Last updateDim, 01 Fév 2015 3pm

Currency: Concerns remain over weakening national currency, Kwacha

Economy - Concerns remain in Zambia over the weakening national currency, Kwacha, despite the country's apex bank's off-loading of US$178 million onto the market to mitigate the local currency's volatility against the US dollar.

The Kwacha this month hit its lowest point, trading at K6 per US dollar.

Since 2013, the Zambian currency has reportedly lost more than 20 percent of its value, making it one of the biggest losers among African currencies.

Bank of Zambia (BOZ) Governor Michael Gondwe disclosed that the central bank has sold US$178 million to the market in order to support the relatively low supply of foreign exchange and moderate volatility in the foreign exchange market.

Gondwe said recent developments in the foreign exchange market have raised concerns not only to BOZ but also the public at large, and that in some cases this has even led to speculative behaviour and panic buying of the foreign currency, thereby inducing more pressure on the exchange rate.

The BOZ does and will continue to intervene in the market with a view to mitigating volatility and building international reserves, he said.

According to the Bank, during 2013 the Kwacha depreciated against the US dollar by 4.9 percent, Pound Sterling (3.6 percent) and Euro (8.3 percent), while posting an appreciation against the Rand of 10.7 percent.

Since the beginning of 2014, the exchange rate of the Kwacha against most of its major trade partner currencies has also exhibited a depreciation trend.

The central bank reveals that as at 10 March 2014, the Kwacha had depreciated against the US Dollar by 7.8 percent to trade at an average of K5.9406 to the Dollar, from an average of K5.5126 to the Dollar at the close of December 2013.

Further, the local currency lost against the British pound and Euro by 8.5 percent and 8.7 percent, respectively, during the period

The development in the Kwacha exchange rate is said to have been driven by both international and domestic factors.

One of such is the US Federal Reserve Board’s recent decision to reduce the amount of US Dollar liquidity supplied through its quantitative easing programme, which has broadly affected several emerging markets, including Zambia’s.

Consequently, emerging market currencies have generally weakened against the Dollar since the year began, the Bank of Zambia observes.

The depreciation of the Kwacha has also been attributed to the decline in the average price of copper to US$7,010 per tonne at the end of February 2014, from US$7,360 per tonne in December 2013. Zambia depends on copper for about 70 percent of its export earnings.

This has had an adverse impact on the Kwacha due to the high correlation between copper prices and market sentiments of the Kwacha-Dollar exchange rate.

The fall in copper prices was mainly on account of low demand largely from China, which has a strong influence on the global economy. The subdued copper prices have to some extent undermined investor optimism.

An analyst, Hjoe Moono, notes that while Zambia many not be the only country that is experiencing a decline in its currency’s value, this is the lowest the Kwacha has ever hit since 1964 and raises serious concerns which cannot be ignored.

“Our role today is to highlight the consequences that this continued loss in value will have as well as offer potentially feasible options which could be implemented by our supreme leader’s government in their pursuit of action to develop our country,” the local media quoted Moono to have said.

“Should we worry about this depreciation? Yes! We should, in fact, we should more than worry, we must do something about it as soon as possible,” he said.

Moono said he suspects the continued depreciation of the Kwacha will cause the cost of oil imports and capital equipment to rise, and that the demand for exports will drop off as the input costs of labour and other factors of production such as electricity and transport rise, driving up the cost of exports and driving down their competitiveness.

“The country should brace itself for higher costs of fuel, higher costs of transport and higher electricity and water tariffs as a result of this depreciation,” he warns. “Clearly, the weakening of the Kwacha will ultimately result in a substantial lowering of living standards of Zambians. Here, the economics of our supreme leader seems to be failing him.”

Moono proposed that government takes urgent policy measures to curb unnecessary imports which put pressure on the demand for foreign currency.

He said in addition to higher custom duties which will also serve as a revenue measure, strict quantitative restrictions on the importation of non-essential items should also be imposed.

The analyst also suggested that the government should reduce its appetite to borrow.

“Issuing Dollar-denominated sovereign bonds in the midst of a crisis-like situation is a risky endeavour, and the government may do well to curb their seemingly insatiable appetite to borrow,” he said, adding that the importation of oil should be carefully examined as this has the greatest potential to trigger local inflation and social discomfort among citizens.

An economist, Oliver Saasa, has however commended the government for offloading US$178 million onto the market to shore up the value of the Kwacha.

Prof. Saasa said with Zambia being an import intensive country, the release of the Dollar on the market would make imports cheaper as the Kwacha would strengthen against the US currency.

“Coming from a significant stress that the Kwacha is facing against the Dollar, the move by Government is much appreciated as it make imports much cheaper especially that Zambia is an intensive import country,” Saasa told journalists.

He however noted that there was the need to put in place sustainable measures to strengthen the Kwacha, as the current move to offload some foreign currencies on the market was only a short-term measure and could stress the country’s foreign reserves.

“Government has to strengthen its policies which include instilling investor confidence, ensuring tax compliance by the mining sector and political and economic stability.

“We need to deal with the root cause of the situation by putting our house in order, that is ensuring investor confidence as well tax compliance by mining houses in the country,” Prof. Saasa said.

Feature by Mildred Mulenga, PANA Correspondent, Lusaka

Pana 17/03/2014