Zambia Eurobonds, Kwacha Slump After Central Bank Governor Fired
By Taonga Clifford Mitimingi and Matthew Hill
August 23, 2020 (Bloomberg)
Lungu named former banker Christopher Mvunga as new governor Kalyalya was considered a steady hand in tough times
Zambia’s currency and Eurobonds plunged after President Edgar Lungu’s shock dismissal of central bank Governor Denny Kalyalya that raised questions about the independence of the institution.
The move comes at a critical time for the economy of Africa’s second-biggest copper producer, which is forecast to contract by 4.2% this year with annual inflation lingering near 16%. Debt is soaring and the fiscal deficit rapidly increasing as the coronavirus pandemiccurbs revenue. Lungu’s decision drew criticism from economists and even South African Finance Minister Tito Mboweni.
Zambia’s kwacha fell 0.6% by 11:47 a.m. in Lusaka to a record low 19.1863 per dollar. The nation’s $1 billion of Eurobonds due 2024 fell as much as 5.7% to 54.07 cents on the dollar, the most since April.
Lungu on Saturday named Christopher Mvunga as Kalyalya’s replacement. The former deputy secretary to the cabinet and deputy finance minister will have to contend with the world’s second-worst performing currency, which has lost more than a quarter of its value against the dollar this year. He’ll also need to limit the government’s growing dependence on the central bank to cover funding shortfalls.
“It is quite surprising because Dr. Kalyalya has performed sterlingly under very extreme circumstances,” Trevor Simumba, an economist based in Lusaka, the capital, said by phone. “To fire him in this manner sends a very negative signal. I’m shocked.”
Lungu didn’t give a reason for firing Kalyalya, who repeatedly urged the government to cut the fiscal deficit amid ballooning debt and falling foreign-exchange reserves. His dismissal could raise concerns among investors who saw him as a credible governor trying to keep a spendthrift government in check.
The move might be a response to the government’s failure to push through a constitutional amendment that would remove the responsibility of printing currency from the Bank of Zambia, according to Grieve Chelwa, an economics lecturer at the University of Cape Town’s Graduate School of Business.
“The backdrop to this is Bill 10,” he said by phone Sunday, referring to the proposed constitutional amendment. “There’s been a struggle for control over the central bank.”
The government had been increasingly relying on the Bank of Zambia for financing, even before the pandemic struck. Central bank holdings of government bonds increased to nearly 20 billion kwacha ($1 billion) in July from 2 billion kwacha at the start of last year. There are fears that Kalyalya’s removal could push Zambia toward soaring inflation seen in Zimbabwe in the 2000s, according to Chelwa.
“You need to remember the decisive role Gideon Gono played in ruining monetary policy,” he said of Zimbabwe’s central bank governor when hyperinflation began. “Mvunga is that kind of an appointee. He is too close to the presidency.”
A call to Mvunga’s mobile phone didn’t connect when Bloomberg sought comment. Lungu’s spokesman didn’t respond to a call or message seeking comment, and neither did Kalyalya respond to a text message.
Kalyalya previously served as deputy governor and spent years at the World Bank. Mvunga is an accountant who has worked for lenders including Standard Chartered Plc and Standard Bank Group Ltd. He doesn’t have the necessary experience in central banking, Simumba said.
“Christopher Mvunga is not capable of being central bank governor,” Simumba said. “Let’s be very clear about that.”