Zambian Kwacha: Africa’s Worst Performing Currency LOOSE fiscal policy on account of widening government over-expenditure is negating BoZ’s significant steps to tighten monetary policy and containing depreciating kwacha, says the International Monetary Fund. And the kwacha is expected to swing towards marginal depreciation in the short term as the market experiences reduced inflow of dollar from exporters with the currency seen trading between K6.25 and K6.35 against the greenback. International Monetary Fund (IMF) resident representative for Zambia, Tobias Rasmussen, said the kwacha weakened to be one of the two worst performing currencies in Africa amidst volatility on the backdrop of a drop in copper prices, loose fiscal policy and low international reserves. “The Bank of Zambia has taken significant steps to tighten monetary policy, including raising the policy rate and reserve requirements for banks,” he said in an interview. “With tighter fiscal policy too, we would expect the currency to stabilise.” Rasmussen said the IMF was working with the government on designing economic reforms that would comprehensively address the challenges Zambia was facing on the macroeconomic front, covering the fiscal, as well as the external position. “High fiscal deficits should never be ignored,” he said. “Putting the deficit on a firm downward trajectory would help ensure macroeconomic stability, promote private investment, and underpin continuation of the strong growth that the economy has recorded over the past decade.” The IMF also warned that the debt level as a ratio of GDP was going to rise sharply if the government did not remain disciplined to ensure the surging fiscal deficit was contained within the planned trajectory. Rasmussen said Zambia’s external and public debt remained relatively low, and would remain at that level under the government’s planned fiscal adjustment scenario. On the rising fears that sovereign bonds of US $750 million and US $1 billion Zambia has acquired in the last two years might land the country into another debt trap, reminiscent of the pre-HIPC levels, Rasmussen said: “The key challenge is to ensure that borrowed funds are put to good use so that they earn a rate of return that is higher than the interest cost. Zambia has significant investment needs in infrastructure and elsewhere, with many investments offering potentially high rates of return in what is a rapidly growing economy. But it will be important to ensure that the funds are channelled into the most deserving investments and that the projects are well managed, all within a strong debt management framework.” He said borrowing for consumption rather than investment was not ultimately sustainable and that it would be important that the eurobond funds are invested in projects with a high rate of return. Rasmussen said the IMF was projecting strong economic growth of 7.3 per cent in 2014, with a rebound in agriculture and expansion in the mining sector. He, however, said a possible drop in copper prices or a failure to contain the fiscal deficit remained the main downside risks to maintaining Zambia’s strong growth momentum. “Investments in mining as well as the more general expansion in construction and services, and the more recent and very encouraging growth in non-traditional exports, can continue to support strong economic growth over the medium term,” said Rasmussen. And market analysts said the depreciation of the kwacha against major convertible currencies in the last few days was normal. “There is nothing fundamental that has changed in the market and so, these movements of the kwacha we are seeing are very normal,” a market source said anonymously. zambiareports/2014/05/05/zambian-kwacha-africas-worst-performing-currency/
Posted on: Mon, 05 May 2014 09:03:35 +0000
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