THE kwacha’s appreciation against major convertible currencies is temporary because the Bank of Zambia does not have an endless supply of foreign exchange reserves, says financial market analyst Maambo Hamaundu.
And Hamaundu has urged the government to issue prompt and “guarded statements” on the country’s economic outlook when responding to international credit rating agencies and avoid rubbishing them.
The kwacha’s volatility on the foreign exchange market has continued enduring its worst performance last week.
In the last week alone, the kwacha depreciated by around K2, trading at K13 to a dollar,
while one British pound was selling around K20, from an average of K11 as of last Monday.
According to the Bank of Zambia, the struggling local unit had made a minor recovery to now trade at K12.06 and K12.08 by Friday for bid and offer respectively, following a frantic intervention to halt the currency’s terminal slide.
Within one year, the kwacha has lost strength by over K4.50, and depreciated by over 45 per cent, the highest depreciation ever seen.
Hamaundu said BoZ’s intervention in the local financial markets would only temporarily halt the local currency’s depreciation as the central bank’ only had a limited supply of foreign exchange.
He warned that demand for the US dollar was expected to grow in the run-up to Christmas, which would put more pressure on the kwacha’s recovery.
“The issue of putting in forex is temporary; it fizzles out after a period of time. It can even be a day or two. So, it is a huge challenge and it is not sustainable. Pumping in forex into the market that is helping supply is a temporary measure because BoZ does not have an endless supply of forex,” he said in an interview.
Hamaundu said demand for US dollars was still likely to increase owing to the need for several companies to start importing goods in ahead of the festive season.
“Looking at it from a demand point of view, when you are in the month of October, normally this is the time that many businesses are buying goods for the festive season, so you find that demand [for dollar] will probably be a bit higher and it will continue piling pressure on our currency. And I don’t think that the appreciation, which we saw a day or two ago, will be sustained,” he added. “I actually see that the kwacha could continue sliding though I don’t expect the depreciation will be like the Monday one where it moved up to K13 [per US dollar].”
And commenting on finance minister Alexander Chikwanda’s remarks in Parliament on Friday, distancing himself from an “overzealous officer” for reacting to Moody’s downgrading of Zambia’s credit rating to negative, Hamaundu urged the government to issue “prompt and guarded statements” and avoid rubbishing them.
“…What is contained in the rating is what is actually obtaining within our system. We are faced with a situation where an exchange rate is running away; a GDP target which is lower than what was projected; a widening budget deficit, balance of payments, all those are indicative of an economy that is under severe stress,” said Hamaundu.
“For a minister to come out and condemn, it is a delayed reaction and should not have waited to issue a statement in Parliament. Overall, it is important to respond promptly and also issue guarded statements.”