SPEED-Notes-2011-001 Foreign Exchange Regulations
Economic Effects of Regulating the “Surrender” of Export Earnings
Under the 2009 Foreign Exchange Act (Lei n.o 11/2009 de 11 de Março), Article 9 requires “resident entities” to declare any funds that are generated or held abroad and to remit to Mozambique receipts from exports of goods, services, or foreign investment, subject to terms and conditions to be defined by regulation. In December, 2010, the Council of Ministers approved a set of regulations, including a provision relating to Article 9 of the Act requiring corporations to remit 50 percent of their export earnings to Mozambique and convert the remittance to local currency. This type of regulation is often referred to as an “export surrender” requirement.
The evident purpose of the export surrender requirement is to reduce dollarization in the economy and enhance the effectiveness of monetary policy in controlling inflation and stabilizing the exchange rate. The requirement may also limit capital flight that can arise from the retention of export earnings abroad. Yet the regulation provoked strong objections from the private sector based on concerns about costs and risks that businesses and investors may face as a result of the compulsory surrender of export earnings, particularly in an environment with an unstable exchange rate.
The purpose of this Policy Note is to assess the economic effects of the export surrender requirement, and to suggest approaches that the authorities might pursue to achieve the intended policy objectives while minimizing possible costs to the private sector. The main conclusion is that the benefits of the measure are likely to be fairly small, but also that the costs will be less serious than suggested by the private sector reactions, because of the flexibility afforded by allowing 50 percent of export earnings to be retained in foreign currency accounts. Still, the new regulation is a backward step in the liberalization process, which sends mixed signals to business and investors about the sustainability of reforms.
Also below is a briefing note. The note makes a brief explanation of two new rules introduced regarding the foreign exchange regulations: (i) the compulsory surrender of 50 percent of export earnings by companies into Metical deposits; (ii) within 90 days. It clarifies that implementation of the new “Regulamento” (soon to be published) should be straight forward but requires banks to adjust IT systems to enable their clients to comply with the law and regulation on time. It proposes the central bank to continue discussions with banks to set necessary modifications to IT systems to facilitate the “Regulamento’s” implementation.