Bank of Zambia Governor Denny Kalyalya says the delay in reaching a conclusion for an aid programme with the International Monetary Fund (IMF) was putting pressure on the kwacha currency.
Zambia and the IMF agreed in October to chart a new path towards debt sustainability after the IMF delayed the conclusion of talks with Zambia, saying it was at high risk of debt distress.
The government had said it hopes to get board approval from the international lender by the end of 2017
“It is more of sentiment because the fundamentals point to continued appreciation,” central bank governor Denny Kalyalya told a media conference.
“One of the factors has been that players were looking to the conclusion of an IMF programme before the end of the year.”
The kwacha currency slid to 10.0850 per dollar on Wednesday from about 9.0000 three months ago and traders said it was due to increased dollar demand and short foreign currency supply
And Dr Kalyalya says containing budget deficit was critical to consolidating macroeconomic stability.
He said the current relatively high fiscal deficit and debt levels have continued to pose risks to macroeconomic stability, hence the need to contain them.
While commending the government for coming up with measures to contain the deficit such as reforming subsidies in the energy and agriculture sectors as paying arrears to dismantle the local debt, the central bank chief noted that further steps were required.
Dr Kalyalya however said preliminary data for September shows that the government’s fiscal deficit and the overall debt was in line with the 2017 budget target of 7 percent.
“The Bank of Zambia will closely monitor domestic and external factor developments and stands ready to implement appropriate measures to maintain price and financial system stability and ultimately support economic diversification and growth,” he said.
He further commended the government over its plans to realign its financing away from external to domestic sources in order to avoid debt distress and achieve debt sustainability, saying this will go a long way in helping contain the deficit.
He noted that the country’s economic outlook remains positive, with figures showing expanded output in key sectors such as mining.
The Central Bank Chief said economic growth prospects were expected to improve over the medium term, with Gross Domestic Product (GDP) for 2017 and 2018 projected at 4.2 percent and 5.0 percent respectively from 3.8 percent recorded last year.
He said this was on account of anticipated expansion in the mining and manufacturing output, complimented by higher production in the agriculture sector as well as recovery in electricity generation.
Meanwhile, the Central Bank has cut its benchmark lending rate by 75 basis points to 10.25 percent citing declining consumer inflation, the high cost of credit and low growth.
The bank said inflation has continued to decline over the last 10 months noting that the cost of credit has been high and growth has been sluggish.