analysisBy Maimbolwa - Mulikelela
A HEATED debate on the ban against dollarisation has continued with some sections of the business community suggesting that the measure is aimed at introducing exchange controls and was detrimental to the growth of the economy.
Economic experts have argued that the law against the use of American dollars will set the pace for a firm basis for a sound local financial sector that will promote a steady growth of the economy.
But Bank of Zambia (BoZ) said the ban against quoting goods and services in dollars was meant to strengthen the Kwacha as the national legal tender, adding that the measure is not aimed at re-introducing foreign exchange controls.
It is worth mentioning at this point that the liberalisation of the Zambian economy in the early 1990's came with its own teething problems particularly with regard to currency management in the financial sector.
This, however, brought about a mis-representation in the currency management as a number of enterprises began to quote and demand payments in foreign currency for goods and services produced within Zambia.
As a result, it posed a number of difficulties to an economy which is striving to actualise the aspiration of the Vision 2030 of becoming a prosperous middle income nation by 2030.
Further, payments in foreign currency for domestic transactions poses a challenge in the economic management and, impacts negatively on the implementation of the monetary policy.
If goods and services were allowed to be illegally quoted and priced in foreign currency, the move would inflict more distortions on the currency.
On the other hand, enforcing the use of the Kwacha for domestic transactions will enhance economic management including the effectiveness of the monetary policy implementation and encourage financial innovation.
In the last five years, the Zambian economy registered remarkable growth, falling inflation and relative stable exchange rate and downward trend in lending rates.
In an effort to build on the successes and address the challenges of currency management, the Government issued a Statutory Instrument (SI) No.33 of 2012, which seek to bring to an end the use of quoting or pricing of goods and services in dollars as a way to strengthen the Kwacha as a legal tender.
On May 7, 2012 the minister of Finance signed an SI number 33 of 2012 which came into effect on May 18, 2012, prohibiting the quoting and pricing of goods and services in foreign currency.
The objective of the SI is to re-inforce the use of the Kwacha, which is Zambia's legal tender, in domestic transactions which is a trend in all countries.
BoZ pointed out that it was illegal for any business house or institution found quoting, demanding to be paid or receiving foreign currency as a legal tender for goods and services.
The Central Bank further warned that anyone found transacting in dollars instead of Kwacha would be fined or imprisoned for a period not exceeding 10 years or both.
Under the provision 6(1) of the SI, it states that "a person who contravenes these regulations commits an offence and liable upon conviction, to a fine not exceeding one hundred thousand penalty units or imprisonment for a period not exceeding 10 years, or to both."
But experts have argued that it has been barely weeks after the law was endorsed by the Government and no checks have been done to ensure that entities are complying with the Currency Regulation.
Commenting on the SI, an economist Likando Mukumbuta welcomed Government's move to ban the quoting of contracts and pricing of goods and services in foreign currency as this was affecting exchange rate stability in the economy.
Mr Mukumbuta pointed out that the ban against dollarisation would establish a firm basis for a sound local financial sector that will in the long run support the steady growth of the economy.
He explained that the Zambian economy was experiencing what he termed as an unofficial dollarisation and the stepping up of the Government to issue an SI to protect the Kwacha as a legal tender was to ensure proper fiscal management relating to the use of the currency.
It would also provide a stable and secure economic and investment climate.
Mr Mukumbuta pointed out that the Bank of Zambia move was intended to better manage inflation, containing the depreciation of the Kwacha and well timed with the rebasing of the Kwacha.
He suggested that the Bank of Zambia should conduct sensitisation campaigns like what was being done with the rebasing of the Kwacha in order for the public to be aware of the measure.
It is, however, important for the Central Bank to step up and enforce the law and put in place mechanism that will support an effective implementation of the SI.
On the other hand, Tourism Council of Zambia (TCZ) highlighted that the tourism sector was principally an export industry and the signing of an SI presents a number of challenges in the pricing of services.
TCZ asked the Bank of Zambia on June 8, 2012, to give a clarification to how the tour and hotel operators would be quoting tourists wishing to visit Zambia and how car hire companies in Zambia operating global web sites will be quoting foreign visitors.
"How should tour and hotel operators quote foreign tourists wishing to visit Zambia? As these visitors are outside the country, can tour and hotel operators continue to quote in dollars and receive payment in dollars," the letter stated.
In response, the Central Bank said the hotel and car hire firms and all tour operators would be required to quote the prices of the goods and services in Kwacha saying that the above firms would continue to buy limited amounts of foreign currency from their residence.
Credit cards and debit cards will continue to be used for settlement of bills for goods and services supplied by the hotels, car hire firms and tour operators.
Furthermore, the Bank of Zambia said the points of sale machines at hotel, car hire firms and tour operators where credit cards and /or debit cards are used will have to be reset to collect credits in Zambian Kwacha.
The Central Bank said advertisement on global websites for firms with global outreach may be shown in foreign currency for purposes of assisting customers understand the pricing structure and compare with similar services.
However, quotation for the products or services will be in Kwacha and guiding exchange rate should be given for such quotation.
BoZ explained that all airlines and travel agencies operating in Zambia will be required to quote, sell and receive payment for tickets and other services in Kwacha.
TCZ chairperson Felix Mulenga said the ban on dollarisation would have a negative bearing on the hotel and tourism sectors because clients make booking in advance saying that quoting in kwacha would result in price fluctuation.
"The move is good for the domestic economy but you must be able to know that we export our products whilst at home and it would be difficult to ask the clients to pay in Kwacha because the make bookings one year in advance and by the time the come the exchange rate could have fluctuated so it is better to quote in a more stable currency such as the United States Dollar," Mr Mulenga said.
Livingstone Tourism Association (LTA) chairperson Kingsley Lilamono agreed with Tourism Council of Zambia that the tourism sector was largely dominated by foreign tourists making it an export industry and as such quoting in Kwacha would disadvantage them.
Mr Lilamono said the measure introduced by the Bank of Zambia to ban the use of dollars would disadvantage the sector saying that domestic tourism presents a small fraction.
He noted that tour and hotel operators market the country's tourist product outside Zambia and quoting in a currency that is not understandable would disadvantage the sector because the dollar was an international currency that was recognised worldwide.
"We are disadvantaging ourselves, this sector is very competitive, look at our neighbours in Zimbabwe they are using the dollar and you will see a number of tourists going there because they have an advantage over us," he said.
Mr Lilamono pointed out that the Central Bank could have consulted the various stakeholders before signing the SI.
"Firstly the implementation is going to be a problem, BoZ should have first sensitised the people like what they are doing with the rebasing of the Kwacha.
What the Central Bank should have done is to create guidelines for the stakeholders to understand how the implementation will be carried out.
"They should have done a research to determine the impact on the ban against quoting and pricing in dollars," Mr Lilamono said.
Standard Chartered Bank head foreign exchange trading Wiggins Mupango said the ban against quoting in dollars would eliminate some artificial demand for dollars on the local economy.
Mr Mupango said the SI is meant to enhance the value of the Kwacha as a legal tender and to some extent aimed at eliminating unnecessary demand for dollars which arise from services and goods produced locally.
"If you look at that perceptive, you will realise that the impact on the foreign exchange market is positive and this should not be seen as a foreign exchange control measure because as you all know the Zambian is liberalised economy and there is limitation on how one can access currency," Mr Mupango said.
"We may see an appreciation of the Kwacha and the Kwacha is mostly moved by international flows and proceeds from copper," he said.
By and large, all existing foreign currency denominated contracts, covering domestic transactions should immediately be converted into Kwacha denominated contracts at the prevailing commercial bank spot selling rate as at May 18, 2012.
It is imperative to understand that for the purpose of this regulation, domestic transactions shall not include foreign currency loans, advances and deposits issued by commercial banks registered in Zambia.
This will not include foreign currency denomination bonds issued in the capital market and interest, fees, commissions and among others.
Further, commercial banks may continue to issue financial instruments such as banks drafts and cheques.
However, the use of this financial instrument will be limited to international transaction only.
As the debate continues, the onus remains with the Bank of Zambia to whether the SI will be filed or implemented.