March 21, 2014 / 11:05 AM / 6 years ago

Zambia lifts forex restrictions to ease pressure on kwacha

LUSAKA (Reuters) - Zambia on Friday lifted foreign currency restrictions that banned the use of dollars for domestic transactions as authorities in the leading African copper producer sought to ease pressure on the sliding kwacha.

A man displays a 50,000 Kwacha note in Lusaka January 23, 2012. REUTERS/Mackson Wasamunu

Finance Minister Alexander Chikwanda said the Bank of Zambia was revoking 2012 and 2013 regulations which required domestic transactions to be quoted and paid for in kwacha, and gave the central bank authority to monitor foreign currency transactions.

“We had interacted with the business community and they made very strong representation against these statutory instruments,” he told reporters in a briefing.

The kwacha has lost more than 13 percent against the dollar so far this year due to lower prices for the copper the country mines and exports and tight supply of the greenback.

Chikwanda said the central bank would not deplete its reserves through interventions to bolster the currency.

“The weakening in the kwacha parity is temporary and the government will not be tempted into taking interventions that may deplete our reserves,” he said.

The kwacha firmed after Chikwanda’s announcement, and traded at 6.15 to the dollar at 1257 GMT, more than two percent above Thursday’s close, after reaching a record low of 6.42 on Wednesday.

Razia Khan, head of Africa research at Standard Chartered, said that with the lifting of the regulations, “the authorities have reversed policies that were widely criticised for adding to pressure on the exchange rate.”

This week, the central bank tightened policy further, restricting commercial banks’ access to its overnight lending facility (OLF) to once a week and increasing the OLF rate by 350 basis points.

Khan said she expected the tightening measures to bolster the currency in the short term.

“Despite concerns over Zambia’s fundamentals and the outlook for copper, its key export commodity, the depreciation looks overdone,” she wrote in a note.

“We now expect a pullback in dollar-kwacha to levels closer to 6.00 as the latest tightening measures take effect. Longer-term, a more gradual depreciation path is likely.”

Chikwanda said that Zambia’s debt is within sustainable levels. The copper producer’s external debt stood at $3.2 billion at the end of 2013, representing 15 percent of GDP.

“The government is mindful of the need to safeguard debt sustainability,” he said. “Current levels of domestic and international debt are within sustainable levels.”

Fitch affirmed Zambia’s credit rating at B on Thursday, after downgrading the sovereign last year. The ratings agency said Zambia’s economic performance was strong and forecast GDP growth of 7.2 percent in 2014, but it warned about the government’s expansionary fiscal policy.

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