The Bank of Zambia has to date pumped in US$ 178 million into the foreign exchange market to prevent the further depreciation of the Kwacha.
Bank of Zambia Governor Michael Gondwe told a media briefing that the central bank had to intervene in order to support the relatively low supply of foreign exchange and moderate volatility in the market.
Dr Gondwe explained that the likely impact of these relative tightening measures is to assist in reducing liquidity levels and to some extent dampen exchange rate pressures.
He said since the beginning of 2014, the Kwacha has depreciated against the US dollar by 7.8 percent to trade at an average of K 5.9406 per US dollar from an average of K 5.5126 per US dollar at the close of December 2013.
“Zambia’s economic growth and increased integration with the world economy has implied that international economic development have had a significant impact on the exchange rate. More recently for instance, the decision by the US Federal Reserve Board to reduce the amount of US dollar liquidity supplied through its quantitative easing program has broadly affected several emerging markets including Zambia’s,” Dr Gondwe said.
He added, “the decline in the average price of copper to 7,010 per tonne at close of February from 7, 360 per tonne in December 2013 has had an adverse impact on the kwacha due to the high correlation between copper prices and market sentiments of the Kwacha dollar exchange rate.”
“Recent developments in the foreign exchange markets have raised concerns not only to the Bank of Zambia but also to the public at large. In some cases this has led to speculative behavior and panic buying of the foreign currency and thereby inducing more pressure on the exchange rate. Developments in the foreign exchange market reflect responses to the country’s growth needs and changes in the international environment,” Dr Gondwe said.
“Above all, this is expected to steer inflation developments towards the end of the year target of 6.5 percent and Government’s growth and employment objectives,” he said.
Dr Gondwe said a strong depreciation or a strong appreciation are not desirable outcomes for sustained growth and stability of any economy.
“In 2007, the Kwacha appreciated by 7.2 percent against the US dollar. This hurt the exporters of non-traditional goods especially the floricultural and horticultural products as they lost competitiveness. On the other hand, steep depreciation makes the imports of capital goods expensive and in inflationary,’ Dr Gondwe explained.
He added, “The Bank of Zambia is still committed to ensuring that the exchange rate remains relatively stable and competitive and will therefore endeavor to take all the necessary measures aimed at minimizing exchange rate volatility while at the same time exploiting opportunities that will arise to accumulate reserves.”
Dr Gondwe said successful management of exchange rate volatility will need implementation of prudent fiscal and monetary policies within a flexible exchange rate regime.
On the statutory instrument 55 introduced in July 2013, Dr Gondwe said the Central Bank is working with the Zambia Revenue Authority to develop an electronic monitoring systemwhich will enhance information exchange on the flows and assist ZRA to follow up on tax compliance.
He said the system is currently being tested and will be rolled out once the tests are completed by end of June 2014.
“Since the implementation of S1 55, the BoZ has observed that corporates are increasingly becoming more transparent in their disclosures and reporting cross border transactions.”
The Central Bank Governor also revealed that Gross international Reserves have decreased to US$ 2.673 billion at the close of February 2014 from US$ 2.751 billion at end January.
He added, “The decline in reserves was mainly due to foreign exchange sakes aimed at supporting the market and payments related to oil procurement.”
The Kwacha has fallen sharply over the last six months against major international currencies but posted some significant movements in both selling and buying yesterday opening at 5.945-5.965 and closing lower at 5.915-5.935.
Standard Chartered Bank has maintained its outlook for the Kwacha for levels in the region of 5.900-6.000 for the remainder of the week.