BY ADRIAN MWANZA
THE Bank of Zambia has indicated that the strong recovery in copper prices coupled with other modalities put in place has seen the Kwacha continue being bullish against other currencies.
More recently, the Kwacha was trading at K21.39 on July 23, 2021 compared to K22.64 on July 1, 2021, representing an appreciation of 5.5 percent.
The Copper prices which were currently at US$9,521 per metric tonne from a low of US$4,745 in March 2020 has contributed to sustained strong export earnings.
According to a statement released by the Bank of Zambia this has resulted in improved foreign exchange flows from the mining sector through tax receipts remitted directly to the Bank of Zambia in US dollars. In view of this, the Bank of Zambia had been able to provide more foreign exchange liquidity back into the market to reduce excess demand experienced since mid-2020.
As at July 23, 2021, the year-to-date rate of depreciation of the Kwacha against the US dollar slowed down significantly to about 5.0 percent compared with almost 30.0 percent over the corresponding period in 2020.
This has enabled the Bank of Zambia to provide more foreign exchange liquidity back into the market to reduce excess demand experienced since mid-2020 and as at July 23, 2021, the Bank of Zambia sold US$687.5 million to the market compared to US$86.0 million over the same period in 2020.
Another factor is that the Bank of Zambia had continued with the local gold purchase programme, accumulating about US$22.0 million in monetary gold as at July 23, 2021. The improvement in the reserve position increases the country’s ability to respond to unexpected external events and the ability to address volatility in the exchange rate.
The appreciation of the Kwacha largely reflected changes in the actual supply of foreign exchange and expectations of further improvements in supply associated with the forthcoming IMF Special Drawing Rights (SDR) allocation, improved prospects of a formal Extended Credit Facility (ECF) programme with the IMF, as well as buoyant copper prices.
This has resulted in improved foreign exchange flows from the mining sector through tax receipts remitted directly to the Bank of Zambia in US dollars.
Another aspect that has helped the Dollar become bullish is the fact that, foreign exchange inflows from non-resident investors purchasing Government securities has significantly increased, further providing liquidity to the foreign exchange market.
The statement said besides supporting the market, the Bank had been able to build up international reserves, which stood at US$1.4 billion at the end of May 2021 compared to US$1.2 billion at end-March 2021.
The Bank of Zambia said it would continue to use all available monetary and foreign exchange intervention options, as appropriate, to address developments in the foreign exchange market.
Having come under immense pressure in 2020, owing to the weakening macroeconomic environment, which was significantly exacerbated by the COVID 19 pandemic, the Kwacha had broadly stabilised in 2021.
In addition, the significant improvement in copper prices and renewed interest in domestic Government securities by non-resident investors were supportive of the foreign exchange market and in turn lower inflation going forward.
