Finance Minister Dr Bwalya Ng’andu says the kwacha is not in free-fall because its sharp depreciation experienced in November, 2019, was exacerbated by huge payments needed for emergency electricity and fertilizer imports, among others, which are only limited to this month.
And Dr Ng’andu says measures will soon be announced to Parliament to illustrate how government is working to reduce debt servicing obligations and demonstrate that the country has the capacity to slowly build up its low international gross reserves.
The Minister was responding to a question from Kapiri Mposhi UPND member of parliament Stanley Kakubo on the cause of the kwacha’s rapid depreciation, the effects it would have on the economy and the mitigating factors that government had put in place to cushion the adverse effects, Friday.
The kwacha sharply depreciated to hit the K14.00 per dollar psychological barrier by mid-November for the first time in six months, owing to a resumption in high demand for the greenback on the local market, from trading at an average K13.29 per dollar by the end of last month.
“Mr Speaker, in response, I wish to inform the House that the recent depreciation has largely been attributed to the following reasons: high demand for exchange related to the importation of emergency electricity to boost domestic supply and petroleum products and fertilizer; low foreign exchange supply in the market, coupled with lower production and supply from the mining sector and relatively low foreign exchange reserves, amid elevated debt service that continues to have a negative impact on market sentiments. The House may also wish to know that prior to November, 2019, the kwacha exchange rate against the dollar has been relatively stable. However, the kwacha has weakened against major convertible currencies, such as the dollar, specifically in November, 2019, with the kwacha depreciating approximately 5.6 per cent on a year-to-year basis; the kwacha has depreciated by 17.6 per cent,” Dr Ng’andu said.
“Mr Speaker, during the recent depreciation of the kwacha against the us dollar, the following measures were undertaken: the Bank of Zambia intervenes to dampen volatility in the market, tightened the Monetary Policy stance to help contain inflationary pressures by raising the Policy Rate from 10.25 to 11.50 per cent and Overnight Lending Facility rate at which commercial banks borrow from the central bank on an overnight basis from 18 to 28 per cent. The effects of the depreciation of the kwacha on the economy include the following: sustained depreciation of the currency can lead to inflationary pressures and consequently lower growth due to negative effects on investments and consumption. Depreciation raises the cost of government foreign exchange related costs, mainly the servicing of external debt, thereby, negatively impacting on the spending on other programmes and raises the cost of doing business for companies.”
He, however, added that there was need to increase the country’s exports driven by the private sector and supported by investment in infrastructure, education and health sectors.
“Mr Speaker, it is important that we understand that there is a relationship between exporting and importing. If we import more, we put pressure on the currency, and if we export more, we earn foreign exchange, which will be able to stabilize the currency. Now, this effort must be driven by the private sector supported by investment in infrastructure, education and health. The House may wish to note that in order to mitigate the adverse effects of the depreciated kwacha, in the short-term, the government, through the Bank of Zambia, has tightened the Policy Rate. The measure is aimed at contributing to the major macroeconomic stability, including mitigating inflation rate. Sir, in the medium-term, the government has a strong policy framework in the Seventh National Development Plan and the Economic Stabilization and Growth Programme of promoting the diversification of the economy, which is key to sustaining macroeconomic stability and stronger economic growth is building the capacity of the economy to produce and export more goods and services,” he said.
And in response to a follow-up question from Zambezi East UPND member of parliament Brian Kambita on hope left for Zambians amidst a free falling Kwacha, Dr Ng’andu dismissed the notion that the local currency was in free-fall, reiterating the BoZ’s action to contain the situation.
“Now, referring to the kwacha as ‘free-falling’ is another exaggeration because it’s not free falling! The central bank, as I have mentioned, is taking a number of measures to try to cushion the impact of the factors in the market that are causing the kwacha to lose value to, like I said, reduce the demand for the dollar in the market and one of the measures being taken is by increasing the Policy Rate and attempting to reduce the liquidity in the market,” he replied.
“Mr Speaker, it is a gross exaggeration to say that the reserves are at the lowest ever, I don’t know whether the member means since the beginning of time, but if that’s what he means, that is not the truth. Yes, the reserves are low, but this House has been informed before that from January, this year, the position of the foreign reserves has remained at US $1.4 billion, which is about 1.6 months of import cover, and we have said before that the target we want is 3 months of import cover, meaning that we have to take measures that will help us to get the level to 3 months of import cover. I have also mentioned that as we to address the issue of managing the debt, and constrict the fiscal space, we will be able to release the pressure on the reserves from that perspective.”
And Dr Ng’andu, the former BoZ deputy governor for operations, announced that measures were being put in place to regain the kwacha’s stability, adding that factors that had affected the local currency this month, such as the payments of power imports and fertilizer, were a one-off.
“So, the measures that this House will soon be informed of, which will show the effort we are making in trying to reduce the debt servicing obligations arising, will in fact be able to demonstrate that we have a capacity to begin to slowly build up the reserves. So, what the central bank is doing is reducing the amount of demand on the dollar that’s arising from kwacha liquidity in the market. So, the measures are there, the central bank is trying its best to stabilize, but I need to indicate that the pressures for November (2019) are specific and they are limited to just November; going forward, they will not repeat themselves at least for the next few months,” said Dr Ng’andu.