(Bloomberg) -- Zambia should first stabilize its economy and build confidence in its own currency before trying to reduce the use of dollars, Standard Bank Group Ltd. said.
Plans by the southern African nation’s central bank to introduce rules aimed at bolstering the local currency as the sole legal tender in domestic transactions have raised concern from various corners — including the private sector and the International Monetary Fund. The proposals include jail terms of up to 10 years for quoting in foreign currency.
The Bank of Zambia sees increased dollarization of the economy as blunting its tools to fight inflation. Yet, the country’s current economic conditions present key risks in implementing the proposals, according to a July 19 research note from Standard Bank, the continent’s biggest lender by assets.
“Our interpretation of the research literature and reading of the current macro-economic environment implies Zambia as likely best served by adopting a long-term approach to achieving greater monetary sovereignty,” the lender said. “This strategy involves timing dedollarization regulations to a more favorable point in the economic cycle, focusing first on stabilizing macroeconomic fundamentals to build confidence in the kwacha, and then laying the groundwork for future dedollarization.”
Inflation is above 15%, and the local currency — the kwacha — has endured volatility since Zambia became Africa’s first pandemic-era sovereign defaulter in 2020. Also, economic growth is expected to halve this year, as the worst drought in decades hammers farming and power production.
While charging dollars isn’t pervasive across Zambian businesses, companies including mall landlords and car dealers often do. About 46% of Zambia’s total bank deposits were in dollars, according to a May central bank report.
Standard Bank pointed to a 2015 IMF study that found high inflation and currency depreciation as primary causes of dollarization in sub-Saharan Africa.
The central bank said it’s still carrying out consultations on the proposed rules.
“After these engagements, the Bank of Zambia will present the finalized draft regulations,” it said in reply to emailed questions July 19. “It is therefore critical to allow this consultative process to conclude.”
--With assistance from Matthew Hill.
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