Zambia’s kwacha has enjoyed a remarkable surge, its longest winning streak in almost a year. While initial reports celebrate this rise, a closer look reveals a more nuanced picture, highlighting potential risks and raising questions about long-term sustainability.
Two key factors fueled the kwacha’s appreciation: a significant interest rate hike and a mandated increase in reserve requirements for local banks. These measures, intended to curb inflation and stabilise the currency, have yielded quick results. However, concerns regarding the sustainability and potential downsides of this rapid ascent necessitate caution.
Firstly, the rapid appreciation of the kwacha could hinder key export sectors like mining and agriculture by making their products less competitive in the international market. This could dampen Zambia’s economic growth and lead to job losses.
Secondly, the current surge might be driven more by speculative activity and short-term market sentiment rather than fundamental economic improvements. This raises the possibility of a sharp correction if market conditions change, leaving the economy vulnerable to external shocks.
Thirdly, while a stronger currency can ease inflationary pressures in the short term, it could also inadvertently hamper efforts to stimulate domestic demand, a crucial factor for promoting sustainable economic growth and addressing poverty and unemployment.
Therefore, while celebrating the kwacha’s current trajectory, policymakers must remain vigilant and prioritise long-term stability over short-term gains. Implementing measures to address these concerns is crucial. Striking a delicate balance between controlling inflation, ensuring export competitiveness, and fostering domestic demand will be key to unlocking sustainable economic growth for Zambia.