Zambia Not Ideally Placed to Dedollarize, IMF Warns

The International Monetary Fund (IMF)’s Zambian representative, Eric Lautier, has expressed concerns about Zambia’s dedollarization proposals.

The International Monetary Fund (IMF) has expressed reservations about Zambia’s proposed dedollarization initiative, warning that it could hamper efforts to contain inflation in the country.

According to Eric Lautier, the IMF’s Zambian representative, successful dedollarization requires an economic environment with low and stable inflation rates and limited external pressures, which Zambia currently lacks. He highlighted the importance of a comprehensive macroeconomic stabilization plan to accompany any dedollarization efforts.

“Forced dedollarization measures are likely to prove ineffective and could even be counterproductive,” Lautier stated. “We are in the process of evaluating those [measures].”

The remarks come after the Bank of Zambia announced proposals to promote local currency use, including severe penalties for businesses demanding U.S. dollars for local transactions. Zambian officials have argued that the widespread use of dollars undermines the central bank’s monetary policy, but businesses have criticized the proposed penalties as punitive and inflationary.

Zambian businesses have resorted to quoting or demanding U.S. dollars for local transactions due to the country’s foreign exchange shortages and high inflation rate, which reached 24.4% in January. Like many African countries, Zambia grapples with a depreciating currency, prompting businesses to hedge against further devaluation by using the more stable U.S. dollar in their transactions.

The central bank aims to discontinue this practice, but consultations are still underway, according to a recent Bloomberg report.