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Kwacha Struggles Despite Central Bank Efforts

The local currency continues to face downward pressure despite the concerted efforts by the Bank of Zambia (BOZ) to stabilize the Kwacha, with experts cautioning about the looming challenges reminiscent of past economic crises.

Despite injecting a substantial sum of $26.75 million into the market last week, the Kwacha remains bearish, reflecting the complex dynamics at play in the Zambian economy. 

Economic analyst Kelvin Chisanga underscores the severity of the situation, likening it to the challenges witnessed during the 2008 global financial crisis and the 2020 COVID-19 pandemic.

Chisanga points to a combination of factors contributing to the Kwacha’s volatility, including supply and demand imbalances, as well as market sentiments. 

While there have been sporadic moments of recovery, such as the surge observed on Monday, February 20th, they have been short-lived, giving way to sharp declines, as seen in the subsequent ‘flash crash’ on Tuesday.

One of the contributing factors to the temporary appreciation of the Kwacha has been increased confidence among mining investors, who have been spending in the local economy, leveraging a weak Dollar. Additionally, BOZ’s interventions, including offloading US Dollars into the market, have provided some relief.

However, Chisanga warns that this upward momentum may be short-lived, as underlying economic fundamentals do not support sustained appreciation. 

He predicts a potential resurgence of the Dollar’s strength, posing further challenges to the Kwacha’s stability. Escalating prices of essential goods, exacerbated by a prolonged dry spell, further compound the economic challenges.

Of particular concern is the impact on food prices, with the dry spell threatening food supply both locally and regionally. Chisanga advocates for strategic government intervention, including subsidies, to mitigate the impact on households. 

However, he acknowledges the potential strain this could place on the local forex market, especially as Zambia may need to resort to importing maize after years of self-sufficiency.

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