Zambia's Kwacha Hits Record Low Against Dollar Amid Economic Challenges

Key Takeaway

• Zambia's kwacha hit a record low of 27.28 against the dollar, leading global currency depreciation with a 1.9% slump this month.
• Severe drought and electricity shortages, exacerbating inflation at a two-year high of 13.8%, are straining Zambia's economy.
• IMF support is sought amid ongoing debt restructuring efforts following Zambia's default on approximately $3.3 billion in liabilities.

Currency Depreciation

Zambia's kwacha reached a new low against the dollar, marking a significant downturn for the nation's economy amidst challenging conditions. On a recent Wednesday, the kwacha depreciated by as much as 0.3% to 27.28 against the dollar, as per Bloomberg's compiled data. This decline has positioned the kwacha as the poorest performer globally among currencies tracked by Bloomberg for the month, with a 1.9% slump. FNB Zambia, a subsidiary of South Africa's FirstRand Ltd., has projected that the kwacha's value will continue to diminish throughout the week.

Economic Pressures

The depreciation of Zambia's currency is expected to exacerbate existing economic pressures, particularly in terms of inflation and the cost of imports. Zambia is currently experiencing annual inflation at a more than two-year high of 13.8%. The nation is facing a severe drought, described as the worst in over four decades, which is anticipated to cut the country's cereal harvest by half this year. Additionally, the drought is causing significant electricity shortages in Zambia, a country that depends on hydroelectric dams for approximately 85% of its power generation. These shortages are due to the reduced capacity of the dams, prompting an increase in food and electricity imports to mitigate the impact.

IMF Support and Debt Restructuring

The International Monetary Fund (IMF) could play a pivotal role in stabilizing Zambia's economy. The government has sought additional financing from the IMF to address the challenges posed by the drought, on top of an existing agreement for about $1.3 billion, equivalent to 100% of Zambia's quota with the IMF. Last year, the IMF temporarily raised the access ratio for low-income countries, including Zambia, to 600% of their quota, which could provide a basis for additional support. Zambia's economic difficulties are further compounded by a complex debt restructuring process initiated after the country became Africa's first pandemic-era sovereign defaulter in 2020. While agreements have been reached with official creditors and bondholders, negotiations continue with commercial lenders to restructure approximately $3.3 billion in liabilities.

Street Views

• FNB Zambia (Neutral on the Zambian kwacha):

  "It expects the currency to continue weakening for the rest of the week."