A DAY after Zambian officials ruled out foreign-exchange controls to halt the kwacha’s 35% plunge against the dollar this year, while stating the country’s intervention strategy to defend the currency had limitations, president Edgar Lungu has stepped in, ordering “additional intervention measures” to keep rein on the turbulence.
Lungu ordered the country’s finance minister to work with the central bank to take steps to reduce volatility in the currency market. They will “assess additional market intervention measures to address the observed excessive volatility,” he said in a statement.
Finance Minister Alexander Chikwanda and central bank Governor Denny Kalyalya had said separately on Thursday that currency restrictions will be a step backward for an economy reeling from a plunge in copper prices.
Zambia earns 70% of export income from the metal.
“They don’t help, they actually accentuate the difficulties,” Chikwanda said on the sidelines of a conference in the capital, Lusaka.
“Even the little forex we have would be taken out if we have control of capital movement. You create panic. It’s not a conducive environment. It’s a recipe for getting the country backward.”
Copper prices near six-year lows have pushed Zambia’s economy into crisis at the same time that a power shortage is forcing mining companies to curb electricity usage.
The kwacha dropped to a record low of 9.9023 against the dollar on Thursday.
Foreign-exchange “controls don’t work because people eventually find a way around,” Kalyalya said in an interview broadcast on state-owned ZNBC radio. “It’s very clear what the government policy is, we are going to maintain a flexible exchange rate.”
Zambia’s policy of running down reserves to defend the kwacha is also limited, Chikwanda said in a speech.
“Our reserves are reducing and this is why you see, even the capacity of the central bank to sort of intervene, measured intervention, is becoming difficult,” Chikwanda said. “Our reserves are not something to write home about. We are now hovering around 2.5 months import cover.”
Foreign-currency reserves fell 30% to $2.6 billion in the year through April 30, according to data from the central bank.
Lungu said the central bank’s monetary policy stance is appropriate to anchor inflation expectations. The bank has kept its key rate at 12.5% after raising it three times last year.
Falling copper revenue has strained the government’s budget, forcing Zambia to raise its deficit target for this year to 6.7% of gross domestic product from 4.6%.
“Our government will have to do some fiscal consolidation,” Chikwanda said. “We have to cut our suit according to the available cloth.” That requires fiscal responsibility, which “means you can’t spend more money than you have,” he said.
Standard & Poor’s, which downgraded Zambia’s credit rating to B on July 2, said the shortfall, on a cash basis, will probably reach 10% of GDP. Including debt payments, it may reach 14%, it said.
“It’s clear that the Zambian economy continues to face headwinds,” Konrad Reuss, S&P’s Managing Director for South Africa and sub-Saharan Africa, said in an interview in Lusaka on Wednesday.
“There is time to get it right. The country has growth potential in many ways. It’s really a balance of finding the right policies now, particularly in the fiscal space.”
Lungu said power shortages in Africa’s second-largest copper producer will reduce economic growth to below 5% this year.