Zambia may be in no mood to tolerate much more currency depreciation, but it will be hard-pressed to prevent it.The central bank increased its overnight lending rate by 10 percentage points on Friday to a record high of 28%. The goal was to instill “stability in the market and to rein in inflationary pressures,” it said.
The kwacha has depreciated 4.7% this month against the dollar, almost as much as Chile’s peso, the world’s worst performer, leaving it 15% weaker this year. Inflation, meanwhile, accelerated to a three-year-high of 10.7% last month.“The central bank is looking to tighten kwacha liquidity, perhaps to quell demand for foreign exchange,” said Phumelele Mbiyo, a senior economist at Standard Bank Group Ltd. in Johannesburg.
The Monetary Policy Committee will also increase the copper producer’s base rate by 100 basis points to 11.25% on Wednesday, Mbiyo predicted.
There’s no guarantee the monetary tightening will work. Markets have long fretted about Zambia’s external debts, which the kwacha’s decline will only make more expensive to service.
Zambia’s dollar-bond yields average 19.6%, according to Bloomberg Barclays Indexes. That’s far into distressed territory, with only Argentina and Lebanon in a worse position.
The Southern African nation has $3 billion of Eurobonds outstanding. Its ratio of debt to gross domestic product will rise to 92% by the end of 2019, triple the figure from 2015, according to the International Monetary Fund.
The situation is exacerbated by the government’s struggle to rein in spending and a severe drought, which is hammering agricultural output and hydropower generation.
“The Bank of Zambia is in a challenging position,” Mbiyo said. “Most of the pressures facing the economy are either due to exogenous shocks because of the drought conditions earlier in the year or due to fiscal-policy conduct.”