VZCZCXRO4633
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0218 0900554
ZNR UUUUU ZZH
R 310554Z MAR 09
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 6865
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RHMFISS/HQ USAFRICOM STUTTGART GE
RUEHLMC/MILLENNIUM CHALLENGE CORP 0101

UNCLAS LUSAKA 000218 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ZA
SUBJECT: Zambia's Currency Tumbles -- and With It, Reserves 
 
¶1.  (SBU) Summary.  In recent months, the Bank of Zambia (BoZ) 
depleted one-third of its foreign exchange reserves in its attempts 
to "dampen volatility" of the precipitously depreciating Zambian 
Kwacha.  Central bank foreign reserves have fallen to 900 million, 
which covers about two months of imports.  In February, the IMF 
proposed a USD 200 million loan to Zambia to provide a cushion 
against sharp movement of the currency.   The BoZ says it remains 
committed to a floating, market-determined exchange rate and it 
continues to "target reserves."  End Summary. 
 
¶2.  (SBU) Declining world metals prices, brought about by the global 
economic crisis, has had a severe impact on Zambia's mining sector, 
which accounts for close to three-quarters of the nation's export 
earnings and ten percent of formal sector employment.  This, 
combined with an overall reduction in foreign direct (and portfolio) 
investment, has dealt a devastating blow to the Zambian Kwacha, 
which has fallen over fifty percent in the past six months, from 
3500 K/USD in late September 2008 to over 5600 K/USD by late-March 
¶2009.  Many agree that the strength of Zambia's currency, which 
generally correlates to the price of copper, is unlikely to rebound 
until copper and cobalt prices recover. 
 
¶3.  (SBU) Fearing a run on the Kwacha that would devastate Zambia's 
consumer-dependent economy and the government's efforts to contain 
inflation (hovering around 15 percent), the BoZ has intervened in 
the currency market.  Over the past four months it has expended 
approximately one-third of its foreign currency reserves.  On March 
25, BoZ Deputy Governor assured DCM and Emboff that the central bank 
continues to support a market-determined exchange rate, but will 
intervene to dampen volatility.  He acknowledged that exporters 
prefer a weak Kwacha, in contrast to the more numerous and vocal 
importers' groups, and that it is impossible to please all sectors 
of the economy, save that less volatility and increased stability 
will serve everyone.  The Deputy Governor lamented that Zambia's 
terms of trade had deteriorated significantly, contributing to a 
current account deficit that necessitated the central bank's 
intervention. 
 
¶4.  (SBU) In February, the BoZ began negotiating a USD 200 million 
loan from the IMF.  An IMF representative assured Emboff that the 
BoZ is not seeking to strengthen its currency, but rather to 
"cushion" against large fluctuations.  They also point to the 
benefits of a weak currency to Zambian farmers whose produce prices 
have become more competitive in foreign markets.  Despite press 
reports that World Bank opposes the loan, the World Bank country 
representative clarified that he supports acquiring debt to restore 
foreign exchange reserves to the equivalent of three months of 
imports.  He recommended caution, however, in the acquisition of 
debt and the use of foreign currency reserves to prop up the Kwacha. 
 The BoZ Deputy Governor is also reticent about taking on this new 
debt:  "We do not want another HIPC situation," he said. 
 
BOOTH