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IMF Says Zambia’s Dedollarization Plan May Be Ineffective - BLOOMBERG
(Bloomberg) -- Zambia’s proposed ban on charging foreign currency in local transactions — punishable with 10-year jail terms — might defeat its own purpose, according to the International Monetary Fund.
The central bank of Africa’s second-biggest copper producer in June unveiled the plans to curb increasing dollarization in the economy that it said blunts its tools to fight inflation. Businesses have already pushed-back on proposed regulations calling them “punitive” and warning that they may actually fuel price growth.
Macroeconomic stability, including low and stable inflation and limited external pressures, would generally be required for such measures to be effective, IMF Resident Representative Eric Lautier said Friday in reply to emailed questions. Annual inflation quickened to a 29-month high of 15.2% in June in the wake of the worst drought in decades. The nation is also emerging from a painful debt restructuring process, and its currency has been volatile.
“Forced dedollarization measures are likely to prove ineffective and could even be counterproductive,” unless accompanied by a strong macroeconomic stabilization plan and, depending on country specific conditions and implementation modalities, Lautier said. “We are in the process of evaluating those.”
The draft regulations are part of other broader reforms implemented to achieve macroeconomic stability, and consultations are still ongoing to finalize the draft regulations, the central bank said in response to questions Friday.
While the law already stipulates the kwacha as the sole legal tender in Zambia, companies like mall landlords, car dealers and hotels often price in dollars. The central bank aims to strengthen the legal role of the kwacha.
Zambia, which has a $1.7 billion economic program with the IMF and is considering asking it for more help, didn’t consult the lender on the plans before announcing them.
The IMF has only just started assessing the initiative and has been consulting with the authorities including the Bank of Zambia about the details to evaluate its merits, Lautier said.
(Updates with comments by central bank in fifth paragraph.)
