FINANCE LAW UPDATE: ANALYSIS OF THE NEW FOREIGN EXCHANGE REGULATIONS IN TANZANIA.

• What do the Regulations say about investment in Securities?
• Are Foreigners eligible to invest in Government Securities?
• Requirement for Non-residents to have Securities Settlement Account
• Conditions for Foreign Credit Accommodation Agreements
• Issuance of securities in SADC and EAC member countries
• Maintaining Foreign Banks accounts and outward direct investment by Residents
• How are Export, Import, and payment transactions regulated under the Regulations?

1.0 Introduction

On the 13^th of May 2022, the Bank of Tanzania published through Government Notice No 294 the Foreign Exchange Regulations 2022 (the Regulations). The Regulations provide for rules related to the management of dealings and transactions related to foreign currency, securities, gold transactions, and other related matters.  In essence, the Regulations revoked the Foreign Exchange Regulations, 1998 and the Foreign Exchange (Listed Securities) Regulations, 2003 Regulations which governed matters concerning foreign exchange and securities in Tanzania before the enactment of the new Regulations.

Our Corporate Commercial Department at Breakthrough Attorneys has noted several remarkable changes in the Tanzania foreign exchange and securities landscape worth discussing. Hence we have prepared this Article analyzing the changes as well as the impact of these new Regulations on the foreign exchange and securities investment in Tanzania.

2.0 What the Regulations say about investment in Securities

Before the enactment of the Foreign Exchange Regulations, 2022 securities investment was governed by the Foreign Exchange (Listed Securities) Regulations, 2003 which has now been revoked by the coming of the 2022 Regulations. Below are some of the key matters worth noting in the Regulations;

1. Eligibility of Foreigners to invest in Government Securities
   Under the revoked  Foreign Exchange (Listed Securities) Regulations, 2003 investment in government securities/bonds was limited to residents of Tanzania and residents of the member countries of the East African Community (EAC). Further to that, the regulations allowed only forty percent (40%) of the total issued securities to be acquired by members of the residents of EAC member countries.

   Regulation 20 of the Foreign Exchange Regulations, 2022 now allows not only residents of member countries of the EAC but also residents of the Southern Africa Development Community (EAC) to acquire government securities/bonds. Moreover, the Regulation allows Tanzania citizens living abroad to purchase government securities.

   We, Breakthrough Attorneys commend this stance as it attracts more investors to finance government budgetary needs. The recognition of Tanzanians in the diaspora will attract Tanzanians to invest their funds back home, however, it is our strong call that this should extend to people of Tanzanian origin having citizenship in other countries.

   Another commendable move in this aspect is the flexibility in the transfer of securities. Unlike the revoked Regulations which gave twelve months, these Regulations provide for only six months as the time after which securities purchased by a non-resident may be transferred to a resident person.

   It should be noted that a resident is any person who consecutively resides in Tanzania for a period of not less than twelve months or his predominant economic interest is in Tanzania for not less than twelve months. Our Corporate Commercial Department has previously written on investment in Government Securities, click this link for more insight on the same.

2. Issuance of local securities in SADC and EAC countries
   As per Regulation 19(8) of the Foreign Exchange Regulations, 2022 residents may issue securities in member countries of the EAC or SADC. This means  Tanzanian companies can attract investment throughout the EAC and SADC region by issuing their shares, corporate bonds, etc to residents of these countries subject to their respective legal limitations.

   A resident business that intends to issue security in this manner is required to only notify the Bank of Tanzania and the Capital Markets and Securities Authority (CMSA) within seven days from the day the approval for the respective issuance was given.

3. Requirement for Non-residents to have Securities Settlement Account
   The Regulations require all payments made by non-residents in securities to be made through a bank or financial institution in Tanzania. It is also a requirement that a non-resident person must maintain a Securities Settlement Account with a bank or financial institution through which all payments for and proceeds from securities shall be paid to or by a non-resident person.

   A Securities Settlement Account referred to in the Regulations is simply a record in ledger form describing the details of securities investments held by a client. Thus, all purchases and sales of securities of a holder of such an account will be recorded in this ledger by the bank. Regulation 23 (2) prohibits banks from allowing the Securities Settlement Account for other transactions other than investment in securities.

   It should be noted that the Foreign Exchange (Listed Securities) Regulations, 2003 did not make this requirement mandatory, foreign investors could only maintain a Securities Investment Account at their discretion.

3.0 Foreign Credit Accommodation

Similar to the Foreign Exchange Circular No. 6000/DEM/EX.REG/58 of 24^th September 1998, the Foreign exchange Regulations 2022 allow borrowing from abroad subject to fulfillment of several conditions. Regulation 25(1) requires such a loan to be carried through a bank or financial institution and the same must be registered by the Bank of Tanzania and assigned Debt Registration Number.

The Regulation further requires a resident borrower after signing the foreign loan agreement, within fourteen (14) days must submit a certified copy of the same to his bank for registration. and the Bank is required to submit the same to the BOT for assignment of a Debt Registration Number.

Banks are required by Regulation 25 (9) to submit to the BOT information regarding a foreign credit accommodation and subsequent related transactions failure of which will attract a penalty equal to One Million Tanzanian Shillings (1,000,000/=) per each day of such failure. Also, failure to register a foreign credit accommodation/loan will attract a penalty equal to One Million Tanzanian Shillings (1,000,000/=) per each day of failure.

We call upon all individuals and entities that access funds from abroad to ensure that they register loan agreements with a repayment tenure of 365 days to avoid non-compliance. We further commend this measure because it will save time unlike the prior requirement of seeking approval.

4.0 Foreign Credit Accommodation Agreements

Also, similar to the Foreign Exchange Circular No. 6000/DEM/EX.REG/58 of 24^th September 1998 the Regulations provide for some standards to which any Foreign Credit Accommodation Agreement must adhere. Regulation 26(3) of the Foreign Exchange Regulations, 2022 prohibits credit accommodation agreements that contain unfavorable conditions.

According to the Regulations, unfavorable terms and conditions include the imposition of interest rates and charges that do not reflect the prevailing market conditions for the respective borrowed currency, and any requirements which require the borrower to open a foreign currency account outside the country.

5.0 Restriction on maintaining Foreign Banks accounts and outward direct investment

The Regulations further impose a restriction on residents of Tanzania from opening or maintaining bank accounts outside Tanzania unless expressly permitted by the Governor or if it is solely an account for the settlement of securities with the EAC and SADC. This means if a person or company other than banks and financial institutions wishes to open or maintain a bank account outside the EAC and SADC region, must seek the approval of the Governor.

It is our view that this may not be practical to residents of Tanzania who also reside in other countries since the definition of the word resident includes anyone who has consecutively resided in Tanzania for twelve or months.

Further, Regulation 28(1) allows a resident of Tanzania to remit funds for investment in real estate only if the funds are transacted through a bank or financial institution in the country and the investment is undertaken in the EAC or SADC region and the relevant documentation regarding the investment have been verified by the respective bank. Other than that, one must seek approval if the funds are to be invested in real estate outside the EAC and SADC.

It is our view that seeking approval to invest in a country other than the EAC and SADC complicates the process, instead, this would be simple if the requirement was only to notify the Bank of Tanzania instead of seeking approval which may take months to obtain.

6.0 Regulation of Export Transactions

Regulation 7 governs payments on exports whereas the exporter is required to receive all proceeds from export or services through a bank, and must ensure that all payments are received within ninety days. This means the agreement between the exporter and the recipient must provide a payment term of not more than ninety days. In case payment is delayed the exporter will be required to furnish reasons for such delay to the respective bank. The reasons provided are also required to be forwarded to the BOT.

Exporters are prohibited from underpricing, and in case the payment for export is made at an amount lesser or more than the value stated in the export documents, the bank in which the transaction is carried has to ask the exporter to provide reasons for the excess or deficit. This requirement forces exporters to disclose the price of the export transaction to a bank through which the transaction is carried.

7.0 Payments on Import Transactions

The Regulations require an importer of any consignment with a value of more than USD 10,000 to make the payment through a bank or financial institution in Tanzania. For payment with a value of a lesser amount, the importer may use other means of payment than banks. The importer is required under Regulation 14(1) to inform the bank through which the payment for goods was made in case the consignment has not been delivered within ninety (90) days from the date of payment. When the importer fails to report this to the bank, the bank will be required to ensure the matter is resolved. Further, the bank will be required to cease providing foreign currency to the Importer in such a case.

8.0 Conclusion

The Foreign Exchange Regulations essentially incorporate together and update provisions of the revoked Regulations; the Foreign Exchange Regulations, 1998 and the Foreign Exchange (Listed Securities) Regulations, 2003, as well as the Foreign Exchange Circular of 24^th September 1998. Thus, Foreign Exchange Circular No. 6000/DEM/EX.REG/58 of 24^th September 1998 is still operational, however, most of what is featured in the Circular is now provided by the Regulations as explained above.

Breakthrough Attorneys commends this enactment and calls upon the Bank of Tanzania in future updates of this law, to consider using notification to BOT in remitting funds for investment instead of seeking approvals for convenience on some matters in which seeking approval makes processes longer than intended. Further to that, the Bank of Tanzania should constantly ensure timely approvals when the same is sought as per these Regulations.

Regarding the restriction on maintaining foreign bank accounts and making outward investments, it is our view that the same does not align with the global economy and digital economy which will limit the country’s development in that direction. The global digital economy makes the world a single market and the movement of finance equates to the ability to transact and scale up one’s economy. This is not only because of the movement of traditional currency but also cryptocurrencies and blockchain technology and the revolution they have brought to the global financial system. It is important to draft our laws in harmony with the prevailing global financial systems, and current and continuing changes brought by technology to support global financial integration.

We are at a time in which regional economic integration is the future of the economy, thus there should be fewer restrictions on operating bank accounts or investing within Africa especially now that the continent is moving towards eliminating trade barriers and forming a common market through the Africa Continental Free Trade Area (AfCFTA). Alternatively, instead of imposing restrictions, the proper measure should have been to set a requirement to notify the BOT on opening an account and give periodic reportings/ filings of statements of accounts. The BOT then would be at liberty to stop any suspicious and unbecoming accounts etc. This would allow free operations of many accounts which will be unflagged by the BOT.

Moreover, we call upon businesses and individuals to adhere to reporting requirements, use of banks, outward transactions, and general limitations on dealing in foreign currency as set out by the Regulations.

 

Important Notice:

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.