(Bloomberg) -- Zambia’s proposed regulations that could impose 10-year jail terms for using foreign currency in local transactions have raised questions and criticism from local businesses, in what could be a crucial test of President Hakainde Hichilema’s pro-investment government.
Companies argue the new rules would hurt growth and investment, while fueling the inflation they’re meant to contain.
Hichilema, who won power in 2021, campaigned on pro-business reforms and has so far mostly won praise from investors. He’s navigated a complex debt-restructuring process and is this year having to deal with the fallout of the worst drought in decades. Political pressure has grown, with annual inflation surging to 15.2%, and power cuts lasting more than 12 hours daily due to the dry spell’s impact on hydropower plants.
The copper-producing nation’s central bank aims to end what it calls increased dollarization that blunts its monetary policy tools in the fight against inflation. While the use of dollars isn’t pervasive across the local economy, businesses like car dealers, mall landlords and hotels often price in foreign currency.
Real Estate Investments Zambia Plc, a property developer, called the planned regulations punitive and hostile. They come as Zambia’s nearing the end of a near-four-year debt-restructuring process that’s hammered the local economy, with the currency showing extreme volatility since the nation in 2020 became Africa’s first to default in the pandemic era. Plunging copper output has further strained the kwacha.
“Businesses with foreign currency obligations may face increased financial strain, potentially leading to defaults and impairments,” Kambeu Banda, the company’s chief executive officer, said in an emailed response to questions. The move “may deter foreign investment, as investors often seek the stability and predictability of transacting in widely accepted foreign currencies.”
The Bank of Zambia is still consulting on the proposed rules, it said in reply to emailed questions, declining to say by when they might come into force. Foreign companies won’t be prevented from repatriating profits.
The government introduced similar regulations in 2012, and abandoned them less than two years later.
The planned resurrection of these rules has “sent shivers in the financial markets,” Anthony Mumba, an opposition lawmaker, said in parliament Thursday. The Zambia Association of Manufacturers also questioned the proposals.
“We’re still trying to understand the rationale,” said Ashu Sagar, president of the industry group. “We are an import-based economy and unfortunately most of our inputs are dollar-driven.”
Manufacturers often borrow in dollars to manage currency risks around imported inputs. Kwacha-denominated loans usually carry rates above 30%, while banks charge less than half of that for dollar loans. Suppliers that up to now have quoted in dollars may raise prices to protect themselves from currency risk if they switch to kwacha, according to Sagar, driving up inflation.
The new rules will result in added complexities for cross-border traders coming from neighboring countries, like Democratic Republic of Congo, who purchase goods in Zambia using dollars. The result may be a parallel market, Sagar said.
Central bank Deputy Governor Francis Chipimo said June 28 there would be some exemptions, including foreign tourists, and for taxes paid in foreign currency. Zambia is joining countries in the region including Angola and Ghana in implementing such restrictions, he said.
Yet some countries that Chipimo cited have seen black markets emerging, and increased transaction costs, according to Banda.
“The new regulations will impose additional administrative and compliance burdens on businesses,” he said. “The regulation could also amplify risks within the financial sector, including currency mismatches and increased vulnerability to exchange-rate shocks.”
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