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The Appreciation of the Kwacha Accelerated by Zambia’s Staff Level Agreement on the International Monetary Funds’ Extended Credit Facility

Economy The Appreciation of the Kwacha Accelerated by Zambia’s Staff Level Agreement on...

By Bernadette Deka Zulu – PMRC Executive Director

In the past few days, the country has witnessed a progressive positive performance of the Zambian Kwacha against major trading currencies. The appreciation of the kwacha has been due to the positive sentiments surrounding the International Monetary Fund (IMF) Staff Level Agreement with the Zambian Government reached on the 3rd of December 2021. The Zambian Government reached a Staff-Level Agreement on a programme under the IMF’s Extended Credit Facility (ECF) that envisages provision of financial support of US $1.4 billion over three years. This news has stirred investor confidence, which has seen the appreciation of the kwacha. The USD-ZMW pair opened the trading session on Monday 6th December 2021 parroted at K17.78/K17.83 and closed at K17.54/K17.59, 1.57 per cent stronger than K17.82/K17.87 as of Friday 3rd December 2021. As of Friday 10th December 2021, the dollar was trading at 15.90/16.21 against the USD.

The announcement of the Staff Level Agreement has led to the oversubscription in bond issuance powered by inflows from non-resident investors making purchases of Government securities, subsequently leading to an improvement in the availability of foreign exchange. Secondly investors and other persons holding on to dollars and other tradable currencies have begun to offload tradable currencies onto the market to buy the kwacha in anticipation of further appreciation of the kwacha against the dollar and other currencies.

This is not the first time that the country has experienced a rapid appreciation of the kwacha due to an announcement of an IMF deal, as this was witnessed when Government received the US$1.3 billion Special Drawing Rights (SDRs) in August 2021, which saw a sharp appreciation of the kwacha after months of depreciation. With the SDRs, came an increase in the country’s foreign reserves, which helped build external resilience, and supported relative stability in the foreign exchange market, which facilitated foreign and domestic investment flows.

It must be noted that while the bond issuance to non-residents has increased foreign exchange inflows for the time being, this measure may not be sustainable in long-term for the stability of the country’s exchange rate. Bonds being sold currently to non-residents (foreign creditors) means that there will be outflows in foreign exchange later in future once bonds mature thereby causing demand pressures in the foreign exchange market which will require the country to plan for, to avoid a slump in the depreciation of the kwacha.

The Staff Level Agreement on the Extended Credit Facility (ECF) demonstrates positive strides made by Government towards restoring macro-economic stability and improving the basis for further economic recovery. Given the IMF deal, it is expected that fiscal deficit will be narrowed as Government will ride on the expenditure under the IMF programme that will allow for priority spending which will build confidence in the financial market players. This, calls for more spending in economic sectors such as Agriculture (Agro-processing, research and development and improvement in extension service delivery), Manufacturing and Tourism as these are productive and sustainable earners of FOREX as well as drivers of the economy that will unlock additional resources for the repayment of the current bonds being issued by the Government.

Lastly, PMRC hopes that the long term currency appreciation and stabilisation benefits will translate into the reduction in prices for major commodities such as fuel and electricity in view of the pending removal of subsidies in these sectors. The sustainability of the kwacha appreciation is important in reducing the inflation rate due to cheaper imports and lower prices. PMRC commends Government on taking a bold decision of reaching the IMF deal in the shortest possible time, as this will go a long way in providing critical budgetary support to the 2022 national budget.

21 COMMENTS

  1. This shouldn’t comfort anyone. It shows how weak and vulnerable our Kwacha is. Last time CK made derogatory remarks about ECL’s corruption the Kwacha depreciated! I’d rather the exchange rate be influenced by activities like production. We can’t have a currency whose value is affected by mere sentiments and you say you have a brilliant BoZ Governor? It doesn’t make sense. I neither need a strong nor weak Kwacha, I want a stable Kwacha!

  2. This shouldn’t comfort anyone. It shows how weak and vulnerable our Kwacha is. Last time CK made derogatory remarks about ECL’s corruption the Kwacha depreciated! I’d rather the exchange rate be influenced by activities like production. We can’t have a currency whose value is affected by mere sentiments and you say you have a brilliant BoZ Governor? It doesn’t make sense. I neither need a strong nor weak Kwacha, I want a stable Kwacha! Next time Mwanza Mutale will hug Sean Tembo it’ll affect the exchange rate. Are we safe?

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  3. Kikikikiki just one day appreciation and it has started sliding again….applying a band aid on a wound that requires surgery…..HH will end up as the worst President in the world

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  4. But things are getting expensive…..so who’s fooling who…..Kwacha just appreciates one day and it start losing value again….total manipulation…it will end in tears….people are complaining K1000 is nothing now in Zambia

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  5. So what does it mean exactly for the currency to strengthen against the dollar? It appears to me we are still a consumption-based society; happy to import stuff we can frigging make ourselves. What is the balanced level that works for both the consumers and producers? I am asking for a confused friend … and myself.

  6. @ Deja Vu my dear brother don’t mess with Politicians….once they get what they want…forget….now HH is enjoying all those Guard of honor parades he’s receiving on his foreign trips….and that’s the power that gets to their heads….

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  7. @Kalok
    My thoughts too…why always rejoicing on the dollar…it’s like Zambia just depends on imports….we have zero confidence in our own products and our own currency

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  8. There is nothing she is writing here but stuff she just copied somewhere here she does not even understand…her PF boyfriends are no more!!

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  9. Stability of the currency must be achieved. Under the Mwanawasa -Banda regimes were 3000s (3) to USD. Equally important is job creation. Without jobs it’s nothing, that’s how Ripiah lost, according to Guy Scott.

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  10. What nonsense by the PMRC. There were multiple dollar in-flows by one of the mines, which of course translates in appreciation. If those in-flows continue appreciation will also continue; if not depreciation will return. No staff level agreement has got anything to do with it

  11. BanaMumbi, of the Bashimba Tv drama said” abantu nga baipusha ati ninshi umutengo was malata waninina?, ati kulandafye ati na dollar nayo naikwela”.This clearly shows that the grassroot do not benefit from the dollar, but the elite.

  12. Correct Sauloshi.It favours those who live on luxurious imports.I was sad after reading on a social what one Zambian lady said., I don’t know if she is a nutritionist who said eating maize meal makes one dull, hence zambians are as a result of that.It clearly shows that our staple food is useless since it makes to be dull.

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