Short-Term Drivers Contributing to Kwacha Appreciation

The Kwacha, the currency of Zambia, has experienced a sudden rebound in performance against major currencies. This comes after the Kwacha faced immense pressure, depreciating by 4.3% in the fourth quarter of 2022, reversing all the gains made since August 2021, and continued on a path of depreciation in the first quarter of 2023, trading at K21.4 against the US dollar.

The Policy Monitoring and Research Centre (PMRC) issued a press statement on the 20th of April, citing the primary factors that have caused the recent Kwacha appreciation. The depreciation in the past was mainly attributed to low foreign exchange supply, reduced economic activities due to loadshedding, and a reduction in offshore flows from portfolio investors looking to participate in the local debt market.

According to the Bank of Zambia, the current account surplus declined sharply in the fourth quarter of 2022, from US$244 million in the second quarter to US$18.3 million. The decline was as a result of a reduction in net merchandise exports and an expansion in services. Exports fell by 6.2% to US$2.7 Billion owing to lower copper and gold earnings, while imports grew by 4.8% to 2.2%, driven by an increase in imports for intermediate and capital goods, particularly fertilizer, machinery, and equipment.

PMRC’s Executive Director, Mr. Sydney Mwamba, said, “There are several factors that have contributed to the sudden Kwacha appreciation, which must be capitalized on to ensure sustainability and the positive trickle-down effect of the currency appreciation on the country’s standard of living.”

Mr. Mwamba noted that the Bank of Zambia’s release of US$443.5 million to stabilize the currency in January, as well as an increase in the reserve ratio on commercial banks’ deposit liabilities by 2.5% points to 11.5%, are producing much-needed results by curbing Kwacha volatility.

He added that “increased copper prices on the London metal exchange is also another driving force to the appreciation of the Kwacha, which surged from around US$8049.86 per tonne in November 2022 to highs of US$9037.95 per tonne in January and trading at US$9030.10 per tonne as of 17th April 2023.”

One of the critical factors that have contributed to the Kwacha appreciation is the positive reports from the IMF spring meetings on Zambia’s request for debt restructuring. Mr. Mwamba stated that this is due to the positive sentiments associated with the credit committee’s agreement that will give guarantees to Zambia as well as provide further relief in terms of supporting the government to restructure its debt.

“It is critical that these sentiments are actualized as soon as possible,” he stressed, “as debt restructuring remains critical in providing a long-term solution to the exchange rate volatility that the country periodically experiences as a result of its trade imbalance.”

Finally, Mr. Mwamba added, “It is critical that the Kwacha’s positive performance translate into higher living standards by lowering the prices of goods and services across the country.”

In conclusion, the Kwacha’s recent upturn is being driven by several short-term factors. However, it is crucial that these positive developments are sustained to improve the country’s standard of living. The success of the IMF’s debt restructuring plan is vital for ensuring the Kwacha’s stability in the long run, and the government must work to ensure that the positive sentiments associated with the credit committee’s agreement are actualized as soon as possible.