Statement on Developments in the Foreign Exchange Market July 2021
Lusaka, Saturday, July 24, 2021 – The Bank of Zambia has received enquiries from the public to clarify the factors behind the recent sharp appreciation of the Kwacha against the United States dollar.
In the May 2021 Monetary Policy Committee (MPC) Statement, the Monetary Policy Rate was maintained at 8.5 percent despite the notable increase in inflation. In doing so, the MPC had stated the following:
“…While inflation is projected to remain above the upper bound of the 6-8 percent target range over the forecast horizon, inflationary pressures are expected to ease in view of the improved supply of food, particularly maize and wheat following a good crop harvest. In addition, the significant improvement in copper prices and renewed interest in domestic Government securities by non-residentinvestors are supportive of the foreign exchange market and in turn lower inflation going forward. The decision also recognises existing vulnerabilities in the financial sector and fragile growth. To restore and anchor macroeconomic stability, the implementation of fiscal adjustment measures in line with the Economic Recovery Programme and understandings reached in discussions with the IMF remain critical.”
The expectations of the MPC with respect to the exchange rate have begun to materialise. Having come under immense pressure in 2020, owing to the weakening macroeconomic environment, which was significantly exacerbated by the COVID 19 pandemic, the Kwacha has broadly stabilised in 2021. As at July 23, 2021, the year-to-date rate of depreciation of the Kwacha against the US dollar slowed down significantly to about 5.0 percent compared with almost 30.0 percent over the corresponding period in 2020. More recently, the Kwacha was trading at K21.39 on July 23, 2021 compared to K22.64 on July 1, 2021, representing an appreciation of 5.5 percent. The appreciation of the Kwacha largely reflects changes in the actual supply of foreign exchange and expectations of further improvements in supply associated with the forthcoming IMF Special Drawing Rights (SDR) allocation, improved prospects of a formal Extended Credit Facility (ECF) programme with the IMF, as well as buoyant copper prices.
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The strong recovery in copper prices to the current level of US$9,521 per metric tonne from a low of US$4,745 in March 2020 has contributed to sustained strong export earnings. This has resulted in improved foreign exchange flows from the mining sector through tax receipts remitted directly to the Bank of…
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