Zambia’s Central Bank Makes Rate Hike to Arrest Free Falling Kwacha

February 3, 2023

Africa’s second largest copper producer, Zambia has made an upward adjustment to the statutory reserve ratio from 9.0% to 11.5%, an increase representing 250 basis points.

The Bank of Zambia announced a rate hike on 1st February 2023 following the sharp depreciation of the local currency, the Kwacha against other major convertible currencies for nearly 3 months in a row.

This is the first rate hike since December 2019 when the Central Bank adjusted the rate upwards by 400 basis points.

In a circular released to all commercial banks earlier this week, the Bank of Zambia stated that the rate hike would take effect from Monday 13th February 2023.

“The minimum statutory reserve ratio on both local and foreign currency deposits, including government deposits and vostro account deposits, will be increased by 2.5 percentage points to 11.5% from 9.0%.” read the circular in part.

The measure which is aimed at addressing the increased volatility in the local currency exchange rate has also been made to safeguard the stability of the foreign exchange market.

The Kwacha has recorded a downward spiral since December of 2022 owing to import of critical agricultural inputs, fuel, and medicines.

As at 31 January 2023, the Kwacha was trading around K19.3/ US$1 compared to K16.6/ US$1 in January 2022.

In an effort to avert the situation, the Bank of Zambia earlier made some sales of foreign currency exchange proceeds from mining companies.

But this has not yielded much as the market has been characterized by weak foreign exchange supply amidst strong demand.

In September 2022, the Kwacha was named the best performing currency globally (against the US dollar) after rallying over 18.5% against the Greenback.

After the August 2021 elections which saw Economist Hakainde Hichilema being elected as Republican President, the Kwacha recorded significant gains owing to positive sentiments arising from confidence in Hichilema’s leadership.

Additionally, inflows from the IMF and World Bank in the form of a US$1.3bn Extended Credit Facility among others saw the currency remain stable for most of 2022.

However, prolonged debt restructuring talks under the G20 Common Framework has caused unbearable fatigue in Zambia’s economic transformation agenda.

In January 2023, both Hakainde Hichilema and his Finance Minister Situmbeko Musokotwane lamented the lengthy debt restructuring process and appealed to Creditors (including China) to expedite the debt restructuring process in order for Zambia to gain the much needed relief and put the country back on a positive economic development trajectory.

The appeal was made when the IMF Boss Kristalina Georgieva visited Zambia.

Zambia is in debt distress after accumulating US$14bn external debt to concessional and private lenders, and needs a deep and comprehensive debt treatment to place public debt on a sustainable path.

Despite embarking on an ambitious mining programme to increase production from 800,000 tons per annum to 3m tons over the next decade, investments in the sector has been slow as investors await conclusion of the debt restructuring process.

Additionally, the wrangles surrounding two of the country’s largest mines, Mopani and KCM have resulted in subdued investments in the mines, and little to no production despite copper prices showing a strong rebound over the last two years.

In addition to the IMF Extended Credit Facility approved by the Board on 31 August 2022, Zambia embarked on fiscal and structural reforms to restore macroeconomic stability and reinvigorate growth.

These efforts have yielded notable results including the reduction and stabilization of the inflation rate from double digit in 2021 to single digit in 2022, and now resting on a comfortable seat of 9.4% as of January 2023. The rate is on track to reach the targeted range of 6-8% by Q1 of 2024.

However, multiple crises such as the Russia-Ukraine war, climate induced load shedding and floods, and rising fuel pump prices are exerting immense pressure on the country’s macroeconomy and may reverse all gains recorded thus far.

The delayed completion of debt restructuring talks has resulted in market fatigue, reversing most of the sentiment induced gains breeding price pressure of which Zambia’s Central Bank seeks to control.

BOZ has joined other Central Banks globally such as the US Federal Reserve, European Central Bank, and the South African Reserve Bank among others in tightening monetary policy during the last two weeks as they seek to tame inflation.

Despite the attendant risks to this action, BOZ has proceeded to implement it given the potential that a prolonged weak currency has in undermining the stable economic environment.

The Central Bank deems that the overarching potential benefits of stabilizing the foreign exchange market at this point, outweigh the perceived adverse effects to the economy.

The Central Bank will review the Statutory Reserve Ratio by June 2023 after monitoring developments in the financial markets over the first two quarters of 2023. The Bank has promised to take appropriate action should he need to arise.

The Author is a Chartered Accountant and Development Finance Expert. He holds a Master of Philosophy in Development Finance from Stellenbosch University, South Africa.