Zambia’s kwacha has plunged to record lows, exacerbated by a severe drought that continues to cripple the Southern African nation’s economy. On January 8, 2025, the kwacha was trading at 27.95 per U.S. dollar, just above the record low of 28.05 reached the previous day.
This decline highlights the country’s struggle to recover despite emerging from a sovereign debt default early last year. The kwacha is now approximately 3% below its post-debt restructuring levels and has fallen nearly 15% over the past six months.
Drought’s Impact on Hydropower and Copper Production
Zambia is grappling with the worst drought in a century, brought on by El Niño effects. The dry spell has severely affected hydroelectric power generation, particularly at the Kariba Dam, which provides the bulk of the country’s electricity.
“Zambia is in a state of severe drought, and this appears to manifest in currency weakness as the hydroelectrically dependent country faces an industrial slowdown,” noted Access Bank Zambia in a research note.
The energy crisis has forced mining companies to cut copper production, a key foreign revenue earner. Reduced copper exports have resulted in lower foreign exchange inflows, putting additional pressure on the kwacha.
Currency Depreciation and Debt Challenges
The kwacha has been under pressure since Zambia defaulted on $11 billion in external debt in November 2020. While the currency briefly appreciated by 20% in February 2024 due to optimism surrounding its debt restructuring deal, it has since resumed its downward trajectory.
Despite the International Monetary Fund (IMF) approving a $569.6 million loan disbursement in June 2024 to aid Zambia’s recovery, the country remains vulnerable. Analysts forecast further depreciation if the drought persists and copper production remains subdued.
Measures to Stabilize the Kwacha
The Bank of Zambia raised reserve ratio requirements in late 2023 to stabilize the kwacha. However, these measures have yet to yield significant results. As of now, some companies are selling dollars to meet local tax obligations, offering slight temporary relief.
Market analysts project that the USD/ZMW exchange rate could rise to 33.095 within the next year, indicating that the kwacha may face further weakening.
Conclusion
The combination of severe drought, reduced copper production, and debt restructuring challenges has plunged Zambia into economic distress. To restore stability and investor confidence, Zambia requires coordinated efforts from both domestic policymakers and international stakeholders.
