations under regulation 25 imposed significant penalties to financial institutions and borrowers for non-compliance with the requirement to submit documents to BoT for purpose of registering a foreign credit accommodation facility. A fine of Tshs 1 million for each day a foreign credit accommodation remain unregistered was imposed. The amendments have introduced new standard penalty. The new standard penalty is a fine of not more than Tshs 4 million, a term of imprisonment of not more than 14 years, or both. This penalty is mandated by the Foreign Exchange Act.
The standard penalty sets a more realistic approach to penalizing non compliance with the requirement to register a foreign credit accommodation. However, this now comes with imprisonment of up to 14 years which is stiff than it was before the amendments. We at Breakthrough Attorneys wish to iterate the importance of registering foreign credit accommodations within the given timeframe to avoid the penalties and adhere to compliance requirements.
On the part of reducing restrictions in terms currency exchange on exports the amendments are commendable since this will enhance movement of funds through export transactions. This will in turn lead to economic growth, stability of foreign exchange industry and play a pivotal role inreduction of the scarcity of foreign currencies (especially USD) in Tanzania. On the side of registration of foreign credit accommodations by the Bank of Tanzania, as much as the amendment tend to regulate the market, it is also important to ensure other aspects of the registration process are enhanced. This should include the timeline that the Bank of Tanzania takes before registering the foreign credit accommodations which usually goes up to months in some cases.
Breakthrough Attorneys believe that there is a need to ensure that the registration process does not take long than a week so as to attract movement of capital to Tanzania. Small businesses in Tanzania especially innovative ones are now more than ever placed to benefit from foreign capital through loans from Non-Bank Lenders i.e., Venture Capitalists, and Private Equity firms. This type of Lenders prefer to enter into markets that offer easy entry and exit options, hence, a simplified debt registration process will attract more foreign capital.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.