Zambia's shock therapy revives faith in currency

Comment on this story
AfricaMap http://sxc.hu/

A clampdown on dollars in Zambia has sent the country's kwacha soaring 10 percent in the past month, marking an early success for an unorthodox policy shift that took markets by surprise.

But indications that the currency of Africa's biggest copper producer is now starting to stabilise present a bigger challenge - whether the notoriously volatile kwacha can hold on to those gains and settle into a comfortable trading range.

A history of high inflation and currency volatility left most Zambians preferring to pay for things like hotel bills, school fees, cars and airline tickets in dollars - to the chagrin of policymakers and politicians.

Inflation averaged 25 percent between 1995 and 2005 but is now just under 7 percent, and policymakers have decided now is the time to restore the faith of the country's 13 million people in their currency.

Foremost is a regulation that came into effect on May 18 requiring all domestic transactions to be quoted or paid for in kwacha, with penalties of up to 10 years in jail for using foreign currency to buy domestic goods and services.

“It's not something which has popped out of nowhere,” said one analyst who worked at the central bank for five years. “When I joined the central bank I found it was a work in progress. When I left, it was a work in progress.”

At first, the currency did not react, suggesting nobody believed the government was serious. But when the reality sank in at the start of July, it suddenly went on a charge, reaching its strongest levels in more than a year.

It has now stabilised below that peak and, with buoyant copper prices and higher capital reserve requirements for banks introduced earlier this year, analysts expect demand for the kwacha to remain healthy.

“The FX policy changes mean that there will be a significant increase in the demand for kwacha,” Absa Capital said in a note.

STRONG KWACHA POLICY

Since coming to power last year, the government of former opposition leader Michael Sata has introduced a raft of “strong kwacha” measures to underpin an economy expected to grow 7.7 percent this year.

He ordered a rebasing of the unit to knock out three zeros, and in March the central bank set its inaugural benchmark interest rate at 9 percent to keep a lid on inflation, and hence the currency on a more even keel.

The early success of May's sledgehammer ban on dollars is likely to be noted elsewhere on the continent, where ad hoc use of foreign currency is a perennial problem.

Mozambique and Angola, two war-scarred former Portuguese colonies, are trying to wean themselves off the greenback, but have so far chosen the slowly-slowly approach.

In 2011, Mozambique told exporters they had to repatriate foreign earnings within 90 days and convert at least half into meticais, while Angola wants foreign oil firms to pay local companies and taxes in kwanza through local banks a year from now.

Ghana, too, is blaming the growing use of dollars for a 17 percent decline in the cedi this year, and says it has initiated “a process of reclaiming the primacy of the domestic currency”. - Reuters


sign up
 
 

Comment Guidelines



  1. Please read our comment guidelines.
  2. Login and register, if you haven’ t already.
  3. Write your comment in the block below and click (Post As)
  4. Has a comment offended you? Hover your mouse over the comment and wait until a small triangle appears on the right-hand side. Click triangle () and select "Flag as inappropriate". Our moderators will take action if need be.