Kwacha hits record low on copper woes

September 5, 2015 8:46 AM

Copper, which fell 2.6 percent in London on Friday, accounts for 70 percent of Zambia's export earnings, which have been further eroded by a power crisis that forced production of the metal to be cut.

A man displays a 50,000 Kwacha note in Lusaka January 23, 2012. REUTERS/Mackson Wasamunu

Zambia's kwacha currency dropped to a record low on Friday, hit by falls in the price of the country's dominant export copper and a power crisis that the southern African nation's president sought to alleviate.

The sharp slide in the kwacha - which has hit a series of record lows recently amid a sharp sell off in commodity-linked currencies as key consumer China's economy has weakened - has renewed pressure on Zambia to diversify its economy.

The kwacha fell more than 2 percent in early trade to 10.1500 per dollar on Friday, before clawing back to 10.0500 by 1433 GMT, still down 1.7 percent on the day.

On Thursday, central bank Governor Denny Kalyalya said policy makers would not intervene in the foreign exchange market to defend the currency, and added his voice to calls for the economy to be diversified.

Late on Friday the government said the state-owned Industrial Development Corporation - a development agency - would raise $500 million to invest in the energy sector and related infrastructure programme.

It did not specify how the money would be raised.

"Although 90 percent of what we are experiencing is externally triggered, we have always known that we are dependent on an export whose price we are not in control of," said Oliver Saasa, an analyst at Premier Consult.

"This is a huge wake-up call that you cannot depend on an export whose price you cannot control."

Last weekend, Treasury Secretary Fredson Yamba said the government would prioritise the rehabilitation of infrastructure such as roads to boost the tourism sector.

President Edgar Lungu said on Friday that overall imports should be cut to tackle the country's trade imbalance, but power imports stepped up to address shortfalls.

Zambia's power generation capacity stands at 2,200 megawatts (MW), with the bulk of the electricity produced from hydropower, but supply is often erratic.

Mining companies operating in Zambia's copper belt have agreed to reduce power usage by between 10 and 15 percent to ease pressure on the national grid, curbing production.

Zambia's Konkola Copper Mines (KCM) owned by London-listed Vedanta Resources Plc has asked 133 employees to stay away from work on full pay while the company undertakes a review of the operations.

"Many entities are likely to use the dollar as the currency of choice for transactions, thereby putting more pressure on the demand side," said analyst Peter Sitamulaho of the local Bonds and Derivatives Exchange.

"The kwacha is afflicted by lack of price transparency, lack of liquidity, too few market participants dominated by less than six banks, the majority being international banks."