• The Kwacha has continued to depreciate against major convertible currencies, the dollar, the Euro, and the Pound.
• This is despite the Central Bank intervening by tightening monetary policy.
• The Central Bank has reduced flows that they have been bringing to the market in terms of support.
The Zambian Kwacha has continued to weaken against the United States dollar, Great British Pound, Euro and South African Rand, despite the Central Bank raising the Statutory Reserve ratio and tightening monetary policy to help stabilize the currency.
In today’s trading session, the local unit opened at K19.39 Ngwee and K19.78 Ngwee on the bid and offer respectively, after closing the market at K19.38 Ngwee and K19.77 Ngwee yesterday.
Demand for foreign currency especially the US dollar has continued to rise even amid Bank of Zambia’s efforts to supply the interbank with Forex.
According to Bank of Zambia, the Kwacha depreciated by 4.3 percent against the United States dollar to an average of K16.71 in the fourth quarter of 2022, after a cumulative appreciation of 10 percent in the previous quarter.
And an Economist has attributed the continued weakening of the currency to limited Forex supply on the market.
Gerald Soko told Money FM News in an interview that this is because the Central Bank has reduced FOREX flows that they have been bringing to the market in terms of support.
Mr. Soko noted that is the Central Bank is the major FX supplier in the market at the moment, considering that all the mining tax flows go to Bank of Zambia in US dollars.
“The Kwacha has continued to depreciate against major convertible currencies, the dollar, the Euro, the Pound despite the Central Bank intervening by tightening monetary policy. There are two key reasons behind what we are seeing at the moment, the first one is that the market is tight in terms of FX supply.”
“And so what we have seen is that the Central Bank has reduced flows that they have been bringing to the market in terms of support. Secondly the negative sentiments also around the debt issue that is fueling speculative demand of the dollar itself. So those are the two key issues that are behind the continued depreciation of the Kwacha,” Mr. Soko noted.
Mr. Soko further said the Kwacha is expected to continue depreciating in the near term because limited FOREX Supply and negative sentiments on debt restructuring process are not very sensitive to monetary policy changes.
“In terms of the outlook, we expect the Kwacha to continue depreciating, again the two factors that I spoke to in terms of driving what is happening at the moment are not very sensitive to monetary policy. So tightening the policy or reducing Kwacha liquidity on the market but as long as FX supply is limited, that problem is not going to be addressed.”
“At the same time, you reduce your Kwacha liquidity in the market but as long as people are not optimistic that we are going to restructure our debt, they will continue speculating on the currency and so we don’t really expect the Kwacha to change course as a result of what the Central Bank has done because those two issues are not very sensitive to monetary policy changes,” he added.
Bank Governor Denny Kalyalya recently disclosed that in an effort to stabilize the foreign exchange market, the Bank provided US$443.5 million to the interbank market in the fourth quarter of 2022, largely from mining tax receipts, compared to the provision of US$333.5 million in the third quarter.