By Tosin Sulaiman
JOHANNESBURG Oct 29 (Reuters) – Zambia’s kwacha slid to its lowest level in more than four months on Monday as the impact of a law limiting the use of dollars in everyday transactions wears off.
Commercial banks quoted the kwacha at 5,265/5,285 to the dollar at 1324 GMT, 10 percent below its peak of 4,790, hit in July. The currency of Africa’s top copper producer has now erased all the gains made since the foreign exchange curbs were introduced.
The regulation, which came into force on May 18, required domestic transactions to be quoted or paid for in kwacha and prohibited the use of foreign currency to buy domestic goods and services. Penalties included up to 10 years in jail.
Before the policy was introduced, hotel bills, school fees and cars were commonly quoted in and paid for in dollars.
After an initial slow reaction, the kwacha soared 10 percent in July, reaching its strongest levels in more than a year as Zambians scrambled to convert their dollars into the local unit.
Analysts said the kwacha’s steady decline since then showed that the strong demand was unsustainable.
“What we’re seeing is the return to the trading range that had been in place prior to the sharp move in the beginning of July,” said Yvette Babb, emerging markets analyst at Standard Bank. “A lot of the market participants who were buying local currency have returned to the market to buy foreign currency.”
Babb added that the kwacha was likely to drop further and could potentially move beyond 5,300.
“We see limited support for the kwacha following from terms of trade dynamics while levels of local currency liquidity remain high. Local market interest rates are relatively low and will therefore fail to attract portfolio inflows at the present level.”
Copper, which accounts for three-quarters of export earnings, hit a seven-week low on Monday on global growth concerns and disappointing corporate earnings.
The Bank of Zambia’s benchmark interest rate is currently at 9 percent.
The kwacha’s slide is also seasonal as retailers and manufacturers tend to buy most of their imports in advance of Christmas to avoid a slowdown in shipping activity in December, one Zambian trader said.
“You find most of them try and stock up in October and November so a good chunk of demand is coming from that angle as well,” the trader said. (Reporting by Tosin Sulaiman; Editing by Ed Cropley and Catherine Evans)