Emergency MPC for currency quagmire? Zambia urgently needs IMF bail out

Analysts in Africa’s second largest red metal hotspot Zambia are left guessing whether the central bank will call for an emergency monetary policy meeting or leave the currency to slide even further after hitting an all time low of 15.2/14.9 for a unit of dollar in 05 December trading. The Kwacha slide 3.7% in excessive dollar demand for energy and agriculture funding in thin dollar liquidity trading leaving the local unit vulnerable to loss streaking. Asset sell off pressure is also mounting as off-shores exit govie security positions given waning confidence in the copper producer.

The central banks quagmire: Zambia’s reserves have dwindled to under one and half yards in dollars with import cover of 1.6 months, a dire quagmire position for the central bank. Governor Dr. Denny Kalyalya hiked the benchmark interest rate 125 bps to 11.5% with a 1,000 bps adjustment to emergency funding overnight rate to 28% which have not shown any positive results as the copper currency weakens further. Statutory reserves were left unchanged at 5% which most players believe was the mistake the central bank made in the November rate decision meeting.

Bottomed monetary policy: The Bank of Zambia, has the mandate to call for an emergency monetary policy meeting in such times but market players are left wondering whether or not this is coming. The urgency is so bleak and vague. It is vivid that central bank policy has bottomed with very little options to tame the slide while leaving room for private sector growth but for the fiscals to align aggressively. Article IV mission team report highlighted a deterioration in Zambia’s economic position exacerbated by fiscal vulnerabilities and drought effects. The report called The last two central bank communiques reflect a weary tone from the monetary side which is bearing the brunt of the dislocated fiscal side. Market analysts are left wondering if their exists political will to restore the red metal producer to fiscal fitness.

IMF bailout package: Zambia needs an urgent bailout package from the Washington based lender the International Monetary Fund (IMF). The copper producer has for over 2.5 years peruses a package but in vain but for its unsustainable debt position and balance sheet vulnerabilities that have made discussions stall with little fruition. With a new finance minister who is pro Bretton Woods, Zambia stands a better chance of perusing the IMF route to improve its investors flows, sentiment and dollar debt pricing in the international capital markets should it contemplate refinancing of its 2022,2024 and 2027 maturing Eurobonds that are currently the worst performing emerging market dollar paper in the world. Credit default spreads on Zambia’s dollar bonds have blown out ranging between 1,750 and 2,200 basis points depicting a deep decline in offshore investor sentiment. This is breeding further asset sell off pressure as off-shores want out of Zambia’s government security positions given perceived risks.

Ballooning Inflationary pressure: With currency risks very high, annual volatility shifts to under 11% from 9% while risks to inflation just widened and December readings could reflect a massive jump justifying the 12-15% projection earlier made. Other risks on the horizon include fuel price hikes by the energy regulator given that that 2.5% psychological trigger was breached.

The Kwacha Arbitrageur