By Matthew Hill Feb 20, 2014
The Bank of Zambia called an emergency meeting with lenders to probe a drop in the nation’s currency to a record against the dollar, two weeks after Ghana limited foreign-currency sales to halt a slide in the cedi.
“The central bank just called a treasurers’ meeting to try to understand the dynamics” affecting the kwacha, Mwewa Kyamulanda, a currency trader with Investrust Bank Plc, said by mobile phone from Lusaka, the capital, yesterday.
The currency of Africa’s biggest copper producer slid as much as 1 percent to 5.78 per dollar, its lowest level since Bloomberg began compiling records in 1994. It was trading 0.6 percent weaker at 5.76 as of 6:03 p.m. yesterday. The kwacha has declined 3.2 percent this month, the continent’s worst performer after the Gambian dalasi. Yields on Zambia’s $750 million of Eurobonds rose four basis points, or 0.04 percentage point, to 8.24 percent, matching a record high.
A falling currency increases the risk of higher inflation in Zambia, which imports items from oil to breakfast cereal. It also makes repayments on external borrowings more expensive. Ghana’s central bank announced limits on dollar use as well as withdrawals and transfers on Feb. 5 in a bid to halt a decline in the cedi, Africa’s worst performing currency this year. Emmanuel Pamu, financial markets director at the Bank of Zambia, declined to comment when contacted by phone before the meeting and three subsequent calls to his mobile were unanswered.
“There seems to be a view that the kwacha has been overvalued quite a bit and this is a correction,” Kyamulanda said. The meeting was with heads of treasuries and Investrust was among those invited to the meeting, which happen “from time to time,” according to Kyamulanda, who said he wasn’t allowed to attend on behalf of his manager and declined further comment.
“Zambians use the value of the kwacha as a direct barometer of how well the country/economy is faring,” Chris Becker, a market strategist at ETM Analytics in Johannesburg, said in an e-mailed note yesterday.
Countries including Zambia and Nigeria may follow Ghana’s clampdown on foreign-exchange trading, which may cause investors to withdraw dollars, curbing supply of the greenback, Becker said in a separate note before today’s meeting. Zambia banned the use of dollars in domestic transactions in 2012.
Nigeria has enough reserves to keep defending the naira, Central Bank of Nigeria Deputy Governor Sarah Alade said Feb. 14. The cedi has weakened 6.9 percent this year and the naira 2.3 percent.
“The risk is that these governments and central banks respond with their own soft currency and capital controls to prevent an outflow,” Becker said. For the kwacha, “further downside is on the cards, and interest rate risks are tilted strongly to the upside,” he said.
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