Zambia’s Record-High FX Reserves Fail to Stabilize Currency Amid Drought

Zambia’s foreign-exchange reserves reached a record $4.31 billion, yet the kwacha experiences continued depreciation, now at 28.83 against the dollar. This currency struggle derives from increased demands for dollars due to high import costs and the effects of a historic drought. Modifications to the foreign exchange policy offered some temporary relief but failed to resolve ongoing economic pressures.

Zambia has recently attained record-high foreign-exchange reserves, amounting to $4.31 billion, equating to 4.6 months of import cover. However, the nation continues to experience currency challenges due to the adverse effects of a significant drought. As of Thursday, the Zambian kwacha has depreciated by 0.2% to 28.83 against the dollar, marking its eighth consecutive day of losses and positioning it as Africa’s fourth-worst performing currency this year. 

The increase in the kwacha’s decline is attributed to heightened demand for dollars driven by rising imports of energy and agricultural commodities. The Bank of Zambia recently adjusted its foreign exchange policy, allowing commercial lenders to negotiate exchange rates with clients for amounts up to $5 million, a rise from $1 million, which was implemented on March 6. Although this adjustment provided temporary relief, it did not sustain long-term positive effects.

The struggles of the currency are compounded by Zambia’s dependence on hydroelectric power, which constitutes over 80% of the country’s energy supply. Despite recent improvements in rainfall, major reservoirs remain critically low, particularly the Kariba dam, which currently has less than 10% of its usable storage for electricity generation. Consequently, Zambia finds itself importing more electricity while residents rely on imported fuel to operate private generators amidst ongoing electricity rationing.

In summary, Zambia’s record-high foreign-exchange reserves have not alleviated the currency’s depreciation as it grapples with the lingering effects of a severe drought. Despite governmental measures to stabilize currency liquidity, increasing demand for dollars and a critical energy supply situation continue to undermine economic stability. The Zambian kwacha’s persistent decline underscores the need for comprehensive strategies to address these structural challenges.

Original Source: financialpost.com