Zambia’s Record-High FX Reserves: Challenges in Currency Stabilization

Zambia’s foreign-exchange reserves have reached a record $4.31 billion, yet the kwacha continues to struggle, depreciating to a near-record low. Rising demand for US dollars due to high energy and agricultural imports compounds the issue. Despite efforts by the central bank to stabilize the currency, long-term challenges remain due to low hydroelectric power reservoirs.

Zambia has recently achieved unprecedented levels of foreign-exchange reserves; however, the country continues to grapple with significant issues regarding its currency. Despite reaching $4.31 billion in reserves by the end of 2024, primarily aided by funds from international institutions, the kwacha has depreciated to nearly a record low. This decline has been influenced by increased demand for US dollars due to rising energy and agricultural imports and worsened by the effects of a previous severe drought.

On March 20, 2025, the kwacha fell by 0.2% against the dollar, marking its eighth consecutive day of losses, thus establishing it as Africa’s fourth-worst performing currency for the year. The increase in dollar demand reflects the challenges faced by Zambia’s economy, particularly as it seeks to stabilize its currency amidst rising import costs.

In an attempt to address the currency situation, the Bank of Zambia recently adjusted the permissible foreign exchange amount that commercial lenders may offer clients to $5 million, up from the previous limit of $1 million. This decision aimed to enhance liquidity in the domestic dollar market, yielding only temporary improvements as the underlying economic fundamentals continue to exert pressure on the currency.

Zambia’s reliance on hydroelectric power means that changes in water levels in dams significantly affect electricity generation. Currently, hydroelectric reservoirs remain critically low, notably the Kariba dam, which has only about 10% of its useful storage capacity left. This has compelled Zambia to import more electricity from neighboring countries while citizens are forced to turn to costly imported fuels for power generation, exacerbating the overall economic strain.

In summary, while Zambia’s record-high foreign-exchange reserves represent a positive financial milestone, the nation faces ongoing currency devaluation challenges primarily due to increased import demands and ongoing drought effects. The efforts made by the Bank of Zambia to stabilize the kwacha have provided only short-term relief, revealing the enduring impact of structural economic factors on the currency and the energy sector’s dependency on hydroelectric power.

Original Source: financialpost.com