KWACHA HAS ENTERED 2025 ON A CHALLENGING NOTE

…..setting four consecutive all-time lows against the US Dollar within the first four trading days of the year, observes Mutwale

Lusaka… Wednesday January 8, 2025 (SMART EAGLES)

Financial Consultant Munyumba Mutwale says the Zambian Kwacha has entered 2025 on a challenging note, setting four consecutive all-time lows against the US dollar within the first four trading days of the year.

Mr Mutwale of Zatu Financial Consultants Ltd, says this depreciation extends a downward trend carried over from 2024, which saw a 3.44% decline in December alone—well above the 2.11% average December devaluation over the past five years.

He notes that despite monetary tightening measures by the Bank of Zambia (BOZ), a combination of global and domestic factors continues to exert pressure on the Kwacha.

Mr Mutwale further notes that over the past three months, the Kwacha has only appreciated on 13 of 64 trading days, underscoring sustained downward pressure.

“January typically experiences the highest depreciation, with an average loss of 5.2% over the past five years. This trend suggests that the current decline aligns with historical patterns and could persist through the first quarter. In H2-2024, the Kwacha depreciated by 13%, following a modest 3% appreciation in H1-2024. This reversal highlights the mounting pressures on the currency in the latter half of the year,” he said this in an ‘analysis’ monitored by Smart Eagles.

“The US Dollar has appreciated 3.36% globally since November 2024, driven by markets pricing in potential policy changes under a Trump administration, including tariff wars and deficit-funded tax cuts. Rising US interest rates, currently at 4.6%, the highest in eight months, exacerbate the cost of acquiring US dollar for countries like Zambia, further straining the FX markets.”

The Financial Consultant indicated that the BoZ’s efforts to mop up liquidity through monetary tightening have been countered by massive bond coupon payouts from the K78 billion in long-term bonds issued during 2020–2021 to settle unpaid government service providers.

“The challenge has been compounded by the introduction of higher par-value bonds in January 2024. These bonds began paying higher coupons than previously discounted bonds starting in July 2024, injecting significant liquidity into the market. The steady depreciation of the Kwacha from K26.01 to K27.99 between July and December 2024 coincided with these liquidity injections,” he submitted.

“This period also saw elevated interest rates exceeding 20%, driven by a national drought, two supplementary budgets, and a growing fiscal deficit. These factors collectively undercut BoZ’s monetary tightening efforts, rendering them less effective in addressing the exchange rate pressures.”

He stated that inflationary pressures and rising consumer prices reflect loose liquidity conditions despite BoZ’s aggressive monetary stance.

Mr Mutwale further indicated that the Kwacha experienced 36 new all-time lows against the US Dollar in 2024, with nine occurring in fourth quarter alone.

“Fiscal policies from 2020–2021 and the realization of higher par-value coupons in mid-2024 are effectively counteracting today’s monetary policy efforts. While BoZ withdraws liquidity through higher policy rates, the Treasury injects it back through significant bond-related payouts,” he added.

Mr Mutwale said the ongoing depreciation cycle is already showing early inflationary signs for the first quarter of 2025.

“Oil markets indicate that petrol prices could rise by an estimated 5%, potentially reaching a new all-time high of K36.39 per liter. This increase is fueled by a combination of the weakening Kwacha and rising global oil prices, driven by crude supply constraints and surging Chinese demand,” he indicated.

“With global crude prices likely to remain elevated and the Kwacha projected to face renewed pressure in March 2025 (based on the five-year average), further increases in pump prices may occur by the end of first quarter of 2025. This will likely drive transport-cost inflation, putting upward pressure on overall consumer prices. While inflation showed signs of slowing in Q4-2024, these developments could trigger a second wave of inflationary pressures early in 2025.”

SmartEagles2025