In a surprise announcement on 21 March 2014, the Zambian government with immediate effect abolished exchange control regulations introduced in 2012 and 2013 in an attempt to halt the rapid devaluation of the Kwacha.
When the Movement for Multiparty Democracy (MMD) came to power in Zambia in 1991, the new government’s priorities were the restoration of economic future growth and employment through liberalising the economy and allowing market forces a greater role. Price controls and subsidies on all consumer items were abolished. In addition, the Exchange Control Act was scrapped in 1994, resulting in no controls on the conversion and transfer of currency from Zambia, with investors being free to repatriate any funds, whether or not generated from a source in Zambia, provided they have been derived from legitimate sources and provided the necessary taxes and duties have been paid.
The Zambian government subsequently identified distortions in the local economy, and specifically currency management, arising from the liberalisation of the economy. To address concerns regarding the excessive demand for foreign currency arising in part from local entities requiring to be paid in foreign currency for goods and services produced within Zambia, the Bank of Zambia issued Statutory Instrument 33 of 2012 (“Instrument 33”), effective from 18 May 2012.
In terms of Instrument 33, quoting in, paying or receiving foreign currency as legal tender for goods, services or any other domestic transactions, is prohibited. The government reiterated that this does not amount to the re-introduction of foreign exchange controls, but is aimed at reinforcing the use of the Kwacha as legal tender for local transactions. Statutory Instrument 78 of 2012 was subsequently introduced effective from November 2012, amending the definition of ‘domestic transactions’ as per Instrument 33.
The Zambian Association of Chambers of Commerce and Industry criticized the blanket ban on dollorised local transactions and raised concerns that these measures have the potential of leading to further depreciation of the Kwacha, an increase in inflation levels and curtailing foreign investment and foreign currency inflows into the country which would result in a foreign currency shortage in Zambia, encouraging informal foreign exchange activities. The Association suggested that, instead, boosting foreign currency reserves would enhance economic development in Zambia.
The government ignored these concerns and, instead, went a step further by introducing Statutory Instrument 55 of 2013 (“Instrument 55”), effective from 1 July 2013, enabling the Bank of Zambia to monitor balance of payment transactions and regulate charges in the financial sector.
In terms of Instrument 55, importers, exporters and foreign investors are required to open and maintain foreign currency denominated accounts with a Zambian commercial bank for purposes of enforcing of these regulations. In addition, exporters are required to repatriate foreign currency earned from exports back to Zambia and report on the receipt of export proceeds within 120 days of receipt of the proceeds. All persons obtaining any foreign exchange loan from a non-resident must also report details of the borrowing to the Bank of Zambia.
Former Bank of Zambia Governor, Caleb Fundanga, at the time warned that this need for stricter regulation should not amount to the re-introduction of exchange controls, as that would cripple the economy. He reiterated that the Zambian economy needs a stable and business friendly environment in order to continue posting positive growth. According to the government, these measures were introduced to help the government monitor currency flows and address tax evasion by foreign companies, but it was in fact negatively perceived by businesses as a reintroduction of exchange control.
In November 2013 the Zambian Economist warned that the Kwacha has substantially eroded in value since 2011 and that the ban on the use of dollars, the Kwacha rebasing and exchange control restrictions have not stemmed this substantial decline. The Kwacha proved to be one of the worst performing currencies in 2014, depreciating 13 percent against the dollar to trade at record lows. This was initially triggered by a 13 percent decline in the copper price this year due to concerns over a slowdown in China, but has been exacerbated by a widening fiscal deficit and investor concerns about certain government policies. Copper accounts for around 70 percent of the Zambia’s export earnings.
In February 2014 the Zambian Finance Minister, Alexander Chikwanda, still seemed unperturbed by the depreciation in the Kwacha, announcing that “the rate at which the Kwacha is depreciating is not very worrying” and ruling out the possibility of the government allowing the Bank of Zambia to offload dollars into the economy in order to stop the rapid depreciation of the Kwacha.
Barely a month later, on 21 March, Mr Chikwanda scrapped both Instrument 33 and Instrument 55 in a desperate bid to halt the currency slide. Mr Chikwanda announced that these regulations were passed principally to support the implementation of monetary policy, but challenges have arisen in the implementation of these instruments. To allow for further consultation, the government has decided to revoke these instruments with immediate effect. In response to the abolishment of these regulations, the Kwacha has immediately gained as much as 3.4 percent against the dollar, its biggest gain since December 2012.
This move has met with general approval from the Zambian business community, hopeful that it would incentivise foreigners to invest in Zambia and improve local businesses’ ability to obtain foreign loans.