Editor's note : President Lungu has issued a formal statement on the rapid depreciation of the Kwacha. The Kwacha today was trading above K10 per US$1. The Bank of Zambia Governor Denny Kalyalya yesterday indicated that he has no plans to halt the depreciation, "It is very clear what our policy is, we are going to maintain a flexible exchange rate". His statement has fuelled further panic with with no end of "bottoming out" in sight. Here is the statement released by State House pertaining to Kwacha issues. It largely repeats what BOZ said recently.
Following the deterioration of the currency and energy situation in the country in recent months, His Excellency Mr. Edgar Chagwa Lungu, President of the Republic of Zambia has intervened to guide monetary and fiscal policy measures designed to stabilise the markets.
The continued difficulties in the global Economy and the unprecedented strengthening of the US Dollar has sent all currencies including our national currency, the Kwacha on a downward spin.
The Kwacha depreciation has in the recent past accelerated largely due to the trade imbalances that we are experiencing because the imports are in excess of the exports which have reduced both in volume and value. This is a major function of low commodity price levels globally. Total exports for the first half of 2015 are 26.9% lower than that recorded in the same period in 2014.
The President has therefore directed the ministries involved in economic management particularly the Ministry of Finance working together with the Bank of Zambia to closely monitor the situation and keep him constantly and frequently appraised. The President wishes to urge all entrepreneurs small, medium and large to increase production of various goods that can be exported to reduce the trade deficits.
There should be a bold drive to increase the levels of production and processing of a wide range of things that are within the country’s reach to reduce on unnecessary imports. A depreciating Kwacha to unreasonable levels has severe cost implications for a country like Zambia, which imports a lot of its requirements, some of which are excessive. The low Kwacha also compounds our external debt servicing.
The President has directed all government institutions to rationalise and minimise in all areas that engender foreign exchange costs. The President also enjoins the private sector to reduce foreign currency related expenditures. He makes a strong appeal to the Commercial Banks to be proactive and on the alert for the many leakages and other illicit out flows without being prodded or policed by the Bank of Zambia.
The President notes that following global economic developments over the past two weeks that have had adverse effects on many emerging and developing economies, including Zambia, the Treasury and the central bank have been closely monitoring developments to assess the resultant impact on the domestic economy and the local currency.
Growth in the Global Economy remains modest and uneven.According to the July 2015 International Monetary Fund World Economic Outlook update, growth for 2015 is projected at 3.3%, 0.2 percentage points lower than in the April outlook.
Growth in emerging markets and developing economies is expected to slow down to 4.2% compared with the outturn of 4.6% in 2014. China's growth slowed down to 6.8% year-on-year in the first half of 2015 from 7.4% recorded in 2014.
In Sub-Saharan Africa, growth is projected to slow to 4.4% in 2015 compared with 5.0% in 2014, largely reflecting the drop in commodity prices that has led to deterioration in external sector performance, particularly for commodity exporters like Zambia.
Zambia remains vulnerable to developments in the global economy. In particular, the balance of payments position has deteriorated reflecting a widening current account deficit. Both traditional and non-traditional exports have declined significantly this year while imports have declined at a slower pace. As a result, the Kwacha has been on a depreciating trend.
In addition, global investors have been anticipating that the US central bank would begin raising interest rates before the end of the year for the first time since 2006. As a result, emerging markets like Zambia have experienced systematic net outflows of capital, creating pressure on their currencies to depreciate.
More recently, the Kwacha has come under immense pressure, largely emanating from global economic and financial market developments.
The major factor has been associated with slow growth in China, the second largest economy after the US. Chinese authorities recently announced changes to their foreign exchange management, a process that resulted in about 4% devaluation of the Renminbi (Chinese Yuan) against the dollar.
Fears that the Chinese economy is slowing down have caused major global stock markets to plummet while emerging markets currencies experienced excessive volatility. The regional currencies that have depreciated include the South African Rand, the Tanzanian Shilling, the Ugandan Shilling and theGhanaian Cedi.
Commodity prices, including copper, have dropped with the Zambian economy impacted adversely through the decline in the price of copper, which has fallen to around US$4,900 per tonne from above US$6,500 per tonne in 2014.
These developments apart from underscoring the long overdue need for the diversification of our economy to reduce dependence on copper, they also provide an opportunity for the country to take practical measures to respond to the challenges of diversification.
Difficult as the situation is, it is an ideal time to actualise this structural transformation. The movements in the exchange rate are sending clear signals that our economy needs an expanded export base and a reduction in unnecessary imports.
“In recent days, we have seen an acceleration in the depreciation of the Kwacha against the major currencies. The increased volatility appears to be reflecting market panic more than underlying fundamentals,” the Head of State said.
“I therefore deem the Bank of Zambia’s current monetary policy stance appropriate in anchoring inflation expectations. I have to this effect directed the Minister of Finance who leads the fiscal policy team to work closely with the Central Bank (which is responsible for monetary policy), to assess additional market intervention measures to address the observed excessive volatility.
The envisaged interventions are designed to calm the markets and allow fundamental factors to be the main determinants of exchange rate movements.
The President regrets there are citizens who have a field day when the country experiences difficulties which arises from external factors beyond our control. Nobody, let alone government, has magical solutions.
The challenges the country faces today are real and unprecedented and should not be reduced to mere political rhetoric. “While I take the lead in providing decisive solutions to these challenges, I ask all Zambians irrespective of political affiliation or any other interests to unite and come together so that we as a nation can pull through these challenges.”
The President wishes to state further that he will announce additional measures in his State of the Nation Address through the National Assembly on 18th September 2015.
The Head of State will provide comprehensive direction to the Nation on short and medium term interventions to cut costs, diversify the economy and reduce the nation’s dependency on copper and hydro power.
(Source : State House)