African countries are cracking down on the use of foreign currencies in domestic transactions, putting a squeeze on some investors
In many African countries, where local currencies are weak and volatile, the dollar serves as a second currency, used in anything from international trade to domestic business and living.
A number of them are now introducing increasingly stringent rules against the use of the greenback in domestic transactions, as they look to bolster weak local currencies.
From next year, Angola – which until now has not imposed generally applicable foreign exchange regulations on oil and gas investors – will require both national and domestic oil companies to pay local suppliers and tax revenues from local bank accounts using the Angolan kwanza.
Mozambique has also overhauled its exchange rules, requiring export income to be repatriated to the country, and half converted to meticais. Meanwhile, after the cedi plummeted by more than 15 percent against the dollar in the first five months of the year, Ghana’s central bank ruled that banks should hold their 9 percent mandatory reserves exclusively in the local currency. The Bank of Ghana is also increasing its monitoring of lenders’ foreign exchange businesses to ensure they adhere to national policy. In July it suspended Access Bank’s local unit from operating an FX business for six months, after it allegedly made illicit transfers of dollar-denominated funds to Nigeria.
In Zambia, the crackdown has been harder. A new ruling has banned the use of dollars in domestic transactions, with the threat of ten year imprisonment. “A person shall not quote, pay or demand to be paid or receive foreign currency as legal tender for goods, services, or other domestic transactions”, the Bank of Zambia announced in May.
But the central bank was quick to stress that the rule does not amount to a reintroduction of exchange controls. “The foreign exchange regime will remain liberal and trading of foreign currency will continue to be undertaken through commercial banks and bureaux de change”, it said.
The bank points out that its new rules aim to develop financial system innovation. But more broadly, these are measures aimed at steering resource revenues through local banks and boost weak and illiquid local currencies.
Angola is now Africa’s second biggest oil producer, Zambia the continent’s biggest copper producer, and Mozambique is poised to become the world’s biggest coal exporter within the next decade. The recent discovery of two huge offshore gas fields in Mozambique has also defined the region as an energy hotspot.
“In the past we saw a country like Zambia with copper prices at record highs and the country not really benefiting from that, because a lot of those monies were circumventing the country,” explains Mike Keenan, African currency strategist at Absa Capital.
“In terms of the country’s best interests you need to have a scenario where ultimately the country as a whole is benefiting from whatever you are selling. But the minute people are transacting in a parallel market, it makes it very difficult to institute credible and consistent policy measures. It becomes a lot more manageable if everyone is working in local currency.”
Some businesses – used to working in dollars and worry about exchange rate fluctuations and the cost of hedging against local currency volatility – are uncomfortable.
“An overnight total ban on all forex pricing, invoicing and payments for all domestic transactions … without proper consultation or implementation period… is an overreaction which has lost the government a lot of credibility,” says one Zambian businessman working in tourism – one of the sectors harder hit by the new rules. “It is laughable to suggest that tourist operators can set prices in kwacha. They cannot possibly advise overseas agents of rates for 2013 in kwacha, as it is not a currency anyone outside Zambia understands or can trade in.”
With exchange costs putting pressure on margins, “only the banks are winning by converting all the forex into kwacha for local transactions and then back into forex for imports again,” he argues.
Agribusinesses, which import many of their inputs, are also worried. “Agribusinesses involved in input procurement are now faced with a risk of foreign exchange rate loss, hence will increase the price of inputs in the domestic market as a way of mitigating against the exchange loss,” argues Ndambo Ndambo, executive director at the Zambia National Farmers Union. “This simply means that farmers will now be subjected to high input costs which ultimately will reduce the profitability of high input intensive farm enterprises.”
“For years the governments have been saying that they want to diversify our very mining dependent economy and have been inviting investors in to invest in tourism, agriculture, transport and so on. It is these sectors which have been sold the dummy and feel deserted by government support,” the tour investor argues. The international tourism industry is lobbying for exemption so that tour operators and lodges can quote in foreign currency to clients and local intermediaries.
Others are more circumspect. “The new legislation has different effects on different sectors of the economy … [and] many businesses are not heavily affected by the new legislation,” argues Prisca Chikwashi, CEO of the Zambia Association of Chambers of Commerce and Industry, an umbrella body representing private sector interests in the country.
“Like in any market, certain decisions taken by governments may look harsh for the moment … but if the benefits are more in the long-run it is important to acknowledge that,” she says. The private sector simply needs to recognise that “a stronger kwacha is cardinal for economic growth.”
In Angola, where the new rules will apply only to the oil and gas sector, investors are also calmer. Here, the main concerns are around operational and counterparty risk. “The sector is concerned with the ability of banks to manage their liquidity,” says Pedro Coelho, managing director, Standard Bank Angola. “But in general investors believe they can use the local financial system and are reasonably comfortable.”
And unlike their Zambian counterparts, businesses seem happy with the government’s consultation process: “The dialogue has been constructive and we find encouraging the decision to phase the law in gradually over 18 months,” says Henda Ducados, external affairs director for Total E&P Angola.
Despite the headache, if a stronger currency is the aim, Zambia’s measure seems to be working. The kwacha has been Africa’s best performing currency this year, appreciating 10 percent between the beginning of May and its peak on July 12.
That was driven in part by businesses, concerned about liquidity, racing to buy up the local currency. But either way, others are watching closely. “We’ve seen some subtle suggestions out of Ghana that they want to follow the Zambian model as well. The cedi has stabilised because there is talk that it might happen. So clearly a lot of these currencies are undervalued,” Mr Keenan says.
“Yes, costs might become a bit more punitive initially, but the reasons why people embark on FDI are not just based on the currency. They will be based on far more fundamental reasons.”