Fake Kwacha gain due to rotten economy, explains World Bank

Fake Kwacha gain due to rotten economy, explains World Bank

zambiaThe World Bank says the kwacha’s appreciation seen last week is a sign of Zambia’s weakening economy resulting from continuous trade deficits.

And the World Bank says real GDP growth is expected to remain subdued in Zambia because of “low copper prices, power shortages, higher interest rates and food costs stemming from the weakening currency weighing on private consumption”.

Meanwhile, the kwacha yesterday marginally halted its rally to trade in the range of K9.80 and K9.82 for bid and offer against the US dollar, with market sentiments on the future of the local currency remaining diverse.

Briefing journalists at his office in Lusaka yesterday, World Bank country senior economist Gregory Smith said headwinds for the Zambian economy are likely to continue.

“I think it’s gonna be a tough year for emerging markets in Africa and it will be much harder to borrow in 2016 than it was in 2015 or 2014. We think the tough times [will] continue for commodity prices in general in 2016 and 2017. So that headwind on the Zambian economy, we see it is going to persist,” Smith said.

“On the currency side, I never thought it (the dollar) will be less than K10 this month and I was shocked last week! I talked to a number of different people – traders in the banks, business people, economists and I think most people were shocked [with the appreciation of the kwacha against the US dollar]. So it is very interesting to see the kwacha appreciate in such a strong manner over the last few months. But I think my main point for now is that we are in volatile times and things can shift swiftly upwards and swiftly shift downwards. So we have to really be careful about jumping [up and down]. For most people, it’s not all good news [but] probably a mixture of a bit of good news.”

He added that an imbalance of trade resulted into lower demand for dollars.

“People want the dollar normally because they are buying something from overseas and if you look at the CSO data, the most recent data, we see a widening trade deficit; there are less exports than imports and so that means there is less demand for dollar. To me, it’s a bad sign and sort of a signal of a weakening economy as well. Lower trade [means] lower demand for dollars and so we just continue to monitor. So basically, it’s been quite a stable first quarter and a volatile April,” Smith explained.

And on continued borrowing, Smith advised Zambia against borrowing “too much”.

“I think that if you are borrowing to invest in making productive investments and borrowing in a sustainable manner, then that’s okay [because] you need some borrowing to develop. What you don’t need is borrowing too much; you have to stay within sustainable levels and when you borrow, especially in foreign currency, you need to be very careful,” said Smith, who further lamented the tightening liquidity levels.

And treasury market sources have said the kwacha strengthened last week due to limited local liquidity on the market and increased supply of dollars after the Bank of Zambia tightened monetary policy.

“There are positive global sentiments towards emerging currencies both on indication of a likely recovery in global commodity prices, and a feeling the Fed [Federal Reserve Bank of the United States] are not going to allow further dollar strengthening,” according to market sources. “What is also happening is that BoZ has literally mopped up all liquidity [kwacha] in the market, and so any slight supply of foreign currency is being met by a total absence of demand from the kwacha side, and so, because of this mismatch, whatever little semblance of forex [foreign exchange currency] the market smells triggers a kwacha rise.”

The Zambian kwacha, South African rand, Kenya shilling, Uganda shilling and Ghanaian cedi are some of the emerging currencies in Africa expected to benefit from improving global views.

“The kwacha is expected to defend its current position to trade between K9 and 10 against the US dollar this week due to increased dollar supply from investors attracted to high-yielding government bonds. Remember the government is running out of cash and the only way to attract more to borrow is for them to increase yields on government securities,” said a Treasury official, speaking on condition of anonymity.

Meanwhile, World Bank acting chief economist Punam Chuhan-Pole, speaking in tele-conference from Washington, said: “Real GDP growth is expected to remain subdued in Zambia because of low copper prices and power shortages and higher interest rates and food costs stemming from the weakening currency weighing on private consumption. However, growth is expected to remain robust in Kenya, supported by private consumption and public investment.”

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