Zambia’s new-found political stability boosts local currency

“Following the general elections on 12 August, the Kwacha gained 30% against the dollar to hit K15.89 ($0.93),” Besnat Mwanza, the director of communications at the Bank of Zambia (BOZ) tells The Africa Report.

It is a remarkable improvement from July 2021 when the Kwacha fell to K22.6 per dollar.

“There was euphoria over HH’s win, [because] of widespread recognition that [defeated president] Edgar Lungu’s economic risk-taking was unsustainable,” Stephen Chan, professor of Africa’s economies at the SOAS, University of London, tells The Africa Report.

“[The] euphoria was over the prospect of a more responsible economic policy emanating from Zambia.”

Back on track

Mining liberalisation, and a debt restructuring programme – following default on debt repayments in 2020 – and high commodity prices have also had a positive impact on the performance of the local currency.

A clear example of Zambia’s positive business upturn is that revenue from the country’s exports increased by 14.2% to $5.9bn in 2021. According to the Bank of Zambia, copper contributed $4.4bn to total earnings that year. In another drive to boost exports, local mining company First Quantum announced a $1.25bn expansion of the Kansanshi Copper mine in May this year.

This is coming from investor’s belief that Zambia’s economy is now in reliable hands

In order to avoid another default, Zambia hopes to see part of its $32bn debt written off by creditors. China, its biggest creditor, will co-chair a debt negotiations committee, set to begin in June. In December 2021, Zambia reached a staff level agreement with the IMF on an extended credit facility worth $1.4bn over three years.

The government has also been on a borrowing spree as investors are keen to get their hands on local currency bonds issued by the Central Bank. At the end of December 2021, the size of Zambia government securities increased 7.1% to K192.9bn ($11bn).

Non-resident investors owned K54.1bn ($3.1bn) compared with K44.8bn ($2.5bn) at the end-June, reveals the Bank of Zambia. At the same time, the average stock price on the Lusaka Securities All Shares Index has risen by 35.4% to K6,059 ($350) by December 2021.

“This is coming from investor’s belief that Zambia’s economy is now in reliable hands,” says Zama Phiri, an independent economist in the capital Lusaka. “[Therefore], if demand for our securities, bonds, and bills continue to soar, you can expect more upward mobility of the Kwacha’s value.”

Drawbacks

Though copper prices remain elevated globally and Zambia’s current account is in surplus – at around $738.4 in December 2021 –  the Bank of Zambia warns that there is need for cautious optimism when it comes to its effect on the currency.

Restoring macroeconomic stability and creating an investor-friendly economy for foreign direct investment to flow in is critical for channelling back export earnings into the economy, says the Bank of Zambia.

In fact, pinning the Kwacha’s hopes on global commodities prices, especially copper, has long been one flaw of Zambia’s economy.

“There has never been diversification in Zambia’s economic base,” says Dr. Stephen Chan, who recently returned from Zambia, and whose advice is highly regarded by the Zambian  government.

“The country [relies] on investor confidence, but must also [begin to] refine its copper and other metals,” he says.

In 2015, when the global copper price crashed from $3.83 per ton in September 2012 to $2.05 per ton by November, Zambia’s local currency fell from 13.07 to the dollar to 13.62 in just a day on November 9 of 2015. “We can get hit in the pockets again suddenly if today’s metals prices cool down,”says Phiri. “The Kwacha is not safe for life. Our reserves are too low to shield the Kwacha.”

Currently, the World Bank says Zambia’s reserves are $1.2bn as of end 2020.