The central bank in Africa’s red metal hotspot have hiked statutory reserves 400 basis points to 9% effective 23 December in an effort to curb a currency slide. The Kwacha has been under pressure and currently trades for all time lows breaching the 15 psychological mark despite monetary policy tightening in the November rate decision meeting which saw 125bps to 11.5% while emergency overnight funding ebbed higher 1,000bps to 28%.

Read also: Zambia this week:- Stat reserves and fuel could ebb higher, currency bears to persist

The central banks move to hike reserve ratio will mop excess liquidity from the markets and will cause a cash crunch that could potentially paralyze private sector growth. The statutory reserves ratio peaked 18.5% during the cash crunch era of 2016 after which liquidity was released back to the market when gross domestic product pace contracted to 3.22%. This triggered the gradual relaxation of SRR to 5% in February 2018.

Read also: An energy crisis precedes a cash crunch, Zambia’s 2015 deja-vus scenario

This sterilization measure will now be a daily compliance requirement as opposed to weekly going forward. Grappling with falling reserves under one and half yards the Bank of Zambia has very little ammunition to cushion against external shocks through currency sales on the open markets but could only use crude monetary tools at the expense of private sector expansion in a suppressed environment.

Temporal fix but fiscals risks remain heightened:The action by the central bank is temporal and unsustainable but the fiscal side has to align through fiscal consolidation. Fiscal posture continue to exacerbate sovereign risks which are persistently manifesting in the financial markets through currency routs and elevated yields on government securities.

As at midday in the capital Lusaka the Kwacha sold for 15.63 for a unit of dollar.

The Kwacha Arbitrageur

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