Zambia’s Kwacha Falls as Drought Fuels Higher Import Costs
Zambia’s worst drought in over a century is driving the kwacha toward record lows.
The currency weakened for the past 13 sessions against the US dollar, its longest slide in six months. It weakened 0.1% to to 27.2843 per dollar by 4 p.m. local time on Monday, hovering around levels last seen in May, when it hit a record low of 27.4250.
The drought has sharply increased Zambia’s reliance on food and power imports, draining foreign reserves and adding to the strain on a fragile economy. Agriculture, the lifeline for over 70% of Zambians, is reeling under the dry conditions, threatening food security and pushing annual inflation to a near three-year high of 15.7%, largely driven by rising prices for meat, maize, and cereals.
“The drought increases Zambia’s power import needs and reduces export revenue from agriculture and copper,” said Gergely Urmossy, an emerging markets strategist at Societe Generale London Branch. Urmossy said that tight liquidity has made the FX market particularly volatile.
Zambia’s power utility, Zesco Ltd., recently boosted electricity imports to provide up to seven hours of power daily, as hydroelectric production dwindles due to parched dams.
The central bank has been on hold since an interest rate hike to 13.5% in May. The next decision is scheduled for Wednesday.
Zambia became the continent’s first pandemic-era sovereign defaulter in 2020. The southern African nation has reworked about 88.2% of its external debt, with about $1.6 billion yet to be restructured, the government said in September.
