LET’S DISCUSS THE CONTINUED DEPRECIATION OF THE KWACHA IN THE FACE OF THE BANK OF ZAMBIAS EFFORTS TO STABILIZE THE CURRENCY.
The recent depreciation of the Zambian Kwacha has raised concerns among economists and citizens alike, especially in the wake of the Bank of Zambia’s consecutive increases in the Statutory Reserve Ratio (SRR). Despite these efforts, the Kwacha continues its downward trajectory. The central bank has implemented successive Statutory Reserve Ratio (SRR) increases. Initially raised by 3% to 14.5% on November 6th and subsequently by an additional 2.5% to 17% on November 22nd 2023 as measures aiming at stabilizing the currency.
Bloomberg’s report on November 6th, ranking the Zambian Kwacha as the world’s second-worst performing currency, provides a broader context to Zambia’s economic challenges. The Kwacha’s position was reportedly just ahead of the Argentine Peso. Meanwhile, Argentine President-elect Javier Milei has expressed intentions to close the Argentine central bank and transition to using the USD. While the situations differ, the Argentine case highlights the potential extreme measures that nations may contemplate in response to currency challenges
The successive SRR increases marked a proactive effort by the Bank of Zambia to address the Kwacha’s depreciation. However, given the limited impact of the first two SRR increments in stabilizing the Kwacha, the question arises whether the central bank will consider a third increment. That being the case, there’s need to assess the effectiveness of the existing measures and carefully weigh the implications of further adjustments. Whether to wait for the current measures to take effect or to proactively implement additional changes is a strategic decision that requires a good understanding of economic trends.
It is possible that a few other underlying issues are overpowering the intended effects of these policy measures.
Tax holidays granted to the mining sector may be playing a significant role in the Kwacha’s depreciation. If mining companies are not contributing their fair share to the national coffers, it can strain the country’s overall revenue, leading to a weaker currency. Therefore, addressing and re-evaluating these tax incentives is crucial for a balanced economic system.
The Mast Newspaper reported on November 23rd that Bank of Zambia Governor Denny Kalyalya stated that the central bank currently does not have sufficient Forex to defend the kwacha. A shortage in foreign exchange reserves can hamper the central bank’s ability to implement effective interventions in the foreign exchange market, potentially limiting the intended impact of SRR adjustments. The reported forex challenges highlight the need for a holistic approach to economic management.
Zambia, as a major copper producer, faces challenges in realizing adequate value from its copper exports. The global copper market dynamics, coupled with potential inadequacies in negotiation and pricing strategies, could be contributing to this issue. The government should explore ways to optimize the value derived from its copper and other mineral resources, ensuring a fair return for the nation.
To strengthen the Kwacha, immediate actions are necessary. These include diversifying the economy beyond copper, implementing stricter regulations on tax incentives for the mining sector, and fostering transparency in resource negotiations. Additionally, the government can also focus on promoting tourism, agriculture and other sectors to attract diverse investments, which will reduce our reliance on copper.
Amid these challenges, the proposal to sell copper in the local currency, the Kwacha, remains on the table. While this strategy may boost demand for the Kwacha, its success hinges on navigating potential risks. Fluctuations in global commodity prices, contractual complexities in the mining sector, and market perceptions must be carefully considered to strike a balance between promoting the local currency and mitigating associated risks. This approach aligns with the idea of promoting domestic industries and retaining a portion of the wealth generated within the country. However, careful considerations must be made to ensure competitiveness in the global market and avoid potential negative impacts on export volumes. Creating a balance between the benefits and risks associated with selling minerals in the local currency is of the essence.
The challenges faced by the Zambian economy extend beyond domestic factors, emphasizing the impact of external influences on exchange rates. Understanding these global dynamics is crucial for crafting effective strategies to address currency depreciation.
The depreciation of the Zambian Kwacha is a complex issue influenced by various factors, including SRR, tax holidays in the mining sector, and challenges in maximizing value from copper and other mineral exports. By addressing these issues through comprehensive policies, Zambia can work towards stabilizing its currency and building a resilient and diversified economy.
Feel free to add your discussions on this and let’s engage objectively for the good of our country.
Xhuzwayo Phiri
