‘STATE MUST BALANCE FOREX STABILITY AND SUPPORTING ECONOMIC GROWTH’
GOVERNMENT has been cautioned to carefully balance the objectives of exchange rate stability with the imperative of supporting economic production and growth.
Policy Monitoring and Research Centre (PMRC) warned of this balance, indicating that sustaining the appreciation of the Kwacha and achieving exchange rate stability required a multifaceted approach.
The Bank of Zambia (BoZ) has recently implemented various monetary policy interventions to stabilise the exchange rate such as market support injections totalling US$215.5 million while increasing statutory reserve ratio from to 26 percent from 17 percent.
Additionally, the central bank increased the Policy Rate by 150 basis points to 12.5 percent, an increase of 3.25 percent from
February 2023.
But PMRC Executive Director, Sydney Mwamba, said while monetary policy actions may be necessary to stabilise the currency, Government must carefully balance the objectives of exchange rate stability with the imperative of supporting economic production and growth.
Mr Mwamba reminded Government that a higher monetary policy rate increased the cost of borrowing for businesses, which could lead to reduced investment and decreased consumer spending, ultimately impacting production levels.
“Moreover, elevated interest rates may discourage borrowing for productive activities such as capital investment and expansion, constraining business growth and innovation,” he said.
Mr Mwamba noted that sustained appreciation and stability of the Kwacha required broader structural and policy reforms in the medium to long term.
Increasing and diversifying exports, he said, particularly in sectors beyond copper mining, were essential for reducing reliance on a single commodity and enhancing foreign exchange earnings.
“Sustaining the appreciation of the Kwacha and achieving exchange rate stability requires a multifaceted approach encompassing short-term monetary interventions, medium-term structural reforms, and longterm economic diversification strategies,” Mr Mwamba said.
He admitted that the appreciation and depreciation of a currency, such as the Kwacha, against major foreign currencies, particularly the United States dollar, were pivotal aspects of a country’s economic dynamics.
“Understanding the factors influencing these fluctuations and their economic implications is essential for policymakers, investors, and the general public.