BoZ to continue monitoring foreign exchange market

BoZ to continue monitoring foreign exchange market
Written by Joan Chirwa
Monday, December 22, 2008 8:44:53 AM

THE Bank of Zambia (BoZ) will continue to closely monitor developments in the foreign exchange market and participate in circumstances that threaten its orderly performance, bank governor Dr Caleb Fundanga has stated.

And the local currency on Friday firmed further to trade between K4,800 and K4,880 per US dollar amidst much volatility in trading on the back of increased supply flows in the market with little corporate demand seen.

In response to a press query, Dr Fundanga indicated that although the Bank of Zambia did not issue predictions of the levels of exchange rate as they were dictated by a host of factors, particularly market forces, the Central Bank would continue to monitor the situation and participate where necessary.

“Our exchange rate is determined by the market and the Bank's role is limited to addressing volatility rather than targeting an exchange rate level,” Dr Fundanga stated.

He further stated that the Central Bank would not tolerate the issue of foreign currency quoting and invoicing of goods and services within Zambia.

“As you may perhaps already know, Zambia is a small but open economy. The reasons for pursuing an open economy policy are actually meant for the country to benefit from unimpeded access to international trade and transfer of technology, both of which are critical for development,” Dr Fundanga stated. “However, this policy does not, or should not, in any way be construed to mean that dollarisation becomes an accepted norm governing local business transactions. We strongly believe that our inflation rate, though rising in recent months, is not at levels that would justify dollarisation. We are fully aware that the recent depreciation of the kwacha may have been precipitated by the rebirth of this practice. Doing so will perpetuate the instability of the local currency.”

A couple of weeks ago, financial market experts warned that the local currency faced further pressure from service providers who were now quoting prices in US dollar.

The experts indicated that increased dollarisation of goods and services was more than likely to further weaken the kwacha's performance against major convertible currencies, giving an example of the Democratic Republic of Congo (DRC)'s Congolese franc that had been overshadowed by the US dollar.

And Dr Fundanga advised businesses in Zambia to desist from quoting or invoicing in foreign currency.

“Let me be quick to state here that, as a way forward, we intend to strengthen the law regarding this issue in order to protect this economy,” stated Dr Fundanga.

And the Citibank market update stated that corporate were on hand last Friday to convert dollars to meet tax obligations and year end conversions at higher exchange rates, necessitating the kwacha's appreciation.

“With the continued steady supply of dollars, the kwacha is likely to continue to be bullish into year end, with bouts of volatility imminent on account of mismatched flows,” stated Citibank.