Anti Dollarisation in Zambia (SI 33) Complied By Kampamba Shula

The zambian government has recently re-introduced the statutory instrument (SI) No 33 of May 2012 which banned paying,quoting or demanding to be paid in foreign currency in domestic transactions.

SOME landlords in Zambia are in the habit of demanding rental payments in US dollars. It has also been rumoured that some chief executive officers of some major parastatal companies and those of certain private sector companies are paid salaries and/or allowances in US dollars. But are such payments permissible under the Zambian law? Closely related to the foregoing, some lawyers in Zambia are reported to be in the habit of charging legal fees in US dollars, especially when they are dealing with a wealthy client such as some local politician who could have amassed wealth dubiously or when they are dealing with a client who is a foreign investor.

But are demands that legal fees be paid in US dollars permissible under the law? Some Zambian hotels too are said to be in the habit of occasionally accepting US dollar payments. But what does the law say in Zambia?
As Zambia moves towards rebasing the Zambian Kwacha, it should be emphasised that, unlike some neighboring countries that permit the use of different types of currencies as forms of legal tender of payment of money, section 33(1) of the Bank of Zambia Act 1996 permits only the use of the Zambian Kwacha and Ngwee as the legal tender of payment of money in the country.

According to the deputy governor the re issuing of the SI was done to correct a typo where the previous SI referred to the non-exiting BOZ act of 2012 rathher than the correct one from 1996.

All contents remained the same as the previous act.

The truth of the matter is that the previous SI was not implemented effectively.This was the reason that the inclusion of a 10 year jail sentence was explicitly implied in the new SI.

The more important question to ask is what effect does this have on the economy.One clear disadvantage is that money kept in dollars earns a better interest than that kept in Kwacha.Also borrowing in local currency has always been at higher interest rates,the reason for this possibly being a hedge against inflation.

The truth is that dollarisation characterised the zambian economy for a long time with firms freely quoting in dollars.The problem with this is that it increased the incentive to hold money in dollars,so whenever BOZ made an open market operation to buy dollars off the market,it would not be as effective.For example earlier this year BOZ depleted its reserves in an effort to intervene in the forex market where the kwacha had been depreciating uncontrollably against the dollar.The effect of this intervention was weak at the most and failed to yield substantial gains due to the high demand of the dollar for local transactions.The good thing is that foreigners can still hold their money in dollars in their bank accounts but will have to convert them if the wish to transact. However, some critics might be wondering what would happen when it comes to payments in Zambia for intra-regional or cross-border international trade transactions. As long as such foreign-originating payments are being cashed out in Zambia, notwithstanding that the money transfer could have been wired in US dollars and to a US dollar bank account in Zambia, the actual over-the-counter payment should appear in Zambian Kwacha. This argument is in line with section 4(2) of the Bank of Zambia (Currency) Regulations 2012. Section 2 of Zambia’s Prohibition and Prevention of Money Laundering Act 2001 defines ‘money laundering’ as: (a) engaging, directly or indirectly, in a business transaction that involves property acquired with proceeds of crime; (b) receiving, possessing, concealing, disguising, disposing of or bringing into Zambia, any property derived or realised directly or indirectly from illegal activity; or (c) the retention or acquisition of property knowing that the property is, derived or realised, directly or indirectly, from illegal activity. And the term ‘illegal activity’ is defined in the same statutory provision of the Prohibition and Prevention of Money Laundering Act 2001 as any activity, whenever or wherever carried out which under any written law in the Republic of Zambia amounts to a crime.

Although the Bank of Zambia Act 1996 does not criminalise the illegal tendering of payment of money using foreign currency within Zambia, such tendering is illegal because section 4 of the recently promulgated Bank of Zambia (Currency) Regulations 2012 prohibits the tendering of payment of money in Zambia using foreign currency. And section 6 of these regulations criminalises the tendering of payment of money using foreign currency. Viewed from this angle, a client can, and has the right to, refuse to pay in US dollars even after eating a meal at a hotel. Likewise, a tenant can refuse to pay rentals in US dollars. Instead, both the two payees here can opt to either report the matter to the police or simply pay the US dollars equivalent in Zambian Kwacha even though the understanding was that the payment would be made in US dollars.

Long Story short the anti dollarisation is not something new but rather something that was not enforced,It immasculated BOZ forex market operations and generally undermined the Zambian Kwacha.

References on the acts specific laws include Kenneth Mwenda a Senior Counsel at the World Bank in Washington DC, USA, as well as Extraordinary Professor of Law at the University of Lusaka, Zambia