THE Treasury has been depleted, says finance minister Alexander Chikwanda.
And Chikwanda has told President Lungu that the Bank of Zambia’s intervention in the foreign exchange market was ill-advised as it contributed to the further depletion of the foreign reserves.
In his letter to President Edgar Lungu dated August 21 referenced “Macro-economic issues – Reserves, balance of trade and exchange rates” where he explained the country’s economic situation in view of the dwindling foreign reserves, Chikwanda stated that the macro-economic indicators were showing an unglamorous and worrying trend.
“We have enormous challenges in the country with some macro-economic indicators showing a rather unglamorous and worrying trend. Our reserves are declining as the trade imbalance is continually accentuated because the imports are far much in excess of the exports,” Chikwanda stated.
He stated that the declining reserves, which as at August 21, 2015, stood at US$1.5 billion, were much lower than the three months import cover required.
“This situation is caused by multi-dimensional factors. One such factor relates to inexorable downward spiraling in the price of copper coupled with lower production, which in turn is not unrelated to low receipts on account of low price for the commodity. Because the outlay on imports exceeds the export earnings, the trade imbalance, meaning the gap between what we earn on exports and what we spend importing goods and services has been noticeably big every month for most of the year to date. This has meant depletion in our reserves, which are now lower than three months import cover,” Chikwanda stated.
“By end of 2014, the unencumbered reserves after adjustment for the Special Drawing Rights stood at approximately US$2 billion. The current situation as at 21st August, 2015 in terms of unencumbered International Reserves less Special Drawing Rights stood at US$1.5 billion, coming to US$2.60 billion when US$1.21 billon of the latest Eurobond is factored into the equation.”
He stated that the low reserves created a mismatch in the supply and demand of the US dollar, causing the depreciation of the local currency.
“The low reserves create a dollar supply/demand disequilibrium, causing the depreciation we are witnessing,” Chikwanda stated.
He also told President Lungu that the Bank of Zambia’s intervention in the foreign exchange market was ill-advised as it contributed to the further depletion of the foreign reserves.
“Bank of Zambia intervention, even a measured one under the circumstances, appears inexpedient and ill-advised because the extra dollars will be brought and taken out of the country occasioning further depletion of the meager reserves,” stated Chikwanda.
“The Ministry of Finance and Bank of Zambia continue to regularly brainstorm and we will keep you updated on the events as they unfold. We stand ready at any time to benefit from your wisdom.”
The kwacha last year breached the K15 mark against the US dollar, but the Bank of Zambia heavily intervened to bring the currency to around K12 per US dollar within a few days.
The Central Bank has continued to actively participate in the foreign exchange market in an effort to stabilise the kwacha, but experts have warned that such a measure was not sustainable as it risks depleting the country’s foreign exchange reserves.