JOHANNESBURG – A new law in Zambia limiting the use of dollars in everyday transactions has triggered a dramatic 8 percent rally in the kwacha in the past week, and other African countries struggling with weakening currencies are taking note.
The currency of Africa’s biggest copper producer climbed more than 2.5 percent on Tuesday to hit its highest level in more than a year as the new law spurred demand for the local unit.
Commercial banks quoted the kwacha at 4,690/4,730 to the dollar at 1240 GMT, compared to Monday’s close of 4,775. Earlier, it traded at a session high of 4,640, its highest since April 2011.
The regulation, which came into force on May 18, requires domestic transactions to be quoted or paid for in kwacha and prohibits the use of foreign currency to buy domestic goods and services. Penalties include up to 10 years in jail.
Analysts said the policy ends the common practice of quoting prices for expensive services such as health and education in dollars instead of kwacha.
The currency has soared in the last week as people have rushed to convert their stashes of hard currency into the local unit.
“They have decided that a lot of the so-called demand for FX in the economy was not really demand. It was mostly that there was common usage of foreign currency in Zambia,” said Razia Khan, head of Africa research at Standard Chartered in London.
Contacted by Reuters, Zambia’s central bank governor declined to comment on the sudden kwacha appreciation.
The success of the intervention in Zambia, one of frontier Africa’s foremost investment destinations, may see it rolled out in similar form elsewhere.
The central bank in Ghana, where the cedi has slid more than 17 percent against the dollar this year, has noted an increasing trend towards “dollarisation”, with cars, school fees, rent and mortgages all paid for in dollars.
In a June 13 monetary policy statement, the bank blamed the “easy availability of foreign cash”, noting that foreign currency to total deposits in the banking system rose to 31.8 percent in April this year from 27.9 percent two years ago.
“The Bank of Ghana has decided to initiate a process of reclaiming the primacy of the domestic currency in trading activity,” it said, without providing specific details.
Standard Chartered’s Khan said cedi volatility had led to the growing preference for foreign currency accounts, putting even greater pressure on the currency.
“If Ghana were to put in place measures that any transactions have to be priced in cedis it would create some level of demand for the local currency,” she said.
“Places like Ghana that have seen their currencies pressured would do well to implement this.”