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Zambia hikes banks’ reserve ratio to stem severe currency fall

Daba Finance/Zambia bank reserve ratio
BREAKING NEWSNovember 6, 2023 at 10:49 AM UTC

Zambia's central bank has taken measures to address the severe depreciation of its currency, the kwacha, which has been one of the worst-performing in the world, even surpassing Argentina's peso. 

The Bank of Zambia has announced an increase in the statutory reserve ratio for both local and foreign-currency deposits, raising it by 3 percentage points to 14.5%, effective from November 13. This move is intended to alleviate the persistent foreign exchange market pressure and curb inflation.

The kwacha has experienced a significant 21% decline against the US dollar since the end of June, primarily due to a drop in metal prices and production in this copper-producing nation. Additionally, the ongoing efforts to restructure more than $10 billion of external sovereign debt have further strained the currency.

Key Takeaways

The consequences of the kwacha’s steep depreciation were reflected in Zambia's consumer price inflation in October, which surged to 12.6%, marking the highest rate in nearly two years. The kwacha's devaluation significantly impacts prices, as Zambia relies heavily on imports for products like fuel and fertilizer, making it susceptible to exchange rate fluctuations. The South African nation became the first African country to default on its sovereign debt during the COVID-19 crisis and only recently reached a preliminary agreement with a steering committee representing holders of $3 billion in Eurobonds—three years after Zambia initially defaulted on these loans. The agreement in principle focuses on the key commercial terms for restructuring the 2022, 2024, and 2027 bonds. As part of the deal, approximately $700 million in claims will be permanently waived, and Zambia will receive approximately $2.5 billion in cash flow relief through reduced debt-servicing payments, particularly during the period of the nation's International Monetary Fund program.

Zambia
Kwacha
Monetary policy
Reserve ratio
Bank of Zambia

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