The kwacha should be expected to remain volatile in 2020, trading at an average K13.28 against the United States dollar, says the Economist Intelligence Unit (EIU).
And the EIU says Foreign Direct Investment (FDI) coming into Zambia is forecast to shrink even further owing to the depressed economic outlook, compounded by a cocktail of factors, which include government’s arbitrary takeover of Konkola Copper Mines (KCM) Plc.
Meanwhile, the EIU have maintained their baseline forecast that the ruling Patriotic Front party would win the 2021 general election, albeit amidst heightened civil unrest and public outrage over the country’s worsening economic conditions.
In its latest Country Report, Thursday, the EIU, a specialist publisher on business developments, economic and political trends, among others, forecast that the kwacha was likely to continue being volatile in the New Year, trading at an average K13.28 next year.
The local currency experienced severe depreciation against major currency convertibles, hitting a record-breaking K15.31 per dollar in early December on the back of heavy electricity and fertilizer imports effected one month prior.
It lost value of around 8.56 per cent in a space of just three weeks from around K14.00 per dollar by mid-November.
But following the Bank of Zambia’s (BoZ) announcement to increase the Statutory Reserve Ratio (SRR) to nine per cent from five per cent, effective December 23, the local currency rebounded to its previous trading position of an average K13.79 per dollar 10 days ago.
“The kwacha has lost considerable value against the US dollar in 2019, partly because foreign investors have been leaving the market, owing to rising sovereign risk and a widening current account deficit. With inflation rising and no IMF programme materialising to reassure investors, we forecast that the 2020 rate will average ZK13.28: US $1, depreciating from an estimated annual average of ZK12.73:US $1 in 2019,” the EIU report read.
It, however, added that the kwacha would only likely rebound amidst improved copper prices on the international market.
“As copper prices rise, the pace of depreciation will slow to ZK13.49 : US $1 (on average) in 2021. From there, the kwacha will begin to appreciate against the dollar, to an average of ZK12.97 : US$1 in 2024 as copper prices continue to rise, to a forecast US$314/lb in 2024,” it stated.
Inflationary pressures are equally likely to persist in the New Year following a hike in fuel pump prices and a 200 per cent increment in power tariffs.
“…This is owing to the inflationary effect of depreciation of the kwacha (as a result of capital flight in the face of high fiscal risks) combining with the inflationary impact in 2020 of a huge electricity tariff hike, which we expect to go through at end-2019 (to pay for the cost of importing electricity from South Africa, currently US $21m per month). Price controls on maize have been introduced to counter food inflation. However, while this will slow price rises for some food staples, it will not be enough to halt an overall increase in food inflation (driven by panic-buying and increases in food producers’ costs – such as the need to rely upon expensive private diesel generators owing to power shortages – being passed along to consumers),” it stated.
And FDI into Zambia is forecast to shrink even further owing to the depressed economic outlook, compounded by a cocktail of factors, which included government’s arbitrary takeover of KCM last May.
“Economic growth in 2020-24 will be considerably below Zambia’s long-term potential. Most significantly, disputed VAT rebates, a botched scrapping of VAT itself, and the forced liquidation of KCM will all hold back investment in the vital copper mining industry. Growth will be weighed down by a slow start in the copper mining industry (recovering fully in 2021) and a contraction in private consumption,” the EIU stated.
“Unexpected increases in the cost of food production (driven by persistent power shortages that have forced food producers to rely on expensive diesel generators) have subsequently been passed on to consumers.”
Meanwhile, the EIU maintained their baseline forecast that President Edgar Lungu would emerge victorious after next year, albeit amidst heightened civil unrest and public outrage over the country’s worsening economic conditions.
“The next legislative and presidential elections are due in August, 2021, by which time the possibility of Zambia’s being caught in a debt trap – a loss of economic sovereignty to creditors – by China will be a key concern among voters. With high debt-servicing costs, fiscal space will also have been tightened, causing salaries to be frozen and subsidies cut. This will damage government patronage networks, forcing it to take a more authoritarian direction, and we expect the upcoming elections to be neither free nor fair. The United Party for National Development (UPND), Zambia’s largest opposition party, along with others, will have to surmount the challenge of an uneven playing field. However, with the government likely to make maximum use of incumbency advantages, our baseline forecast remains for Mr Lungu and the PF to win in 2021,” stated EIU.
“Zambia will, however, face substantial threats to underlying political stability in 2020-24, and simmering popular frustration over economic and political grievances could quickly turn violent.”