A Quick Thought on Aligning the USD/ZMW Pair to Prevailing Market Conditions

The current USD/ZMW rate of 26.550/26.600 does not accurately reflect Zambia’s prevailing economic conditions. Dollar demand on the FX market has significantly decreased, while dollar supply has risen, largely driven by offshore sellers. However, the exchange rate remains range-bound because a substantial portion of Zambia’s dollar inflows, particularly from the mining sector, does not reach the FX market. If these inflows were fully integrated, the kwacha would likely trade closer to 23.000-24.000.

The Bank of Zambia (BoZ) plays a crucial role in ensuring that the FX rate aligns with economic fundamentals. It must prioritize reintegrating these inflows into the market, allowing the currency to adjust naturally and reflect actual supply-demand dynamics, rather than remaining artificially elevated.

A strategic approach is needed to facilitate consistent dollar inflows, especially from copper export revenues, alongside offshore portfolio flows. The kwacha should not only absorb shocks during outflow periods, adjusting higher, but also appreciate when FX supply increases. The currency’s failure to adjust in response to improved supply entrenches negative sentiment, fueling speculative behaviors such as dollar hoarding during periods of kwacha strength, driven by expectations of depreciation.

While the BoZ may aim to accumulate reserves, potentially holding back FX sales to do so, this strategy risks perpetuating entrenched bias toward a weaker kwacha. Failing to reset the exchange rate to a lower baseline means that, when flows reverse, the starting point is higher than it should be. This not only reinforces negative sentiment but also impedes the potential for improved economic activity through reduced import costs at a lower exchange rate.

Thus, resetting the baseline for the kwacha is essential for shifting market behavior and enhancing economic dynamics. Additionally, the swift implementation of dedollarization regulations will further reinforce this reset, helping to reshape perceptions and encourage more rational behavior in the FX market.

Chart Source: Bloomberg

Dean N Onyambu is the Founder and Chief Editor of Canary Compass, a co-author of Unlocking African Prosperity, and the Executive Head of Treasury and Trading at Opportunik Global Fund (OGF), a CIMA-licensed fund for Africans and diasporans (Opportunik). Passion and mentorship have fueled his 15-year journey in financial markets. He is a proud former VP of ACI Zambia FMA (@ACIZambiaFMA) and founder of mentorship programs that have shaped and continue to shape 63 financial pros and counting! When he is not knee-deep in charts, he is all about rugby. His motto is exceeding limits, abounding in opportunities, and achieving greatness. #ExceedAboundAchieve

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