As Africa’s red metal hotspot grapples with a currency slide quagmire that has seen the copper currency hit all-time lows, the central bank stepped in to curb volatility through a ‘15 pip’ point system. As part of revised foreign exchange trading rules the Bank of Zambia prescribed a constrained pricing mechanism that set the trading pips to 15. This means that foreign exchange pricing will have an additional decimal place to four (from three) with 15 at the end i.e. if today’s exchange rate was 18.750 then the proposed pip system would allow for next pricing to 18.7515. The revised Interbank Foreign Exchange Market (IFEM) rules all remain unchanged save the 15 pip pricing mechanism.
Rule No.9 will effect a month later. The Bank of Zambia further prescribed that rule No.9 of the IFEM rules, “Authorised Dealers may seek services of a foreign exchange broker, but shall not deal with a foreign exchange broker that has not been approved by the Bank of Zambia. The requirement criteria for foreign exchange brokers shall be prescribed by the Bank of Zambia,” will become effective starting 26 May (a month exactly after the revised IFEM rules were rolled out).
Counterintuitive and vague prescriptions. These rules have however been perceived as counterintuitive because the proposed mechanism, has no provision that takes into account the price at which market players source dollars at. Because of this market players will be disincentivized from being active on interbank trading. Furthermore, if interbank participation is enforced, it would additionally exacerbate volatility as players will have a behavioral tendency to buy from each other to absorb or recover dollar trading losses as a result of the prescribed crawling peg methodology.
Black market could result from crawling peg. The crawling peg in constrained pricing mechanism could support development of a parallel (black) market with unrealistic local interbank price lagging the ‘real’ price. This has been the case at certain points this year where moral suasion has overwhelmed the interbank space. The net effect has been a delay in the ability for clients to access dollars from the banking sector.
The Kwacha has reversed some losses rallying to 18.825 for a unit of dollar supported by provisional taxes and PAYE conversions falling well ahead of due date of 10 April. Currency outlook remains bearish in the medium to long term.
The Kwacha Arbitrageur