A tale of two forex controls: Kampala and Lusaka defend their own (The Africa Report n°43 – August/September 2012)

Government officials in Zambia and Uganda are using different tools to strengthen the use and value of their local currencies.

Moves by Zambia and Uganda to shore up their currencies against the US dollar have drawn anger from bankers and businesses. In May, Zambia prohibited the quoting and pricing of goods and services in a foreign currency, to promote the use of the kwacha. Penalties include up to 10 years imprisonment.

Since coming to power last September, President Michael Sata’s Patriotic Front government has grappled with a weakening kwacha, which analysts blame on a lack of investor interest and sluggish mining output. Strikes by workers demanding higher wages drove Zambia s trade surplus to its lowest level for years in February.

The quoting ban boosted the fortunes of the kwacha, which touched K4,700 against the dollar in the first week of July, a 13-month high. Tour operators fear the move would hurt Zambia’s fragile tourism industry. « [Tourists] would rather go to Botswana or Kenya where they would not have to go through all that process [of changing their currency to kwacha], » says Rachel Ward, managing director of Zambezi Shuttles. The Law Association of Zambia has also called for the ban to be reversed.

Meanwhile, eight months after Uganda central bank instituted a USh10 ($0.04) cap on the spread between bid and offer prices quoted by commercial banks dealing in foreign currency, Uganda is experiencing less currency volatility. Regulators implemented the policy after Uganda’s forex market became a soft target for speculators, with shilling-to-dollar transactions undergoing swings as high as USh50 in the space of a few hours. Sources say the central bank is now looking at how it could implement a similar ceiling for forex bureaus.

« Foreign exchange transactions should be informed by the amount of liquidity in the market and not by the volatility, » said Denis Mashanyu, a trader with Standard Chartered Bank.

The price ceiling could also hurt banks that depend on forex transactions as a vital revenue stream. The forex income as a percent of total income at Standard Chartered Bank shot up from 5.7% in 2010 to 14.1% in 2011, according to the bank’s 2011 financial statements.

Jeff Mbanga in Kampala and Chiwoyu Sinyangwe in Lusaka

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