GOVERNMENT will continue to ensure stability of the exchange rate by using appropriate fiscal and monetary instruments while maintaining a fine balance between the use of such instruments and growth objectives, Minister of Finance Alexander Chikwanda has said.
In ensuring exchange rate stability, Mr Chikwanda said the Bank of Zambia (BoZ) has tightened monetary policy and has been selling foreign exchange to the market, which has led to a relative stability of the currency observed since November, 2015.
He said in a ministerial statement presented to Parliament on the state of the economy on Wednesday.
Mr Chikwanda said the move has been complemented by the treasury, which has increased its operational liaison with the central bank and begun to operationalise the treasury single account to facilitate effective cash flow management.
“As a result of these interventions, the Kwacha appreciated against the US dollar by 8.6 percent to K10.98 in December, 20l5 from Kl3.7 at end September, 2015,” he said.
Mr Chikwanda said the Kwacha has also firmed up against other major trading partner currencies and has currently stabilised around K11.30 per US dollar despite the bias for the larger part of 2015 being towards depreciation of the local currency.
“For instance, the Kwacha depreciated by 24 percent and 20 percent in September and October, 2015, respectively [against the dollar],” he said.
On inflation, Mr Chikwanda attributed the higher inflation, which stood at 21.1 percent in December 2015, to the pass-through effects of the sharp depreciation of the Kwacha in the third quarter of 2015 coupled with the high production costs which were induced by power rationing.
He, however, said inflation is expected to remain high, particularly during the first half of this year, although predicates a sharp decline from the third quarter.
“We project that inflation will close the year at around 15 percent. Over the medium term, we expect inflation to return to a single digit level as the exchange rate stabilises, fiscal deficit reduces and the power situation improves,” Mr Chikwanda said.