Bloomberg News

Zambia Central Bank to Intervene to Bolster Kwacha

February 06, 2013

Zambia’s central bank plans to sell more dollars to bolster the second worst-performing currency in Africa and curb inflation, officials said.

The kwacha, which has slumped 9.6 percent against the dollar in the past six months, needs to be at a “more realistic” level, Governor Michael Gondwe said in an interview at his office in the capital, Lusaka, on Feb. 5. The Bank of Zambia has already reduced foreign-currency reserves by $36 million this year to support the local unit, its economic director, Emmanuel Pamu, said in an interview.

Policy makers in Africa’s biggest copper producer are struggling to halt the kwacha’s slide after foreign investment declined and the currency was rebased on Jan. 1. Rising food and import costs prompted the Bank of Zambia to raise interest rates and increase the reserve ratios for commercial banks in the past four months, undermining economic growth.

“The exchange rate needs to be right, because if it gets out of hand it has an impact on inflation,” Gondwe said. President Michael Sata has “legitimate concerns” because of the weaker currency and rising costs in the economy.

The kwacha’s slide is the worst after Malawi’s currency in the past six months. The unit was at 5.345 against the dollar at 6:30 p.m. in Lusaka yesterday.

Finance Minister Alexander Chikwanda said on Feb. 5 the weaker currency may lead to an inflation spiral and boost the government’s debt costs. The kwacha should trade at 5 to 5.10 a the dollar to hold back inflation, he said.

‘Small Advantage’

The depreciation has “a small advantage to the exporters but a huge disadvantage to the economy as we import and service external commitments,” Chikwanda told reporters in Solwezi, near the border with Democratic Republic of Congo.

Zambia’s intervention in the foreign exchange market comes at a time when governments around the world raise concerns about currency wars driven by central banks moving to weaken their currencies to bolster economic growth.

Inflation in Zambia slowed for the first time in six months in January to 7 percent as the government sold stocks of corn, the staple food, to millers at a lower price that it was bought. The inflation rate will probably continue to ease from February to May, Pamu said.

“We are employing some measures to bring the kwacha down to where it should be,” he said. “Dealing with the liquidity levels should bring it back to a more realistic number.”

Dollar Shortage

The kwacha’s slide is mainly due to a lack of liquidity in the foreign-currency market, Pamu said. Zambia’s current-account deficit of $211 million last year, compared with surpluses in the previous three years, has contributed to the weaker kwacha, he said.

The shortage of foreign-currency may be due to mining companies, which account for about 75 percent of Zambia’s export earnings, withholding dollars, Stanley Tamele, head of global markets at Standard Chartered Plc’s Zambian unit, said on Jan. 30.

The central bank plans to meet with mining companies to question them over this, Gondwe said.

“We are a free market,” he said. “It’s not that we are controlling them, but we need to understand” the reasons for the dollar shortage.

To contact the reporter on this story: Matthew Hill in Lusaka at mhill58@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net


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