THE embattled kwacha yesterday appreciated rapidly after State House instructed BoZ to dump dollars onto the market to support the local currency.
And market experts have warned that the kwacha will fall much faster the moment BoZ leaves the market.
According to market information, the kwacha, which opened trading yesterday averaging K13.44 against the US dollar, had appreciated to K12.36 by lunch time.
After collapsing to its all-time lowest of K14.63 on Tuesday, the kwacha has been strengthening steadily, aided by interventions from the Bank of Zambia. The local currency yesterday saw an over seven per cent appreciation, the biggest one-day gain since 2008.
According to market sources, the interbank was flooded with dollars from the central bank, resulting in the kwacha appreciating against major convertible currencies.
“Our view is that the kwacha will continue to appreciate today [yesterday],” according to the FNB – Zambia newsletter. “If the central bank has actually sold [millions of dollars] to the market, we will see a significant reduction in liquidity, forcing banks to enter into the overnight lending facility which, as mentioned, was increased by currently 25.5 per cent. This could see the kwacha continue to appreciate in the short to medium term.”
And market sources said there were no fundamental changes currently to support the kwacha’s appreciation.
The sources said this week alone, BoZ had offloaded in excess of US $100 million, which had resulted in the kwacha appreciating.
“Normally, the central bank’s intervention is to smoothen the market operations to avoid volatility, but this one is massive,” the sources explained. “The Bank of Zambia has dumped dollars into the market and all of a sudden, interbank is flooded with dollars and this is the rapid appreciation you have.”
The sources said it was risky to create an artificial appreciation of the kwacha when all fundamentals pointed to a weak local currency.
Last week, the central bank announced that it had spent US $510 million this year to stop the kwacha’s fall.
“When it became apparent the kwacha was heading for K15 on Tuesday, there was a clarion call from Plot One (State House) that BoZ does anything within their means to prevent that from happening,” said the sources. “With that instruction from State House that BoZ pours in a lot of dollars to make the kwacha appreciate and hope that it holds in the strong bands,” said the sources. “But this is not sustainable because I don’t think BoZ has got a pocket that deep. And what normally happens in scenarios like this is that once the central bank is out of the market, the rate of depreciation will be much faster.”