Zambia relies heavily on copper exports which account for a staggering 70% of export earnings, as such, the Kwacha responds to forex earnings which are dependent on copper prices and production, market watchers note.
Meanwhile, according to economists, the recent appreciation of the local currency which was necessitated by China’s coming on board to the creditors’ negotiation table is not sustainable in the long run.
In line with market forces, country’s currency tends to suffer when forex earnings decline and vice versa.
Likewise, the Kwacha is affected by the actions of the large exporting firms (like mining companies) as to where they deposit and hold their export earnings.
The local currency’s appreciation or depreciation is also influenced by demand for foreign exchange necessitated by the importation of petroleum products and agricultural inputs, among others.
This creates pressure on Kwacha against foreign currency to pay for imports thereby leading to depreciation, hence need to boost forex reserves.
Overtime, the diminishing confidence in Zambia’s economy led to an outflow of foreign currency as foreign holders of Government securities divest from the domestic market reducing forex inflows.
As such, economic analysts urge the country’s monetary authorities to put in place policy measures that promote investor confidence.
Without that, the Kwacha will start a downward spiral once again, in line with market demands and prevailing forces.
According to Shimukunku Manchishi, researcher at the Zambia Institute for Policy Analysis and Research, the government has also become a key player in the forex market arising from its demand for US Dollars required for monthly interest payments on debt and this tends to contribute to depreciation.
On another note, he says externally, the unprecedented Covid-19 pandemic has led to low supply and high demand for U.S. Dollars, and low investment amid global uncertainty.
This has over the years translated into a depreciation of the Kwacha against other convertible currencies, particularly the green buck.
