By Matthew Hill Mar 21, 2014 9:03 AM PT
Zambia scrapped two laws restricting foreign-exchange trade in Africa’s second-biggest copper producer, triggering the kwacha’s biggest gain against the dollar in 15 months.
Legislation introduced in 2012 that bans the use of dollars and other currencies within Zambia is revoked with immediate effect, Finance Minister Alexander Chikwanda told reporters today in the capital, Lusaka. The government also abandoned a law that requires companies to notify the Bank of Zambia of foreign transactions, Chikwanda said at the briefing while flanked by officials from the central bank.
“These regulations were passed principally to support the implementation of monetary policy,” he said. “Challenges have arisen in the implementation of these statutory instruments. To allow for further consultation government has decided to revoke these statutory instruments with immediate effect.”
Before today’s announcement, the kwacha had weakened by more than 13 percent against the dollar this year, more than any other African currency tracked by Bloomberg. The Zambian unit has been hit by copper prices that have retreated 13 percent since January 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.
Zambia’s move to abolish foreign currency restrictions differs with the approach by Ghana, which last month tightened restrictions in a bid to stem declines in its currency.
Chikwanda’s announcement “demonstrates the absolute determination of the Zambian authorities to do whatever might be needed to halt the currency slide,” Razia Khan, head of Africa research at Standard Chartered Bank Plc in London, said in a reply to e-mailed questions. “Many market participants had seen those statutory instruments as unhelpful -– although there is probably some debate around this.”
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 and the world’s best performer today. The kwacha earlier traded as much as 1 percent weaker. Yields on Zambia’s $750 million Eurobonds maturing in 2022 dropped the most in two weeks.
The laws were revoked after the government held meetings with business leaders who were “strongly” opposed to the regulations, Chikwanda said.
The implementation of the laws had a “negative impact” on businesses’ ability to contract foreign loans, Geoffrey Sakulanda, president of the Zambia Association of Chambers of Commerce and Industry, said in an interview at the Finance Ministry after the announcement.
“This is the best economic news we’ve had since the Patriotic Front government came into power” in 2012, Trevor Simumba, managing director of Sub-Saharan Consulting Group Zambia, said by phone from Lusaka today. “It’s going to calm the market and also incentivize investors that were holding back to invest.”
The World Bank supports the revocations of the laws, known as statutory instruments 33 and 55, it said. The move will improve confidence in policy making, Kundhavi Kadiresan, country director for Zambia, Malawi and Zimbabwe, said in an e-mailed statement today.
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. The company 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 Olwen Renowden, an analyst at Fitch. “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 last year and has expanded at an average rate of 6.9 percent since 2012, Chikwanda said.
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