Africa’s second largest copper producer Zambia is in a dollar supply quagmire given the recent dollarization of mining taxes suffocating the supply side of the foreign exchange flows and an arrears dismantling program that has increased demand for dollars. The Zambian authorities through its stimulus package to liquidate a portion of its outstanding to suppliers and contractors paid some Oil Marketing Companies – OMCs with bonds which were rediscounted for cash which is fueling dollar demand as players seek liquidity to fund their line of business.
The recent monetary policy stance has seen a change in behavioral appetite for Kwacha loans a shift exacerbated by a fall in Kwacha interest rates as markets run liquidity flush on expansionary monetary policy.
Other drivers of the demand side are agriculture inputs such as fertilizer funding as the Farmer Input Support Program – FISP and the petroleum energy sectors.
The Zambian central bank has been active in open market operations injecting liquidity that has forced yields on treasury bills lower by between 150 – 385 basis points over a 10 week period which has resulted in a repricing of average lending rates after a 350bps benchmarks interest rate cut to 8% the lowest since the policy rate was introduced. The Zambian market is seeing more dollar loan conversions to kwacha facilities given the low interest rate benefit of expansionary monetary policy.
The losing streak extended. The supply-demand imbalances in fundamentals are manifesting in exchange rate slide at a time growth and consumer demand are weak. The copper currency extended its losing streak having opened the week at 19.225 for a unit of dollar and widened to 19.650 on 27 August after reversing some of the losses to 19.500 levels on 28 August. The central bank has sold over $50million dollars on the open market so far as pressure continues to build up. The Bank of Zambia extraordinarily cut rates 125bps to 8% in the third rate cut of the year as consumer demand shrivels.
Inflation at risk. Inflation has started to ease as food prices ebb but currency weakness does widen cost push effects that could reverse the general decline in prices. Zambia Statistics Agency printed a 15.5% August inflation, 0.3% drop from 15.8% levels in the prior month. Zambia’s biggest threat to inflation is cost push currency effects.
Sudden shift in monetary policy. The copper producer had a sudden shift in monetary policy after Dr. Denny Kalyalya was replaced ex-commercial banker Christopher Mvunga which has been recieved with criticism by the international community which has caused a blow out in credit default spreads on Zambia’s dollar bonds and general asset sell – off pressure. The Washington based lender the IMF in a presser stressed the need for central bank independence for macroeconomic stability purposes especially at a time as this in disease pandemic era. Zambia seeks a Rapid Credit Facility from the IMF and is in talks around a economic package.
The Kwacha Arbitrageur
