IN an article published on Thursday, January 27, 2022; “Zambia’s leader says turning around economy, despite empty coffers” published by AFP and Rodger Bosch, quoted that President Hakainde Hichilema said his new government was on the fast track to restoring Zambia’s credibility and credit-worthiness after inheriting an economy strapped for cash and crippled by debt.
He said among other things that; “Inflation is at 15.1 percent, according to official figures and is now the lowest in nearly two years, and the local Kwacha currency has appreciated for the first time in 17 years.”
It is the statement about the Kwacha that caught my attention. It is the second time in a week that the President is affirming that the Kwacha has appreciated for the first time since 17 years ago.
This would mean that the Kwacha has not appreciated since 2005.
EXCHANGE RATE FLUCTUATION AND EXCHANGE POLICY IN ZAMBIA
Zambia adopted a managed float exchange rate system in 1994, when the Kwacha was made fully convertible.
Prior to that, the exchange rate was fixed from the time of independence in 1964.
The foreign exchange rate management, predominantly superintended by the Bank of Zambia has undergone tremendous changes, from the fixed-rate system, through to the auction based system and now the pegged system that was adopted following the floating regime.
In response to some market fundamentals, our currency has frequently fluctuated to appreciating or depreciating.
In fact one of the subsidies to the fuel sector hedges against this factor of frequent exchange rate fluactuations.
In early 2021, the Kwacha depreciation went to an all time low and traded close to K23.00 per US dollar.
Therefore when in May 2021, there was a sudden and rapid appreciation of the Kwacha, an intense debate arose on what economic fundamentals could have changed to warrant such sudden appreciation.
In the May 2021 Monetary Policy Committee (MPC) statement, the Bank of Zambia explained the appreciation of the Kwacha.
“In addition, the significant improvement in copper prices and renewed interest in domestic Government securities by non-resident investors are supportive of the foreign exchange market and in turn lower inflation going forward.”
“The strong recovery in copper prices to the current level of US$9, 521 per metric tonne from a low of US$4, 745 in March 2020 has contributed to sustained strong export earnings.
“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.”
The MPC of the central bank meets quarterly to decide on the Policy Rate.
However, the MPC can meet at any other time during the year should conditions warrant a change in the monetary policy stance.
The local currency has since May 2021 been bullish and has traded as low as K15.50 just before the August 2021 general elections.
So to hear the President repeatedly state that this is the first time the Kwacha has appreciated in 17 years despite the open facts, is clearly concerning.
In fact, the Kwacha has continued to depreciate since his election and now stands at around K18.