Zambia seen losing battle against Kwacha speculators on deficit

The Bank of Zambia’s measures to stem a slide in the kwacha by clamping down on currency speculators are being undone by government overspending.

Central bank Governor Michael Gondwe on May 30 raised the overnight rate that lenders use to borrow from each other and ordered reserves be set aside for Zambian accounts held abroad.

Gondwe is seeking to ease pressure on the kwacha, Africa’s worst-performing currency this year against the dollar after Ghana’s cedi, as the budget deficit swelled because of higher salaries for civil servants and fuel and corn subsidies.

The new rules spurred a 5 percent gain in the kwacha last week, paring losses versus the greenback for 2014 to 16 percent. The rally will be short-lived until the government demonstrates more fiscal discipline, according to Shilan Shah, a London-based Africa economist at Capital Economics Ltd. and Irmgard Erasmus, an analyst at Paarl, South Africa-based NKC Independent Economists.

“Investors are essentially seeing through these kinds of emergency foreign-exchange restrictions,” Shah said. “What is really needed is more fundamental reform, particularly in terms of fiscal policy, as opposed to just implementing stopgap foreign-exchange restrictions.”

Central bank spokesman Kanguya Mayondi declined to comment, saying the central bank will release a statement, without giving more details.

The Bank of Zambia raised overnight borrowing costs to 22 percent, 10 percentage points above the key policy rate from 6 percent previously, while subjecting foreign-exchange accounts to a 14-percent statutory reserve ratio,Razia Khan, Standard Chartered regional head of research for Africa, said in an e-mailed note to clients on June 2.

The central bank’s Mayondi confirmed the measures by phone on June 4.

The actions are aimed at curbing currency speculation by flushing out investors betting against the kwacha using offshore accounts, Salim Mulla, a Lusaka-based currency trader with Finance Bank Zambia Ltd., said. If the measures prove effective, the kwacha may rally, he said.

Speculating against the currency may result in “heavy financial losses” when the kwacha “reverts to an equilibrium path that is consistent with fundamentals,” the central bank said in a statement on May 29. The currency strengthened 0.1 percent to 6.6086 per dollar as of 8:51 a.m. in Lusaka.

Policy makers have spent more than $178 million of the central bank’s reserves to stem the kwacha’s slide and contain inflation in Africa’s second-biggest copper producer, which imports items from oil to fertilizers.