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Kwacha appreciation accelerated by Zambia’s staff level agreement on IMF extended credit facility

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By Bernadette Deka Zulu

In the past few days, the country has witnessed a progressive positive performance of the Zambian Kwacha against major trading currencies.

The appreciation of the kwacha has been due to the positive sentiments surrounding the International Monetary Fund (IMF) Staff Level Agreement with the Zambian Government reached on the 3rd of December 2021.

The Zambian Government reached a Staff-Level Agreement on a programme under the IMF’s Extended Credit Facility (ECF) that envisages provision of financial support of US $1.4 billion over three years. This news has stirred investor confidence, which has seen the appreciation of the kwacha.

The USD-ZMW pair opened the trading session on Monday 6th December 2021 parroted at K17.78/K17.83 and closed at K17.54/K17.59, 1.57 per cent stronger than K17.82/K17.87 as of Friday 3rd December 2021.

As of Friday 10th December 2021, the dollar was trading at 15.90/16.21 against the USD.

The announcement of the Staff Level Agreement has led to the oversubscription in bond issuance powered by inflows from non-resident investors making purchases of Government securities, subsequently leading to an improvement in the availability of foreign exchange.

Secondly investors and other persons holding on to dollars and other tradable currencies have begun to offload tradable currencies onto the market to buy the kwacha in anticipation of further appreciation of the kwacha against the dollar and other currencies.

This is not the first time that the country has experienced a rapid appreciation of the kwacha due to an announcement of an IMF deal, as this was witnessed when Government received the US$1.3 billion Special Drawing Rights (SDRs) in August 2021, which saw a sharp appreciation of the kwacha after months of depreciation.

With the SDRs, came an increase in the country’s foreign reserves, which helped build external resilience, and supported relative stability in the foreign exchange market, which facilitated foreign and domestic investment flows.

It must be noted that while the bond issuance to non-residents has increased foreign exchange inflows for the time being, this measure may not be sustainable in long-term for the stability of the country’s exchange rate.

Bonds being sold currently to non-residents (foreign creditors) means that there will be outflows in foreign exchange later in future once bonds mature thereby causing demand pressures in the foreign exchange market which will require the country to plan for, to avoid a slump in the depreciation of the kwacha.

The Staff Level Agreement on the Extended Credit Facility (ECF) demonstrates positive strides made by Government towards restoring macro-economic stability and improving the basis for further economic recovery.

Given the IMF deal, it is expected that fiscal deficit will be narrowed as Government will ride on the expenditure under the IMF programme that will allow for priority spending which will build confidence in the financial market players.

This, calls for more spending in economic sectors such as Agriculture (Agro-processing, research and development and improvement in extension service delivery), Manufacturing and Tourism as these are productive and sustainable earners of FOREX as well as drivers of the economy that will unlock additional resources for the repayment of the current bonds being issued by the Government.

Lastly, PMRC hopes that the long term currency appreciation and stabilisation benefits will translate into the reduction in prices for major commodities such as fuel and electricity in view of the pending removal of subsidies in these sectors.

The sustainability of the kwacha appreciation is important in reducing the inflation rate due to cheaper imports and lower prices. PMRC commends Government on taking a bold decision of reaching the IMF deal in the shortest possible time, as this will go a long way in providing critical budgetary support to the 2022 national budget.

* Bernadette Deka Zulu is PMRC Executive Director

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