We don’t have sufficient forex to defend kwacha – Kalyalya
By Kholiwe Miti
WE don’t have sufficient foreign exchange to defend the local currency, says Bank of Zambia governor Denny Kalyalya.
With the BoZ increasing the monetary policy rate to 11 per cent and statutory reserve ratio to 17 per cent, Dr Kalyalya said the situation ,which “we are experiencing is not a good one anyway”.
“What we are saying is that the kwacha has been under severe pressure. Why this? Well for us we see that there has been excess demand for foreign exchange in our market mostly by the energy and manufacturing sectors amid low supply especially form the mining sector and the other factor is obviously the strengthening US dollar. Now we are not sitting idle by and watch the situation deteriorate. We monitor volatility, the rates that you see posted they already take into account some of the actions that we do to moderate that volatility. But sometimes that volatility is so strong that the moderating actions that we take are kind of overwhelmed. So what we are saying is that to moderate that volatility, to help meet some of the critical imports because if we do not do that we would probably have fuel shortages, we would not have some of the medicine that you need, we would not be current with some of the debt service, so we have to do what we have to do to ensure that the economy is facilitated to move forward,” he said. “So much of the firepower we have had to do that has been facilitated by purchases from the market, notably from the mining companies in the form of mineral taxes. Now we recognise that we do not have sufficient and will not have sufficient foreign exchange to defend the currency. No country can do that. I dare say that even bigger countries they do not do that because you are taking a losing battle especially for a country like ours which is a small open economy. The demand that you see is in two parts, there is the domestic and the external. The kwacha is visible everywhere…So if we tried to say we want to defend the currency, that would quickly be dismissed by the market because we will be overrun. So that is why as a country we adopted the flexible exchange rate to take some of that pressure from the economy.
Now you have seen in recent past other countries they have had to actually do manual interventions by devaluing their currencies to align to the new levels. Now one way to tell whether the currency is misaligned is the emergencies of black market. I would like to find out from you if you know of any black market that is happening here and that gives you an insight that the currency is aligned. Yes there are pressures but people are still going through the established channels to obtain the currency.”
Yesterday, Dr Kalyalya announced that the monetary policy rate has been raised by 100 basis points to 11 per cent due to the current and projected inflation moving further away from the six to eight per cent target band.
“The [monetary policy] committee judged that, if left unchecked, inflation could become anchored at above target levels thereby making it harder to achieve macroeconomic stability. Therefore, in the environment we have found ourselves in, a much stronger policy response is warranted to anchor inflation expectations and bring inflation back into the 6-8 per cent target band,” he said. “The committee also considered stability in the financial sector and sustained progress on fiscal consolidation in arriving at its decision. The positive spillovers from reaching a staff-level agreement on the second review of the IMF Extended Credit Facility on November 20, 2023, and progress on external debt restructuring are essential for macroeconomic stability.”
Dr Kalyalya noted that inflationary pressures have persisted and in October it rose to 12.6 per cent. He said higher food, mostly maize and its products, and retail fuel prices as well as the depreciation of the kwacha against the US dollar have been the major drivers of “these” inflationary pressures.
“In the third quarter, the kwacha depreciated by 5.8 per cent against the US dollar and the pressure has persisted in the fourth quarter. Between end-September and November 21, 2023, the kwacha depreciated by 10.9 per cent to K23.30 per US dollar. Sustained excess demand for foreign exchange, mostly by the energy and manufacturing sectors, amid low supply, especially from the mining sector, and the strengthening of the US dollar on the international market have been the key factors explaining the observed depreciation of the kwacha against major currencies,” he said. “To moderate volatility and help meet critical import requirements, the Bank had to sell a large proportion of the foreign exchange from mining taxes paid directly into the bank in US dollars. In the third quarter, US $173.0 million was sold against the US $256.4 million received as mining taxes. In addition to these sales of foreign exchange to the market, on November 13, 2023, the bank increased the statutory reserve ratio by 300 basis points to 14.5 per cent. Noting the persistence of pressures in the foreign exchange market, on November 21, 2023, the statutory reserve ratio was adjusted by a further 250 basis points to 17 per cent effective November 27, 2023. All these are extraordinary measures we thought were necessary to address an extraordinary situation that we are facing. People may say that ‘aren’t you making things worse’? Well, our view is that the situation which we are experiencing is not a good one, anyway! So we can’t just watch it because it will deteriorate further. We have to take these measures and review them as time goes by so that we can make adjustments as the situation dictates.”
Dr Kalyalya said inspite of the pressures, the sales to the market, and debt service, there was a modest build up in gross international reserves in line with the ECF arrangement.
“In this regard, reserves increased to $2.9 billion, equivalent to 3.2 months of import cover, at end September from $2.7 billion, 2.9 months of import cover, at end June. This was made possible by the second disbursement under the IMF Extended Credit Facility, project inflows, mining tax receipts, and some market purchases,” said Dr Kalyalya.-The Mast