BoZ explains 14.9% Kwacha depreciation

The Kwacha depreciated sharply against major currency convertibles in a space of six weeks, losing value by nearly 15 per cent, triggered by dwindling dollar supply from the mining sector, according to the Bank of Zambia.

And Bank of Zambia (BoZ) governor Dr Denny Kalyalya says he hopes an amicable solution can be found to the ongoing turbulences being experienced in the mining sector to ensure copper production is not disturbed.

Meanwhile, Dr Kalyalya says the effect of the impending Goods and Services Tax (GST), due to be implemented on July 1, 2019, on inflation cannot be predicated before its implementation.

Speaking during the announcement of the Monetary Policy Rate (MPR) in Lusaka, Wednesday, Dr Kalyalya revealed that the Kwacha’s rapid depreciation against major currency convertibles was triggered largely by dwindling dollar supply from the mining sector, whilst demand for the greenback had sharply risen in response to the Ministry of Energy’s demand for petroleum imports.

Dr Kalyalya illustrated how badly the local currency had depreciated between April 1 and May 17 by explaining that supply from the mining sector during the first quarter of 2019 had fallen to US $435.1 million compared to US $683.1 million in the corresponding period last year.

Demand for the dollar to pay for petroleum products on the other hand had climbed to US$216.4 million last quarter up from US$178 million over the same period last year.

The kwacha plummeted to hit K14 per dollar, losing value of 14.9 per cent in just a space of six weeks, from trading at an average K12.20 per dollar in early April.

“This is something of a structural nature, which can only be resolved by structural changes to have procurement of petroleum products is done. But for now, what we see being a challenge is that, at times, they weight to accumulate much kwacha before they go to demand for foreign exchange from the bank. In so doing, it tends to be lumpy, and that sends a signal to other players that there’s so much demand in the foreign exchange market and that triggers some other reaction,” Dr Kalyalya explained.

“In terms of foreign exchange supply, (copper) production had come down; the price of copper has also moved. Generally, when you look at the export-import arrangement, the exports have been coming down as well, which means that the earnings of that have come down as well.”

Asked to what extent the central bank thinks turbulence in the mining sector would continue negatively impacting the kwacha, given the recent happenings on the Copperbelt Province, Dr Kalyalya hoped that amicable solutions to persistent challenges would be found.

Government has since taken repossession of Konkola Copper Mines Plc (KCM) following the Lusaka High Court’s decision to appoint a provisional liquidator into possibly winding up the company.

“In terms of the effects, they do have a bearing on this (kwacha). But what we are hoping for is an amicable solution will be found soon so that they (mining companies) can focus on production. But we can’t comment on the specifics, but what we can say, we are intricately linked…I think in taking whatever action the government is taking is really trying to get the most out of the situation in terms of the economy,” he said.

Meanwhile, Dr Kalyalya said that it was too early to predict what impact the Sales Tax would have on inflation before it the new tax was implemented.

He was responding to a question as to whether the cascading effect of implementing Sales Tax would worsen the inflation outlook.

“Until we get to actual implementation, we may be guessing here. So, the best will be how it is rolled out that’s how we will see whether that aspect of cascading is as pronounced as it is made to be sound,” said Dr Kalyalya.

The central bank governor earlier announced that the Monetary Policy Committee (MPC) decided to hike the Monetary Policy Rate (MPR) by 50 basis points to 10.25 per cent in response to rising inflationary pressures, exchange rate volatility and weak economic growth, among others.

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