This week President Michael Sata is expected to sign into law the The Bank of Zambia Amendment Bill 2013, which, among other requirements, will impose exchange controls on exporters, requiring them to deposit earning into local banks in rebased Kwacha in an effort to artificially prop up the value of the currency.
However, the Ministry of Finance appears quite keen to avoid the term “exchange controls.”
“We are not introducing exchange controls,” said Deputy Governor of the Bank of Zambia Bwalya Ng’andu in an interview with Bloomberg. “These measures are well-meaning, we are just trying to increase our capacity to manage things a little more effectively.”
However, most any other analyst will tell you that any rule on what you must do with your export earnings is in fact a type of exchange control.
One expert currency trader we consulted for this article commented that Zambia’s latest move only raises more questions than it answers.
“First of all, why all the panic over the value of the Kwacha?,” the trader, who wished to remain anonymous, tells Zambia Reports. “The currency is trading at about 5.4 to the dollar today, which is pretty much back to the level where it was a year ago. What happened was that there was a false appreciation caused by President Sata’s decision to ban the use of dollars in Zambia, combined with an ‘expectation’ that the Kwacha should ‘normally’ trade around 5 to the dollar. But the problem is that you can never force a currency to be more valuable – this will only make it worse.”
Along with these new foreign exchange controls, Zambia has also recently introduced price controls on staple foods such as mealie meal, which has caused further supply shortages, while re-nationalisations and expropriations of mining, telecommunications, and transportation companies has some observers worried that Zambia is slowly returning to a statist model of economic policy.
“All of this is just arguing about window dressing. If there is real, honest confidence in an economy, that they would not need to undertake these measures,” said the currency trader. “Take a look at a place like Norway, where they do not need to convince foreign investors in their oil sector to keep their export earnings denominated in Krone – it’s simply not necessary.”
There is some confusion over the new exchange laws as well. For example, there is apparently no time requirement for the deposits to be held in rebased kwacha. So why bother with it all? Perhaps an exporter will just deposit the funds there for 5 minutes, and then move it dollars.
“This measure is not de facto bad, it is de facto vague pending more details,” said the analyst. “If they were smart, if Bank of Zambia knew what they were doing, they would be clearer and turn this into an argument about reserve ratios, much in the same way banks are required to hold a minimum collateral at all times in caes of emergency.”
According to Chola Mukanga, who writes at Zambian Economist, “It is the most sweeping legislative change that has taken place in our financial system since market liberalisation in the 1990s.”
Mukanga writes that the BOZ appears “politically captured,” and that due to this lack of independence they are “trying to make the Kwacha stronger when economics suggests that they must simply manage volatility and allow the Kwacha to find its “natural equilibrium.”
There certainly appears to be a government expectation regarding the value of Zambia’s currency, as demonstrated by Deputy Finance Minister Miles Sampa’s comments to Bloomberg, when he described the kwacha’s trading level as “abnormal.” However, as highlighted by analysts, there is no such thing as normal or abnormal in trading, only supply and demand.
In response to these new exchange controls, it is quite possible that foreign investors and exporters may rush to convert holdings out of rebased kwacha, which would worsen the problem even further, placing pressure upon Mr. Sampa – who is the nephew of President Sata – to ease up on the political oversight of BOZ before it is too late.