In Christopher Mvunga’s debut rate decision meeting, the monetary policy committee kept the benchmark interest rate unchanged at 8%. The committee had previously cut rates 125 basis points to 8% the lowest Zambia has seen since the policy rate started being tracked on account of lacklustre demand. In arriving at today’s consensus, the Bank of Zambia were alive to the risks in the economy posed by fiscal fragilities that were compounded by Zambia’s ballooning debt obligations while weighing the need to claw back growth in a feeble environment. Private sector activity remains constrained as measured by Purchasing Managers Index – PMI which remains in negative territory for 20 months in a row last printing at 48.9 from 46.6 as significant recovery from May lows of 34.7 the weakest Zambia has ever seen.
The copper producer last week defaulted on its coupon payment of $42.5million of its 2024 Eurobond which has attracted international attention and has $121million worth of coupons falling due in the next 5 months. Pockets of reprieve were observed in the period with the G20 extending its suspension of interest for country’s to June 2021 including Zambia while two Chinese Banks namely China EXIM and China Development Bank deferred the copper producers debt obligations to December 2020 and April 2021.
Prior to the MPC meeting, Zambia’s social media took to reporting that the central bank would ban opening of dollar accounts following the dollar scarcity in the market. The social media publication hinted that the central bank was preparing to reign in the $2.6billion in customer deposits in the market.
In response with his opening remarks, Governor Mvunga commented:
“Please tarnish the social media concerns around the propaganda around the central bank banning dollar accounts in light of dollar scarcity the market faces,” Zambia’s Governor said. We have no intentions of doing that. Such inaccurate news has a way of pricing into the markets to destabilize prices.
The red metal producer is in the middle of a debt restructure negotiating process driven by Lazard Frere’s with China and Bond holders seeking reprieve to cushion it from COVID induced impacts. Zambia has accumulated arrears in excess of $500million for which it has reached out to all its commercial lenders for service suspension.
Read also: Zambia’s MinFin justify default on ‘dollar-bond’ coupon, IMF team expected next month
“Supply demand imbalances have persisted in the Zambian market exerting pressure on the exchange rate, Christopher Mvunga said. The Governor acknowledged the fiscal strains that Zambia currently is facing and that successful debt sustainability good for both fiscal fitness and macroeconomic stability.
With the default and subsequent stances by offshore players, the market anticipated greater currency sell-off pressure. However given that the market had already priced in the default and the current dollar scarcity remains a backstop for potential depreciation.
The Kwacha Arbitrageur
