Kwacha Responds to Market Signals Amid Policy Shifts

In a recent analysis by Economist Kelvin Chisanga, it has been observed that the Zambian Kwacha is facing downward pressure, primarily in response to recent policy changes and market dynamics. 

Mr. Chisanga sheds light on the key factors influencing the Kwacha’s performance, offering valuable insights into the currency’s current situation.

According to Mr. Chisanga, the prevalent use of the US Dollar for importing essential commodities such as fertilizers, fuel, medicine, and consumer goods during the holiday season is a significant contributor to the Kwacha’s depreciation. 

This heightened demand for the Dollar within the local market has put the Kwacha under considerable pressure.

The Kwacha is notably reacting to signals from the market, with much of its response attributed to adjustments made to reserve ratios. 

These adjustments, while aimed at curbing inflationary pressures, have raised concerns about potential inflationary spikes by year-end. 

A weakening local currency may further exacerbate this situation, potentially resulting in an increase in price growth.

Mr. Chisanga points out that the recent increase in the statutory reserve ratio, effective from November 13th, is expected to impact key economic fundamentals and could lead to an increase in the monetary policy rate. It is anticipated that this policy change may entail a 100 basis point increase.

One of the significant challenges facing the Kwacha is its exposure to a strong US Dollar environment, leading to trade imbalances between imports and exports. 

Low copper production, coupled with robust regional demand for agricultural products, has hindered Zambia’s exports, subsequently driving up the demand for the US Dollar in the local market. As a result, the Kwacha has experienced a depreciation of around 25% since the beginning of the year.

Furthermore, policy measures have played a role in affecting Dollar inflows. Restrictions on transaction limits, particularly at border posts like Kasumbalesa, have constrained the inflow of foreign currency into the country, limiting mechanisms that could help stabilize the supply of foreign currency.

The Kwacha’s performance in the coming months will be closely monitored as it navigates market dynamics and responds to policy adjustments.