A country’s currency is a measure of that country’s economic stability. A stable currency enables great financial forecast either on a national level, corporate level or even just on a personal level. It is much easier to plan for investment and it’s cash flows if the currency does not fluctuate every now and then. On the other hand, it is extremely hard to have any financial projection if the currency of the nation keeps fluctuating every now then; it becomes even much riskier to invest in projects.
For instance, an individual who studies at a foreign University is much likely to be paying their tuition fee in foreign currency; meaning it will be very easy for them to forecast the cost of their education for a foreseeable future if the currency is stable. However, the same cannot be expected if the currency keeps on fluctuating.
Now it should be noted that there are factors that cause a currency to change in value or fluctuate. This article looks at factors that are impacting the Zambian Kwacha at the moment. As of Wednesday 2nd September 2020, according to Bank of Zambia, the kwacha closed its trading selling at K 19.62 per US dollar. This is an increase of K 5.43 from K14.19 per US dollar on 03/01/2020.
The following are some of the factors that are affecting the currency;
Government Public Debt
As of the September 2019 national budget review by the Minister of Finance Dr. Bwalya Ng’andu, government’s external debt stock stood at US$10.23. The servicing of this debt has contributed to the depreciation of the Kwacha. Since debt is serviced in foreign currency, the demand for the foreign currency has gone up making the country’s reserves to go down while at the same time making the supply of the kwacha to go up, as well, hence making it to lose value against foreign currencies.
Electricity Supply and Cost
A 2020 report by the International Growth Center (IGC) stated that Zambia’s state-owned power utility company, ZESCO, has been struggling to meet power demand. To manage the load, ZESCO has resorted to load shedding. The load shedding coupled with the recent tariff upward adjustment has pushed the cost of production up. The cost of production contributed to the increase in the average rate of inflation in the first quarter of 2020, as reported by the Bank of Zambia. Subsequently, the inflation rate has then contributed to the depreciation of the Kwacha against foreign currencies. Even though Zambia recorded a trade surplus, the cost production has affected its export potential which in turn has affected negatively, the Kwacha’s gain against major foreign currencies.
COVID-19
As of 2nd September, the Ministry of Health Zambia recorded a cumulative total of 12,415 recorded cases of Covid-19 in Zambia. Covid-19 has forced many countries to go on lock down as a result; it has hampered the productive capacity of economies. The Zambian economy, with its already existing problems, has been hit badly. According to the Minister of finance Dr. Nga’ndu, the IMF has projected the Zambian economy to shrink by 2.6%. Due to low production levels, many workers have been laid off and those entering the labor market cannot find jobs. This scenario creates a decline in the aggregate demand of the economy; people lose their incomes and companies lose their sales revenues, further reducing production levels. Since production levels have gone down, Zambia has been failing to acquire the much-needed foreign currency to boost its reserves.
Speculation
The projections by the IMF on the prospects of Zambia’s economic growth, the levels of public debt, and the erratic power supply have given rise to speculations. Speculations have affected the currency in that most people, now, would rather hold foreign currency as opposed to the Kwacha. This has caused an increase in the demand for foreign currency, as a consequence, putting the kwacha under pressure and making it lose its value further.