The Zambian Kwacha enjoyed a relative patch of stability in January and February 2020 following significant tightening of the central bank’s monetary policy in November and December 2019.
This changed in the final month of the quarter when the spread of the pandemic put intense pressure on Zambia’s high debt levels, rising fiscal deficits and declining international reserves, causing the kwacha to weaken over 35% against the dollar in Q1 2020.
The Zambian National Bank has lowered its policy rate by 225 bp to 9.25% since then to help cushion the economic downturn of Covid-19 on financial sector stability, economic activity and on the citizens’ livelihoods. The cuts complemented a broader set of measures the Bank had announced earlier. The Bank plans to provide 10 bn kwacha (3% of GDP) of medium-term liquidity support and scale up open market operations both in the form of repos and asset purchases to provide short-term liquidity for commercial banks.
Sub-Saharan African currencies have outperformed many high-yielding EM peers in the wake of the pandemic and have fared better than during the global financial crisis. FX returns in Zambia are roughly in line with Brazil and South Africa despite markets pricing a high likelihood of debt distress. The currency stabilization in Africa may be partly explained by multilateral financing. The IMF allocated $53 bn to low and middle income countries for programme support, of which an unprecedented $20 bn has been allocated to SSA. Oil exposure and high debt levels are the main drivers of vulnerability in SSA FX, but with copper being Zambia’s main export product, the nation’s primary risk factor remains its debt levels.
Copper prices have rebounded strongly after following the Covid-19-induced crash in Q1 2020 as a result of a rapid drawdown of global copper inventories.
In the week ended June 24, copper inventories fell for a sixth straight week to their lowest level in more than 1.5 years, leading to a rally in copper prices on Thursday. 3-month copper rose 0.3% to $5,884.50/t but was trading flatter than previous days as concerns about supplies intensified. Copper and the Zambian kwacha share a historical positive correlation, and the prospect of a continued recovery of copper prices as economies continue to reopen may further contribute to a stronger kwacha in the medium term.
ZMK falling over 35% against USD in Q1 2020
Zambian kwacha moving in line with its main export product copper
Author: Ima Sammani, FX Market Analyst