With the Zambian authorities having directed the mines to remit all taxes, over an above mineral royalties, in dollars effective 04 June, the markets are left in limbo as to what this step means. Some schools of thought dub it as the second step towards a managed currency regime which will be drastic shift away from a free float which the copper producer has been nodded for in Africa evidenced by the high rating in the ABSA index pillar almost at par with South Africa. The third will be usually be a foreign exchange auction system inferring from the widened playing field the authorities will have.
Read more: Zambia’s mines will now remit ‘all’ taxes in dollars as BOZ shores forex reserves
Read more: Weak capacity of local investors weigh as Zambia maintains 8th place on the AFMIndex
In the month of April, as part of Monetary Stimulus, the Bank of Zambia did prescribe amendments to its Interbank Foreign Exchange Market – IFEM framework to introduce a ‘crawling peg’ that will allow for pricing to adhere to 15 percentage point pricing mechanism in constrained times. This was dubbed as potentially the genesis of foreign currency controls which for a long time many have been in denial.
WHAT IT MEANS FOR THE FX MARKET
The foreign exchange market will shrink in magnitude and so will turnover as currency conversions will not be churned as much. Key drivers of dollar demand in the Zambian market include central bank purchases for debt service purposes and shoring up of foreign currency reserve, energy demand for petroleum and the agriculture input demand for the Farmer Input Support Program – FISP. According to sources close to the matter, the Ministry of Energy will manage execution of energy demand for currency and as such petroleum purchases will be diverted away from the currency market. This will curb the abrupt volatility experienced historically which could in turn result in exchange rate stability in the medium term. The Zambian market has for years suffered exchange rate malaise from the poor execution of energy demand causing spikes in exchange rate. This however contradicts the liberalization drive of the energy (petroleum procurement) to competitive markets (private sector) which government made markets believe they were moving to. It is vague as to what the next steps are but markets are left guessing whether this is the metamorphosis of the currency regime to a managed float.
Agriculture input demand. We still remain of the view that agriculture input demand to kick in 3Q20 will exacerbate demand for dollars. There is increased possibility that there could be a shift in procurement of seed and fertilizer through Ministry of Agriculture, the implications being these conversions will not be done through commercial banks anymore. If this does actualise, foreign exchange activity will mute further in the Zambian market.
Repatriation legislation. It is highly likely that to place a lid on repatriation of dollars, from players that may be nervous about these developments, currency repatriation legislation could be on the cards. Lack of clarity could potentially brew massive disinvestment risk and asset sell-off pressure that could lead to capital flight out of Zambia.
It is about a dry point of construction that these developments signal’s Zambias realization that it could have to navigate through the economic woes with little assistance from multilateral lenders until it does complete its debt reorganization which is a key prerequisite for a bailout package with the International Monetary Fund – IMF.
Markets opened bearish at 18.220/18.270 from previous days 18.150/18.200. As at 11.35pm the local currency was trading for 18.300/18.350.
The Kwacha Arbitrageur and Cynical investor
