Economist attributes Kwacha appreciation to tight liquidity

• Local contractors have not been paid.
• People are handling less Kwacha.
• The appreciation of the Kwacha has nothing to do with the IMF bailout package.

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An Economist has attributed the appreciation of the Kwacha to tightening of liquidity in the economy.
Rita Mkandawire told Money FM News in an interview that this is because government has not paid any local contractors, thereby increasing demand for the currency.
Ms. Mkandawire said this situation implies that people are handling less Kwacha, adding that the currency usually gains value when the demand for it increases.
She charged that the Central Bank is currently holding on to Kwacha, and government’s decision not to pay local contractors due to the on-going audit of domestic arrears has reduced liquidity in the market.
“Usually the currency gains value when the demand for it increases, so what is happening is that we are facing a situation where local contractors have not been paid, government has not paid any local contractors so the demand for Kwacha has increased . So this adds pressure and also it simply means that people are handling less Kwacha, when the demand for dollar increases, the dollar gains value.”
‘So what’s currently happening is that Bank of Zambia has just held on to Kwacha and the government also them not paying local contractors has reduced liquidity in the market,” Ms. Mkandawire said.
Ms. Mkandawire further stated that the appreciation of the Kwacha should not necessarily be due to economic development or the improvement of people’s livelihoods because the cost of living is still high.
“So for me the appreciation of the Kwacha should not necessarily be due to economic development or the improvement of livelihood of the people because the cost of living is still high, it’s just that there is a tightening of liquidity in the economy,” she stated.
Meanwhile, Ms. Mkandawire said the US$1.3 billion International Monetary Fund (IMF) bailout package has nothing to do with the appreciation of the Kwacha, because the currency has been stronger for the past weeks, and the deal was only approved last week.
She however noted that the bailout package will boost investor confidence, and ultimately bring in more dollar inflows, and in turn stabilize the economy.
“The IMF bailout package obviously has got its own advantages, but remember the approval only came in last week but we have seen that the appreciation has been happening for the past weeks. So investors will come, there is going to be investor confidence boosted, there will be dollar inflows, and our debt can also be restructured, it’s also a plus to the country and that will bring economic development, ultimately the economy will stabilize because of the package.”
“But currently, the appreciation of the Kwacha has nothing to do with the development, it is just because there is very little liquidity because life is still expensive and then also when there is an increase in fuel, the first attribute will be that there is an increase on the international market and that is very true.
“The reduction is still affected by the international market because we have to import fuel so this time the fuel was imported at a lower price. If the price was higher, in as much as government would like to price it lower they can’t because they bought it at a higher price that is why we are having these monthly reviews. Government is stocking fuel on a monthly basis which I think also is a good strategy, it helps us plan month by month. So for me it doesn’t necessarily interpret any improvement in the cost of living,” she added.

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