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FDI and the wider economy in Zambia when Government attempted to capture foreign currency — Grivas Chiyaba (Economics PhD seminar)
In an effort to capture more foreign currency from export earnings, the Zambian Government implemented currency management policies. In 2012, the Government introduced a policy to bar the settlement of domestic transactions in foreign currency. This was augmented by another policy in 2013 aimed at improving monitoring of balance of payments. An analysis of foreign currency transactions post 2012 suggests that the immediate impact of the currency management policy was a rise in liquidity on the foreign exchange market. Coincidentally, the composition of FDI flows components changed at the time of implementing the policies, with intra-company debt being the main source of financing, surpassing equity and retained earnings, which were the main sources prior to 2012. Using confidential Zambian firm-level data covering the period 2008 – 2017, the study analyses the evolution of FDI, and provides implications of this analysis both for Zambia and how this might be generalised to other developing countries. The study also investigates whether the new financing strategy by foreign firms was a form of profit shifting or a switch of tax avoidance from one form to another.