GOVERNOR’S STATEMENT ON RECENT DEVELOPMENTS IN THE FOREIGN EXCHANGE MARKET

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Finance Bank Zambia
Finance Bank of Zambia - Thabiso Makelo

Having had our Quarterly Media Briefing earlier in the month we thought we would not be coming back this soon. However, global economic developments over the past two weeks have had such adverse effects on many emerging and developing economies, including Zambia, and thought that our explanation of the developments would assist our local economic agents and the general public to have a better appreciation of what is going on and therefore avoid taking actions that will compound the situation.

 

The Bank of Zambia, like many central banks the world over, has been closely monitoring developments in the global economy, and the resultant impact these have had on the domestic economy and the local currency.
Growth in the global economy remains modest and uneven. According to the July 2015 International Monetary Fund World Economic Outlook update, growth for 2015 is projected at 3.3%, 0.2 percentage points lower than in the April outlook. While growth in the United States and the United Kingdom is now projected at 2.5% and 2.4%, growth for the Euro area and Japan, is projected at 1.5% and 0.8%, respectively.

 

Growth in emerging market and developing economies is expected to slow down to 4.2% compared with the outturn of 4.6% in 2014. China’s growth slowed down to 6.8% year-on-year in the first half of 2015 from 7.4% recorded in 2014.
In Sub-Saharan Africa, growth is projected to slow to 4.4% in 2015 compared with 5.0% in 2014, largely reflecting the drop in commodity prices that has led to deterioration in external sector performance, particularly for commodity exporters.

 

Zambia remains vulnerable to developments in the global economy. In particular, the balance of payments position has deteriorated reflecting a widening current account deficit. Both traditional and non-traditional exports have declined significantly this year while imports have declined at a slower pace. As a result, the Kwacha has been on a depreciating trend.

 

In addition, global investors have been anticipating that the US central bank would begin raising interest rates before the end of the year for the first time since 2006. As a result, emerging markets have experienced systematic net outflows of capital, creating pressure on their currencies to depreciate.
More recently, the Kwacha has come under immense pressure, largely emanating from global economic and financial market developments. The major factor has been associated with slow growth in China, the second largest economy after the US.

 

Chinese authorities recently announced changes to their foreign exchange management, a process that resulted in about 4% devaluation of the Renminbi (Chinese Yuan) against the dollar. Although authorities hinted the move was designed to stimulate the slowing Chinese economy, elsewhere it raised suspicions that the country’s economy might be weaker than widely believed. Major global stock markets plummeted while emerging markets currencies experienced excessive volatility. The regional currencies that have experienced depreciations include the South African Rand, the Tanzanian Shilling, the Ugandan Shilling and the Ghanaian Cedi.

 

Commodity prices, including copper, have dropped with the Zambian economy impacted adversely through the decline in the price of copper, which has fallen to around US$4,900 per tonne from above US$6,500 per tonne in 2014.
These developments apart from underscoring the long overdue need for the diversification of our economy to reduce dependence on copper, they also provide an opportunity for the country to take practical measures to respond to the challenges of diversification. Difficult as the situation is, it is an ideal time to actualise this structural transformation. The movements in the exchange rate are sending clear signals that our economy needs an expanded export base and a reduction in unnecessary imports. We all need to engage in expenditure-reducing and expenditure-switching activities going forward.

 

The global situation remains highly fluid. Under these circumstances, the Bank of Zambia deems the current monetary policy stance appropriate and will continue monitoring the developments closely and take other measures as the situation warrants and in line with its mandate.
Issued by
Head – Communications Division
Bank of Zambia
LUSAKA
August 28, 2015

1 COMMENT

  1. Ba governor if don’t anything to tell people just shut yo stinking sick mouth

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