Around Thursday 22nd July, the Kwacha began to appreciate significantly against the US dollar. By Friday 23rd the dollar was trading at around K20 from K22. 5 only a few hours before. With the increased hype around this appreciation, it wasnt long until opposing political camps started claiming credit with both the PF and UPND claiming that the appreciation of the Kwacha was indicative of their party winnig the upcoming general elections.
Ministry of finance and BOZ both issued statements claiming that the appreciation was due to ‘sound economic policies and improved investor confidence’.
But what really happened?
A review showed that the initial appreciation of the local currency was caused by off investors who sort to participate in the BOZ bond auction of Friday 23rd August. These off-shore investors off loaded about $90 million onto the local market to buy Kwacha to invest in the govt bonds. This resulted in an immediate appreciation of the local currency. BOZ holds bond auctions every month, in line with their mandate, for fiscal and balance of payments support.
The appreciation resulted in sentiment or panic selling as other market players acted to reduce their dollar balances. Consequently, by close of market on Friday, the dollar was trading at around K19. 5. Through out the weekend of 24th & 25th, the Kwacha continued appreciating to trade as low as K18. 5/dollar at the bureaux.
On Monday 26th, with the larger banking FX market having resumed, the Kwacha continued to appreciate, trending towards K17/dollar. However, by mid day the momentum in the appreciation began to slow down. BOZ immediately moved in and started off loading dollars, from the international reserves, onto the market to continue buoying the Kwacha (maybe to please the politicians but also to align with their, and MOF’s, earlier statements on the appreciation).
But BOZ can only use the international reserves to an extent as the reserves are meant to support imports and cannot be allowed to go below a certain level. In this regard, it remains to be seen whether the Kwacha can continue appreciating given a weak supply of dollars on the local market and skeptical sentiment around economic performance.