Kwacha Losses Continue

The Kwacha continues to record losses against the dollar this week. Global financial services firm StoneX Inc say they expect the trend to continue until the Government addresses its debt problem. It is estimated that Zambia’s external debt now stands at around the $12 billion mark. While President Lungu has recently attempted to shift blame onto the coronavirus pandemic, total government debt had already grown from 32% in GDP to 88% of GDP in 2019 under his administration. 

While the Bank of Zambia has introduced measures to try and reduce kwacha volatility, the debt problem appears to be too large to outweigh its impact and the currency has depreciated despite the rise in copper prices to an almost eight-year high, which would normally be expected to strengthen the kwacha as demand for the currency increases. 

Zambia’s debt problem made international headlines in November when the Government defaulted on its debt as it failed to meet the deadline for a $42.5 million payment on one of its Eurobonds. 

Senior foreign-exchange trader at StoneX David Willacy is quoted by Bloomberg as stating, “It is likely the kwacha will continue to depreciate in the absence of any new large dollar inflows, or debt agreements from the government.” 

According to reports the kwacha has weakened 9% against the dollar since September 2020. In an attempt to increase control of the foreign-exchange market legislation has recently been introduced that requires mining companies to pay taxes and royalties in dollars directly to the Bank of Zambia. Mining companies account for more than 70% of export earnings. 

With the kwacha weak pressure on inflation continues. Government is once again engaging the International Monetary Fund (IMF) in an attempt to address the challenge after several failed attempts and past talks broke down. Talks are expected to resume on February 11. However, it is considered unlikely an agreement will happen before elections in August. 

Minister of Finance Bwalya Ng’andu has said that the Bank of Zambia is also working with commercial lenders to increase liquidity and minimise volatility resulting from speculation.