• The continued depreciation of the Kwacha is becoming of concern.
• It threatens the recovery in terms of economic activity seen in the last two years.
• Import costs at business houses are rising and that restricts the capacity of business firms in terms of their production of goods and service.
Zambia’s currency, the Kwacha has continued to depreciate and has now hit the K21 per US dollar mark.
This is owing to overwhelmingly high demand for the greenback on the local market, coupled with limited supply, and protracted debt restructuring process.
Most commercial banks have today quoted the local unit at an average K20.67 and K21.08 on the bid and offer, respectively.
And Economist Gerald Soko says the persistent depreciation of the local unit is threatening the country’s economic recovery process.
Mr. Soko told Money FM News in an interview that being an import dependent country for final commodities at household level and raw materials for the manufacturing sector, import costs at business houses are now rising.
He said this situation is restricting the capacity of business firms in terms of their production of goods and services, and also fueling high inflation rate.
“The continued depreciation of the Kwacha and obviously the pace now is becoming of concern, threatens the recovery in terms of economic activity that we have seen in the last two years. We are a country that imports not just final commodities at household level for consumption but also imports especially for the manufacturing sector.”
“What we have begun to see is that import costs at business houses are rising and what that does is that it restricts the capacity of business firms in terms of their production of goods and services but also inflation is going to be fueled. So we want to deal with two things, there is inflation that is coming from imports for the commodities or production processes, but also inflation for the final goods and services that we import,” Mr. Soko noted.
And Mr. Soko predicted a double digit inflation rate for March 2023, which may result in high borrowing costs because commercial banks also look at inflation when it comes to pricing loans.
“When that happens, what we are likely to see is that with inflation going up, borrowing costs at commercial banks are not likely to come down because when it comes to pricing loans, commercial banks also look at inflation so if inflation is going up, lending rates also tend to go up. So those are some of the issues that are threatening the recovery in terms of the economic activity at the moment. We have firms that are suffering higher import costs and you have retailers that are getting goods and services at a higher price because the Kwacha is weaker.”
“But also banks as they start to look at inflation, for example this month I think we are going to touch double digits so when banks see that, even in their pricing of credit they will start resisting reducing rates. We have seen this already happening, lending rates in the market in the last three months have been ticking up, they have stopped the down trend that we were seeing in 2022,” he stated.
The local currency has quickly lost value despite Bank of Zambia tightening the Monetary Policy Rate for the first quarter of 2023 and raising the Statutory reserve ratio on commercial banks’ deposit liabilities by 2.5 percentage points to 11.5 percent as an additional measure to minimize exchange rate volatility.