Zambia’s kwacha currency today reached a record low of 27.33 against the US dollar.
The recent depreciation of the kwacha partly stems from a severe drought that has ravaged crops in Zambia, forcing the country to ramp up food imports. Critically low water levels in Zambia’s hydropower dams, which generate 85% of the nation’s electricity, have also necessitated plans for increased electricity imports, further straining the local currency. Moreover, a rising demand for dollars to import petroleum products has intensified pressure on the kwacha.
This recent slump in the kwacha is not new. The Zambian currency has depreciated more than 300% against the US dollar over the last decade.
Zambia has grappled with several economic challenges in recent years, especially a significant debt burden. In November 2020, it became the first African country to default on its sovereign debt during the COVID-19 pandemic, with its external debt rising from $4.8 billion in 2014 to $11.2 billion in 2019. More than three years later, Zambia is still negotiating with its creditors. However, progress was made in March when the government and a group of bondholders agreed on a deal in principle.
In an earlier interview with How we made it in Africa, Simon Bentley, managing director of Farm Depot – a retail chain that supplies a broad range of agricultural products to small-scale farmers – identified exchange rate volatility as one of his most significant obstacles. This has been problematic for Farm Depot, as some of its products, like fertiliser, are priced in US dollars but sold in kwacha.
(Read our full interview with Simon Bentley: The journey of building a retail chain for farmers)
American-born Carl Jensen, co-founder and CEO of Zambia-based Good Nature Agro (GNA), also cites macroeconomic issues, especially those pertaining to currency, as the primary challenges the company has encountered since its establishment in 2014.
GNA contracts over 20,000 small-scale farmers to grow legume seeds and commodities – such as cowpea, soya bean, and groundnuts – and then purchases these products from the farmers to sell at a profit.
Jensen says he has been surprised by how much the company’s direction has been impacted by forex-related matters. A scarcity of US dollars in neighbouring countries has also impacted GNA. A case in point is Malawi, where GNA was developing a strong customer base until a US dollar shortage in the country led to a significant decrease in imports.
According to Jensen, it has been a “rough ride” but he says he has confidence in Zambia’s current trajectory. “We’re still riding a depreciating kwacha but in large part it’s because some of the tough points are being addressed. The kind of out of control borrowing that took place years prior has left the country in a really rough spot … The government is working hard to restructure all of those and progress has been good. They’ve been cutting back on several programmes that were just kind of bleeding money … So even though it’s a little painful right now – with quite a bit of inflation, continued depreciation, higher costs where subsidies have been removed on things like fuel – I think it is all for the good.”
(Read our full interview with Carl Jensen: $10m company proves small farms can be big business)
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