By Enyichukwu Enemanna
The Central Bank of Zambia has rolled out plans to sanction the use of foreign currency for transactions in the country’s economy, a big move that aims to boost the kwacha.
The southern African nation has faced severe currency volatility in the past five years, driving up the cost of imports and fanning inflation, which neared a two and a half year high this month.
Several business outlets, including car dealers, shop owners and hotels often charge in dollars, as against the local kwacha.
A draft document released by the Bank of Zambia on Saturday indicates that those found using foreign currency for domestic transactions may face prison terms of up to 10 years or fines.
The kwacha gained about 7% on the last trading day of the week.
“When people basically are functioning significantly in dollars, then obviously the tools which we have to actually carrying out our mandate are blunted,” Bank of Zambia Deputy Governor Francis Chipimo said Friday. “External shocks are also in a way exacerbated in our market.”
Heritage Times HT reports that several African economies have largely depended on the use of dollar to transact businesses locally, weakening the strength of the local currency.
In Nigeria, use of dollar for local transactions, often referred to as dollarisation has pushed up inflation, causing a steady fall in the value of Naira which had earlier this year reached all-time low at N1,800 to a dollar.
The Bank of Zambia, however, is still discussing the proposed rules with market participants, the Deputy Governor said in comments broadcast on privately-owned Diamond TV Zambia.
The kwacha has been among the world’s worst performing currencies over the past 12 months, depreciating by 28%, according to data compiled by Bloomberg.
It’s staged a strong recovery this month to become the biggest gainer globally, after the nation finally ended a near four-year default on its dollar bonds and received an outsized $570 million payment from the International Monetary Fund.
The currency volatility has been attributed to the drawn-out debt restructuring process, a drop in copper output last year, which is the country’s main source of export earnings, and more recently a severe drought that’s increased the import bill.
The servicing of its restructured dollar bonds may add to foreign currency pressures.
Zambia introduced restrictions on dollar use among local businesses in May 2012 and abolished them less than two years later.
