In a bid to address the severe depreciation of its local currency, the Zambian central bank has announced a forthcoming increase in the minimum mandatory reserves that commercial banks must maintain with the state institution. This move aims to mitigate the woes of the beleaguered kwacha and stabilize the foreign exchange market.
According to a circular issued by the apex bank, the statutory reserve ratio for deposits in both local and foreign currencies will be elevated by 3 percentage points, reaching 14.5%. This change will come into effect on November 13.
The primary purpose of this measure, as stated by the Bank of Zambia, is to alleviate the persistent pressure on the foreign exchange market and to manage inflation.
Zambia’s kwacha has been grappling with a substantial 21% depreciation against the US dollar since the close of June, a decline that positions it as one of the worst-performing currencies worldwide, surpassed only by Argentina’s peso.
Several factors contribute to this depreciation, including reduced metal prices and production, along with the complex challenges associated with restructuring over $10 billion of external sovereign debt.
In October, Zambia witnessed a surge in consumer price inflation, reaching 12.6%, marking its swiftest pace in nearly two years. This inflation is partially attributed to the depreciation of the kwacha.
Given Zambia’s substantial imports, which encompass a diverse array of products, from fuel to fertilizer, exchange rate fluctuations have a significant impact on prices, making the efforts to stabilize the currency and manage inflation of critical importance.
