Zambia's Kwacha Soars: A Tale of Dollar Selling and De-Dollarisation
In a dramatic turn of events, Zambia's Kwacha has reached its highest point in over two years, sparking curiosity and excitement among investors. But what's behind this surge? It all began with a government directive to curb the use of foreign currencies in domestic transactions, a move that ignited a wave of dollar selling. This bold step towards de-dollarisation has had a profound impact on the currency's performance.
The Kwacha's ascent was fueled by a 0.9% climb against the dollar, eventually settling at a 0.4% gain for the day. This surge is a continuation of last year's rally, which was largely attributed to soaring copper prices. However, the recent appreciation is also linked to a surge in foreign-exchange supply, as described by Chipo Shimoomba, a treasury dealer at First Alliance Bank. He attributed this to 'panic selling' of dollars following the government's de-dollarisation push.
The Bank of Zambia's December directive to settle all domestic transactions in local currency has played a pivotal role in this transformation. It has accelerated the liquidation of dollar holdings, creating a bullish short-term outlook for the Kwacha. Additionally, the demand for dollars has temporarily eased due to the Christmas break, as factories across Zambia shut down, reducing import-related currency needs.
Zambia's position as the continent's second-largest copper producer after the Democratic Republic of Congo has been a significant contributor to this success. Record-high copper prices have boosted export revenues and foreign inflows, further strengthening the Kwacha. The Lusaka Stock Exchange has also delivered impressive returns, making it one of the strongest performers in emerging markets.
President Hakainde Hichilema's efforts in restructuring Zambia's debt have further enhanced investor sentiment, especially ahead of his bid for a second term in August. This positive outlook is further solidified by Zambia's recent decision to accept China's yuan for mining taxes and royalties, marking a significant shift in financial dynamics and highlighting Beijing's growing influence in the continent's strategic resource sectors.
