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Controversial foreign exchange controls "not enforced", Reserve Bank Governor says

Nuku'alofa, Tonga

Governor, National Reserve Bank of Tonga, Dr Ngongo Kioa. May 2018.

A new Foreign Exchange Control Act 2018 that gives the National Reserve Bank of Tonga sweeping powers to selectively stop Tongan residents from investing offshore and from holding overseas bank accounts, property and other offshore assets, is not currently being enforced.

The Governor of the National Reserve Bank of Tonga (NRBT) Dr Ngongo Kioa said this afternoon that the new Act could not be enforced at this stage because it is awaiting regulations and directives from Crown Law.

“The move is to counter people who borrow money from Tongan banks and invest it overseas,” he told Matangi Tonga today. He said that specifically this is what the Reserve Bank wanted to stop, and "to get those investors to return the money back to Tonga".

Dr Kioa also said the Act would only be enforced to stop the flow of Tongan currency overseas when the nation's foreign reserves drop below the amount needed to support at least two months of imports.

Tonga’s Foreign Reserve holdings of $476.5 million in July 2018 were equivalent to 7.9 months of imports.

Concerns

The Act passed by Parliament in early March was assented by King Tupou VI on 21 June 2018.

In a media release on September 6, headlined "New Foreign Exchange Control Act 2018 comes into force on 10th July 2018", the NRBT stated it was notifying the public that the Act had become law and was Gazetted.

Meanwhile, growing concerns among the business community have been expressed about the negative impacts of the new law on business confidence and the economy. Many business people, who learned of the Act's foreign investment restrictions only last week, queried how it was possible that such an Act, possibly requiring them to divest foreign assets, could become law without extensive consultation with the community. Business people who operate with overseas accounts and assets, and there are many in Tonga, fear being targeted.

There is also fear that sections in the Act are legislated to stop everyone resident in Tonga from acquiring or holding assets outside of Tonga, without special permission from the Reserve Bank, and possibly to force them to relinquish existing overseas assets.

Foreign Exchange Control Act 2018:

"5  Holding, taking, sending or transferring of foreign exchange and gold.

"Save as otherwise provided in this Act, no person resident in Tonga shall acquire, hold, take, own, possess or transfer any gold, foreign exchange, foreign security or any immovable property situated outside Tonga."

Part II Section 4 of the Act which regulates management of foreign exchange and gold, also states that without the permission of the Reserve Bank payments to and from people outside Tonga cannot be made in any manner other than through an "authorised person".

Foreign Exchange Control Act 2018:

"4  Dealing in foreign exchange and gold

(1)  Save as otherwise provided in this Act, rules or directives made thereunder, or with the general or special permission of the Reserve Bank, no person shall 

(a)  deal in or transfer any gold, foreign exchange or foreign security to any person not being an authorised person; 


(b)  make any payment to or for the credit of any person resident outside Tonga in any manner otherwise through an authorised person; 


(c)  receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside Tonga in any manner; or 

(d)  enter into any financial transaction in Tonga as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside Tonga by any person. 


(2)  The permission of the Reserve Bank under subsection (1) may be delegated to any authorised persons. 
..."

Repatriation of proceeds

Other sections in the Act attempt to legislate the repatriation to Tonga of all foreign earnings of Tongan residents, "within such period and in such manner as may be specified by the Reserve Bank."

Heavy penalties of fines and imprisonment may be imposed for contravention of the Act.

The media release by the NRBT last week also indicated that the new legislation might be enforced selectively.

The NRBT stated that under the old legislation "there was no requirement in place to ensure the repatriation of the proceeds of export of say fish and squash as well as income from whale watching that are being paid overseas..."

They stated the Act was expanded from the previous acts and regulations "to also include receipts from outside Tonga."

The Act was passed by parliament during a night session in March in the midst of Tropical Cyclone Gita recovery.

See also:

March 22, 2018 Government wants Reserve Bank to 'run a tight ship'
The reasoning behind the Tongan Parliament's urgent push to work seven hours overtime on the 8th and 12th March in order to pass five bills that don’t address Tonga’s immediate Cyclone Recovery needs, remains a mystery to the public and some Members of Parliament. Three of the five bills grant the Reserve Bank more control over moneylenders while the two other bills regard foreign exchange levies and Pacific Games taxation incentives. ...

Comments

I think this law will always be ineffective. You cannot force investment, people invest in things they believe will give them returns relative to risk. It's about risk and reward, if people are investing overseas there's a reason for it. So the solution lies in how to make Tonga a better option for them to invest. And I'm sure Tonga is much preferred but there might a reason they found overseas less risky. And if we are worried about downward pressures in the pa'anga to other currencies, we should be looking at how to get people buying Tonga pa'anga, so we can look at policies that raise business confidence in Tonga, push through key reforms, how to make Tonga an attractive place to invest for foreign and local investors.

We just need to start the ball rolling, and the Tongan economy will start booming, I'm sure many migrants overseas would love to come back and invest in Tonga, but only when it becomes a less riskier and profitable place to invest.