BOZ Chief Confident of Bailout Package as IMF Temporarily Halt Deal Discussions
“In a depreciating currency environment, that really puts a toll on the reserves.” Yet two years ago, soon after taking up the position of governor, he said he felt helpless and disheartened.
As Zambia’s currency, the kwacha, spiralled downwards, shopkeepers would constantly erase and rewrite price tags, updating in real time the cost of the items they sold.
“It was very disruptive and was really a threat to the effectiveness of monetary policy,” Kalyalya said now of that brief period when the central bank seemed to have lost control of the situation.
People started calling the Kwacha the ‘ ZimKwacha’, a reference to Zimbabwe’s troubled currency. “We had to act to stem that,” he said. Kalyalya, who was an Executive Director at the World Bank with oversight of 22 African countries including Zambia before he returned home to take up the role Central Bank Governor, said he wanted to prevent Zambia from going the way of its troubled immediate Southern Africa neighbour went.
Two years on, that worst-case scenario appears to have been avoided. Kalyalya says the reforms Zambia is now pushing through will make its economy, currency and banking sector more resilient to stresses in the future. The crisis in 2015 stemmed in large part from Zambia’s historical economic dependence on copper –dutch disease, which is the country’s main export and accounts for a whopping 74% of Zambia’s foreign exchange earnings and close to 30% of government revenue.
Copper had fuelled the country’s economic boom, generating an average annual gross domestic product - GDP growth of 6% to 7 % over the previous decade. But when copper prices fell, because of lower demand from China which consumes 43% of global copper, , the Zambian economy took a severe hit.
The kwacha fell, and the central bank’s move to raise the statutory reserve ratio in 2014 was not enough to ease the pressure. Earlier on in his tenure, Kalyalya said he would deal with currency volatility with measures including tightening liquidity.
But while that helped the kwacha recoup some of its losses against the dollar, the challenges facing the central bank soon became even greater, culminating in Zambia’s "Worst Monday" on September 28, 2015, when the currency fell by about 16% against the dollar in a single day.
“It’s like you are driving and you see the [speedometer] needle going,” Kalyalya recalls of the speed at which the currency fell. Zambia’s woes on that day were aligned with those of mining group Glencore, the parent company of Mopani Copper Mines, the second-largest employer in Zambia after the government. Dr. Kalyalya’s first term as Central bank governor draws to a close next year.
In other news the International Monetary Fund (IMF) has said it has temporarily halted bailout talks to allow the Zambian government to put public debt on a sustainable path.
Zambia is seeking a $1.3 billion bailout from the IMF.
"The talks were put on hold after providing new information on government’s external borrowing plans needed to be reconciled key program objective of putting the debt on a sustainable path,” IMF resident representative Alfredo Baldini told journalists on Thursday afternoon. He also dismissed claims that former IMF country mission chief Tshidi Tsikata had been replaced for failing to close the deal with the Zambian government.
Baldini also expressed concern with the pace at which Zambia’s public debt was contracting, saying this would put Zambia at high risk of debt distress. While acknowledging Zambia’s need to address infrastructure gaps needed to maintain debt sustainability, Baldini suggested it was critical for Zambia to slow down on the contraction of new debt.
The newly appointed mission chief to Zambia is Baileau Loko, the IMF announced earlier this last week. Zambia has been seeking a bailout since 2014.