Bank of Zambia Plans to Criminalize Foreign Currency Use Amid Kwacha Rally – BitKE

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The [Central] Bank of Zambia has published plans to criminalize the use of foreign currency in the local economy amid the biggest rally in the Kwacha in four months.

A draft document shared by the Bank of Zambia indicate that persons found using foreign currency for domestic transactions may face prison terms of up to 10 years or fines.

 

“When people basically are functioning significantly in dollars, then obviously the tools which we have to actually carrying out our mandate are blunted,” said Bank of Zambia Deputy Governor, Francis Chipimo.

“External shocks are also in a way exacerbated in our market.”

 

According to Bloomberg, the Kwacha has been among the world’s worst-performing currencies over the past 12 months, depreciating by 28%.

The southern African nation has faced severe currency volatility over the past five years, driving up the cost of imports and fanning inflation, which neared a two and a half year high this month. Companies, from car dealers to mall landlords and hotels, often charge in dollars, shunning the local Kwacha.

Nonetheless, the currency experienced a significant rebound in June 2024 to become the top performer worldwide. It gained about 7% on June 30 2024.

The Kwacha’s resurgence follows the government’s resolution of nearly four years of default on its dollar bonds and receipt of a substantial $570 million payment from the International Monetary Fund (IMF).

Factors contributing to the currency’s volatility include:

  • The prolonged debt restructuring process
  • A sharp decline in 2023 in copper output (Zambia’s primary export earnings source), and more recently,
  • A severe drought that has escalated the country’s import costs

Moreover, the servicing of its restructured dollar bonds may add to foreign currency pressures.

Zambia previously introduced similar restrictions on the use of foreign currency in May 2012, only to abolish them less than two years later. The central bank’s current discussions with market participants aim to finalize the proposed rules, ensuring they are effective and sustainable.

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