Zambia should allow the market to determine the kwacha’s value, even as Africa’s worst performing currency this year threatens to push inflation into double digits, said Caleb Fundanga, a former central bank governor.
Using foreign currency reserves to stem a decline in the kwacha isn’t a solution, said Fundanga, who served as Bank of Zambia chief from 2002 to 2011. It’s better “to allow the market forces of supply and demand to determine the level,” he said, speaking by phone from Lusaka, the capital.
The central bank said on March 13 that it had sold $178 million of foreign exchange to moderate the volatility of the currency, which has retreated almost 14 percent against the dollar this year. A weaker kwacha fuels inflation in Africa’s second-biggest copper producer, which imports items from oil to soap, and makes repaying foreign debt more expensive.
“I think importers are already feeling it,” and inflation could return to double digits, said Fundanga, president of the Institute for Finance and Economics, a research and consultancy company. “This is an import-dependent economy.”
Inflation, which last breached 10 percent four years ago, accelerated for a fourth straight month in February to 7.6 percent. That’s the highest level since November 2011 and, coupled with the falling kwacha, prompted the central bank to raise interest rates to a record high of 10.25 percent on Feb. 28.
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