Zambia’s gross foreign exchange reserves figure for December 2019 reported at the economic briefing on 12 February by Minister of Finance Dr. Bwalya Ng’andu revealed muted economic activity. The copper producers reserves rose a marginal $40million to $1.45billion from the period June to December 2019 translating to an inverse growth in import cover to 2.1 months from 1.6 months. The increase infinitesimal growth was attributed to net off taker dollar purchases from the open market as the central bank is a major player in its quest to shore the weak levels coupled with the build up from the mines that now remit mineral royalty taxes in dollars directly to the Bank of Zambia.
Technically not an improvement but signal of muted economic activity. The 2.1 months import cover at $1.45billion level signals a steep decline in level of imports tied to muted economic activity over the period. Mathematically import cover is the number of times the foreign exchange reserve stock level will cover the import bill of a nation. This could in part explain why Zambia posted a trade surplus in December because the level of imports was suppressed significantly below that of exports.
Bullion quantification key to estimating reserve boost. The Zambian government will boost stock of strategic reserves by buying bullion from the 21 districts which will be managed by ZCCM-IH a state owned mineral investment vehicle and will sell directly to the central bank. At present it is unknown the quantity of gold that will be purchased but going with a proxy being Democratic Republic of a Congo (DRC) that mined 32,187kilos of gold (1.13million ounces) translates to $1.77billion in value at current bullion pricing. It’s is very crucial for Zambian authorities to estimate the quantities to understand the build up in strategic reserve stocks this will add to already existing foreign exchange reserves. This also provides an opportunity for build up in sovereign wealth funds over the long term if Zambia gets the model right.
Various metrics for economic activity ranging from Purchasing Managers Index (PMI) to gross domestic product growth confirm the slow down in activity in 2019. Underlying the drivers of weak private sector pulse has been lack of liquidity manifesting in weak aggregate demand generally. Manufacturing cost environments were elevated from energy costs that resulted in higher selling prices.
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