Zambia – new foreign exchange regulations to come into effect on 1 July by Yvette Babb* • 13 June 2013 Read Full Report So, what’s the story? – The perception of large scale capital flight from Zambia’s natural resource sector has culminated in regulations that seek to monitor all international transactions. In monitoring all current account transactions, the Zambian government aims to quantify the revenue generated from exports (particularly from the mining sector), but importantly to also understand the ways in which these funds are externalised. Whilst these regulations do not impose any restrictions on the outflow of funds from Zambia, all current payments (related to imports, income flows and/or current transfers) will need to be reported to the central bank (together with supporting documentation). This move is in line with on-going efforts by government to boost compliance with its fiscal framework and, as such, its revenue collection. This change is in addition to the gains in revenue collection achieved by the adjustment to the framework itself, which included a rise in mineral royalty taxes, from 3% to 6% in 2012 and the reduction in capital expenditure allowances in 2013. SI 32 in a nutshell - While we will seek to discuss the regulations in the current wording here, there is a high level of probability of amendments in the short term. Under new regulations, exporters (of goods and services) will be required to remit all proceeds to a foreign currency bank account held in Zambia. The Balance of Payment Monitoring Regulations 2013, also known as Statutory Instrument 32 (SI 32), come into effect on 1 Jul 13. The new regulations require export transactions with a value of over USD100’000 to be supported by a Letter of Credit (LC). Furthermore, monitoring forms will need to be completed for transactions with a value in excess of USD10’000. The same also applies to import transactions with a value above the same thresholds. Again, these payments are required to be made from a foreign currency onshore account. Beyond imports and exports, the regulations aim to monitor other outflows and inflows relating to income, current transfers, capital and investment flows. Payments of dividends will, as a result, need to be supported by underlying documentation. All external private debt will also need to be registered with the Bank of Zambia (BOZ), together with details of the repayment schedule. Financial service providers are only allowed to facilitate debt service remittances in accordance with the regulations. Enhanced credibility and quality of Balance of Payments data – These measures should arguably lead to more accurate and credible balance of payment (BOP) figures, which will provide a better basis for policy interventions by government. International trade statistics, which are generally compiled using information provided by the customs authority, will be further corroborated by the information provided on the BOP forms to the BOZ. The export monitoring form (known as Form I) will include the need to submit details on the grade and quantity of copper, which should lead to more accurate figures on copper exports. Financial institutions are arguably being used as a vetting agency through the imposition of the LC requirement. The LCs, however, will only validate the value of the transaction and not necessarily the detail of the nature of the exported goods. The question remains whether this goal could not have been achieved without the LC requirement. This is particularly pertinent, as the LC requirement will add to the cost of doing business in Zambia, over and above the administrative burden that is imposed under SI32. The Letter of Credit requirement - We expect the LCs will mainly be issued by foreign banks, as Zambian banks (with exception of those with foreign parent companies) do not meet the requirement for the LCs to be confirmed by a bank with a minimum B+ rating. Furthermore, whilst banks in Zambia are in the process of increasing of their capital base in line with new requirements (ZMW520m or caUSD97m for foreign banks to be met by Dec 13), the capital base of the banking system will not be able to cope with the volume of LCs as implied by the current value of trade. • LCs: raising the cost of doing business - The imposition of the LC requirement for all export and import transactions with a value of above USD100’000, as well as the documentation requirements of SI 32, will add a direct cost to each international transaction. The administrative burden under these regulations will fall, in large part, on the financial service providers (as well as on the exporters and importers). • LCs: limiting other forms of credit - The total value of Zambia’s trade suggests that the value of outstanding LCs will be substantial. The average monthly value of trade in goods was equal to USD1.5bn in 2012 (USD770m in exports and USD660m in imports). As a result of the USD100’000 threshold for the LC requirement, it is likely that almost all trade transactions will be affected. These credit facilities are likely to impose on the capital base (and risk limits) of issuing banks, which will limit the ability of these banks to extend other forms of credit to Zambian companies. Raising foreign currency liquidity in onshore banking system – Importers and exporters are required to open foreign currency accounts for international transactions, with all export proceeds to be remitted to this account within 60 days of shipment (as it currently stands). We expect the majority of these funds to leave the Zambian banking system in the form of import and other current payments (relating to income and transfers). The current account reached a surplus of mere USD10m in 2012, as the trade surplus of USD1.5bn was eroded by service and income outflows. The timing mismatch between these flows is likely to be associated with an overall increase in the level of foreign currency deposits in the Zambian banking system at any given time. Foreign currency deposits were equal to caUSD1.2m in Mar 13 or 25% of total monetary aggregates. There will also be a dramatic increase in the number of international transactions. Impact on the foreign exchange market – The regulations described in SI 32 are not directly associated with an increase in the demand for local currency. In 2012, regulations were effected to make the Zambian kwacha (ZMW) the sole legal tender for domestic transactions (under the Bank of Zambia (Currency) Regulations, 2012, known as SI 33 and the amendment known as SI 78). International transactions will continue to be freely conducted in foreign currency. It could be argued, that previously a large share of export proceeds did not find their way onshore. These proceeds were typically held offshore, with some conversion of foreign currency into ZMW, which was then remitted to Zambia to meet liabilities to e.g. the tax authority, local suppliers and employees. SI 33 resulted in a larger proportion of transactions that were required to be settled in ZMW. This did lead to an initial surge in the demand for ZMW (and a sharp move down in the USD/ZMW exchange rate). This was, however, temporary as those who previously had a foreign currency revenue base, returned to the market to seek foreign exchange to meet their liabilities. SI 32 will not immediately lead to a further shift in demand for local currency, and therefore will in our view not provide immediate support to the ZMW. There is, however, likely to be a shift in the conversion of foreign currency into ZMW in the offshore market, to the onshore foreign exchange market. The availability of ZMW in the offshore market is arguably already limited by existing regulations that restrict offshore funding (funding is only available for a period of longer than 1 year), however we are likely to see less demand for ZMW in the offshore market. We remain constructive on the ZMW - The USD/ZMW exchange rate has remained in the 5.2-5.4 range YTD. While monetary conditions are likely to remain supportive of the ZMW, the local currency is not unaffected by the turmoil in international financial markets. The pair broke 5.4 on 12 Jun, with some risk to the upside in the immediate short term following from the global risk off environment. Zambia remains particularly vulnerable to a decline in copper prices. Copper made up close to 70% of exports in 2012, when the price of copper was on average USD7’960 per metric tonne (MT). The decline in copper prices will exert further pressure on Zambia’s external sector, particularly the trade surplus (which declined to USD1.45bn in 2012, from USD2.2bn in the preceding year). The price of copper reached USD7’070/MT on 12 Jun, from on average USD7’922/MT in Q1:13. External reserves have been under pressure, falling to USD2.47bn in Apr 13 (ca2.95-m of import cover) from USD3.07bn in Jan 13. This partially reflects direct intervention in the FX market by the Bank of Zambia. The central bank’s preference is likely to remain in favour of ZMW strength. A sharp move up in USD/ZMW is seen as undesirable in light of its impact on debt servicing costs as well as on the cost of imported goods (particularly fuel). With not a lot of ammunition left in the form of foreign exchange reserves to directly protect the currency, the funding channel is likely to play a more dominant role in the central bank’s policy. • Tighter monetary policy conditions - We expect the monetary authority will remain vigilant in light of inflationary pressures. Term deposits and repos (used intermittently by the central bank to drain liquidity) will keep excess liquidity in the interbank market within limits and, as such, the overnight interbank rates in low double digits. Inflation, at 7.0% y/y in May, remains above the BOZ’s 6.0% objective for 2013, with upside potential to 9.0% y/y by Sep 13. The fuel price hike (of over 20%) in May due to the removal of subsidies was the main driver of the move inflation to 7.0% y/y from 6.5% in Apr. We foresee further upside risks as a result of second-round effects arising as producers pass the rise in costs onto consumers. The same applies to a 26% increase in electricity prices that is still under consideration by the ERB. We also see the potential for demand pressures on inflation. Whilst the rise in private sector minimum wages in Jul 12 did not lead to material pressure on inflation, we believe the fairly substantial public sector wage increase (of on average 50%) presents a more considerable risk. Potential for increased USD conversion into ZMW over time - Since SI 32 is unlikely to increase the demand for ZMW, it will probably have no direct impact on USD/ZMW. ZMW appreciation pressure will arise, though, from increased application of the funds to settle ZMW obligations, through e.g. increased consumption of locally provided goods and services and/or more tax. Whilst not guaranteed, it is likely in the context of the spirit of the government’s ambitions the prospect for rising local costs (in the form of electricity and wages) and the continued commitment of (mining) companies to their operations in Zambia. Zambia: imports and exports Source: Zamstats, Standard Bank Research
Posted on: Thu, 04 Jul 2013 09:15:56 +0000
Trending Topics
Recently Viewed Topics
© 2015