The Bank of Zambia – BoZ disclosed that the continuous instability of the exchange rate in Zambia is a threat to financial stability, as this could trickle down to asset price distortions, and credit losses.
According to the BoZ Financial Stability report accessed by the Zambian Business Times (ZBT), as observed in recent times the volatility of the Kwacha had escalated, slumping to a historical high of ZMW27.2175 against the US dollar in early February 2024.
“The exchange rate volatility surged above its 14-year historical average, as the Kwacha experienced both appreciation and depression, the local unit weakened in February as the stock of unfulfilled foreign exchange demand orders (pipeline demand), swelled in the absence of substantial inflows from the mining firms before recovering following liquidity tightening measures pursued by the Bank.
“The high exchange rate is a threat to financial stability, as it leads to credit losses from unhedged foreign currency denominated exposures and trading losses from foreign currency net open positions on balance sheets of financial institutions,” the report stated.
Furthermore, the report revealed that the price volatility for the Lusaka Securities Exchange All-share Index (LASI) suffered a decrease in stock valuations in March.
“The LASI has been on an upward trajectory, post-Covid, there remain a few businesses with access to market-based f inance, with high borrowing costs limiting their access to credit markets, this potential constraint many firms’ efforts to raise capital for investment and expansion,” the report echoed.
