Kwacha Soars To No. 1 As Zambia Lifts Forex Restrictions

Kwacha Soars To No. 1 As Zambia Lifts Forex Restrictions

Laws in Zambia that ban the use of dollars and other currencies were revoked today, effective immediately, triggering the kwacha’s largest gain against the dollar in 15 months, Bloomberg reports in BusinessWeek.

The laws were revoked after the government met with business leaders who were strongly opposed to them, Zambian Finance Minister Alexander Chikwanda said.

The kwacha had weakened by more than 13 percent against the dollar this year before today’s announcement — more than any other African currency tracked by Bloomberg, BusinessWeek reports. Zambian was hit by copper prices that dropped 13 percent since Jan. 1 and policy announcements that damaged business confidence, Fitch Ratings said today. A weaker currency may stoke inflation in Zambia’s import-dependent economy and push up costs of repaying foreign debt, it said.

Following today’s announcement, the currency gained as much as 3.4 percent and traded 2.9 percent stronger at 6.152 per dollar by 5:26 p.m. in Lusaka — the biggest gain since Dec. 24, 2012 — making it the world’s best performer today, according to Bloomberg.

Flanked by officials from the central bank, Chikwanda told reporters today at the capital, Lusaka, that laws introduced in 2012 were revoked. In addition to banning foreign currency, the laws required companies to notify the Bank of Zambia about foreign transactions.

Chikwanda’s announcement “demonstrates the absolute determination of the Zambian authorities to do whatever might be needed to halt the currency slide,” said Razia Khan, head of Africa research at Standard Chartered Bank Plc in London, in an email to Bloomberg. “Many market participants had seen those statutory instruments as unhelpful -– although there is probably some debate around this.”

Zambia’s move to abolish foreign currency restrictions differs from the approach by Ghana, which tightened restrictions in February in a bid to stem declines in its currency.

Zambia’s laws had a negative impact on businesses’ ability to secure foreign loans, said Geoffrey Sakulanda, president of the Zambia Association of Chambers of
Commerce and Industry.

“This is the best economic news we’ve had since the Patriotic Front government came into
power” in 2012, said Trevor Simumba, managing director of Sub-Saharan Consulting Group Zambia. “It’s going to calm the market and also incentivize investors that were holding back to invest.”

World Bank said it supports the revocations of the laws — aka statutory instruments 33 and 55. The move will improve confidence in policy making, said Kundhavi Kadiresan, country director for Zambia, Malawi and Zimbabwe.

Fitch affirmed Zambia’s B credit rating and said the outlook for the Southern African nation is stable. It warned that expanding government spending and the weakening economy posed risks to economic growth. Fitch cut its assessment of Zambia’s debt by one level to five steps below investment grade in October.

The rating “reflects Zambia’s continued strong macroeconomic performance, with robust growth and low inflation,” said Fitch analyst Olwen Renowden. “However, vulnerabilities have increased as fiscal policy has turned more expansionary and the exchange rate has come under pressure.”

Preliminary data shows Zambia’s economy grew an estimated 6.4 percent in 2013 and has expanded at an average rate of 6.9 percent since 2012, Chikwanda said, according to the report.