(Bloomberg) -- Zambia’s central bank is still consulting over plans to curb the use of foreign currency in domestic transactions, with Governor Denny Kalyalya calling out a “frenzy” of critics publicly questioning the proposals.
The government last month announced draft regulations aimed at bolstering the local kwacha as the sole legal tender in Zambia, with punishment of as many as 10 years in prison for businesses quoting prices in foreign currency. Some companies called the proposed regulations punitive and said they might fuel the inflation they aim to fight.
“It looks like when you say I’m consulting, people think you have already made up your mind,” Kalyalya said in a speech Wednesday in the capital, Lusaka. “Even when it clearly says it’s a draft, we are consulting.”
Organizations that have raised concerns include the International Monetary Fund, which said forced dedollarization could be ineffective and even counterproductive. Zambia has an economic program with the Washington-based lender.
“The IMF concerns are for the implications for the program,” Kalyalya said. “It’s not that this is not something we can do, no.”
The Bank of Zambia has repeatedly highlighted that the law holds the local currency as the sole legal tender in the copper-producing country. The bank is just trying to best implement that law, Kalyalya said.
“What we are seeking to do is not really a full-scale dedollarization,” he said. “We are focusing on the aspect of the currency as a medium of exchange. As a store of value, that function is going to remain intact.”
Still, the central bank in May flagged the elevated dollarization of deposits and loans with local lenders as being a key risk to financial stability. Local companies often borrow in dollars because those loans offer much lower rates than kwacha debt. Dollar savings help preserve wealth, after the local currency halved in value against the greenback over the past five years.
Kalyalya said it remains to be seen if the proposed regulations will fuel inflation, and that increased dollarization was harming local companies.
“We see some businesses having closed because of the demand to be paid in dollars,” he said. “That shouldn’t be the case.”
(Adds central bank governor’s comments in the final two paragraphs.)
©2024 Bloomberg L.P.
