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Zambia: Central bank pumps in US$178 million to salvage Kwacha

The Bank of Zambia (BOZ) says it pumped US$ 178 million into the foreign exchange market to prevent the steep depreciation of the Kwacha and ensure foreign exchange market’s stability.

According to Bank of Zambia (BOZ) Governor, Michael Gondwe, as at 10 March 2014, the Kwacha had depreciated against the US dollar by 7.8 percent to trade at an average of K5.9406 per US dollar from an average of K5.5126 per US dollar at the close of December 2013.

Gondwe said further that the local currency lost against the British pound and Euro by 8.5 percent and 8.7 percent, respectively.

The Bank of Zambia does and will continue to intervene in the market with the view to mitigate volatility and build international reserves, the Bank Governor told journalists in Lusaka Thursday.

He noted that since the beginning of 2014, the exchange rate of the Kwacha against most of its major trade partner currencies has exhibited a depreciation trend.

“Zambia’s economic growth and increased integration with the world economy has implied that international economic development have had a significant impact on the exchange rate,” Gondwe explained.

He cited the recent decision by the US Federal Reserve Board to reduce the amount of US dollar liquidity supplied through its quantitative easing programme which he said had broadly affected several emerging markets including Zambia’s.

The Governor also attributed the depreciation of the Kwacha to the decline in the average price of copper to US$ 7,010.0 per tonne at close of February 2014 from US$ 7,360.00 per tonne in December 2013.

This, he explained has had an adverse impact on the Kwacha due to the high correlation between copper prices and market sentiments of the Kwacha dollar exchange rate.

He said the fall in copper prices was mainly on account of low demand largely from China which has a strong influence on the global economy. The subdued copper prices have to some extent undermined investor optimism.

“In order to support the relatively low supply of foreign exchange and moderate volatility in the foreign exchange market, the Bank of Zambia has, to date, sold US$178 million to the market.

“The likely impact of these relative tightening measures is to assist in reducing liquidity levels and to some extent dampen exchange rate pressures. Above all, this is expected to steer inflation developments towards the end -year target of 6.5%, and government’s growth and employment objectives.”

In 2007, the Kwacha appreciated by 7.2 percent against the US dollar. This is said to have hurt the exporters of non-traditional goods, especially floricultural and horticultural products, as they lost competitiveness. On the other hand steep depreciation makes imports of capital goods expensive and is inflationary.

He said recent developments in the foreign exchange markets have raised concerns not only to the Bank of Zambia but also to the public at large and that in some cases this has led to speculative behavior and panic buying of the foreign currency and thereby inducing more pressure on the exchange rate.

“Developments in the foreign exchange market reflect responses to the country’s growth needs and changes in the international environment,” Gondwe added.

He said the gross international reserves had declined to US $2.673 billion at the end of February from US $2.751 billion in January.

“The decline in reserves was mainly due to foreign exchange sales aimed at supporting the market and payments related to oil procurement,” Gondwe stated.

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