Zambia’s foreign-exchange reserves have reached new heights at $4.31 billion; however, the currency struggles due to ongoing drought and increased import demands. The kwacha has depreciated significantly, making it Africa’s fourth-worst performing currency this year. Despite measures to enhance dollar liquidity, the underlying economic challenges persist, primarily due to a reliance on dwindling hydroelectric reserves.
Zambia has recently reached a record high in foreign-exchange reserves totaling $4.31 billion, equivalent to approximately 4.6 months of import cover. However, the repercussions of a historic drought continue to exert pressure on the Zambian currency, the kwacha, which recently fell to 28.83 against the US dollar, marking its eighth consecutive day of depreciation. Factors such as increased demand for energy and agricultural imports have contributed to this decline, positioning Zambia as Africa’s fourth-worst performing currency this year.
Despite these high reserves, the brief uptick in currency value following recent measures by the Bank of Zambia quickly diminished. The central bank raised the limit on foreign exchange transactions allowed for commercial lenders from $1 million to $5 million on March 6, aiming to enhance domestic dollar liquidity. Nevertheless, analysts note that the positive effects of these interventions are fleeting, as foundational economic factors continue to dictate currency performance.
The Zambian economy heavily relies on hydroelectric power, with over 80% of its electricity generated from hydro dams. Unfortunately, due to suboptimal rainfall over the past years, critical reservoir levels remain low. For instance, Kariba Dam, the largest of its kind, currently holds less than 10% of its usable storage capacity, necessitating increased electricity imports from neighboring countries. Consequently, citizens resort to using imported fuel to operate private generators amid ongoing electricity rationing, exacerbating the financial strain on the economy.
In summary, while Zambia boasts unprecedented foreign-exchange reserves aimed at stabilizing its economy, the ongoing drought and dependency on hydroelectric power present formidable challenges. The kwacha’s depreciation reflects persistent demand pressures for foreign currency amid rising import costs. Furthermore, recent regulatory measures have not succeeded in altering the underlying economic fundamentals, which continue to govern Zambia’s currency market dynamics.
Original Source: financialpost.com
