(Bloomberg) -- Zambia’s currency kwacha plunged to a record low as a severe drought increases power prices and risks hurting the African nation’s economy.
The currency weakened for an 11th consecutive day to trade at 28.1200 per dollar by 2:06 p.m. in London. Tuesday’s 0.4% retreat was the biggest in three weeks.
Zambia’s reliance on the Kariba Dam for electricity generation has been a key factor in the currency’s decline. Although the dam’s water levels rose slightly, they were still only at 2.6% of usable storage, forcing mining companies of Africa’s second largest copper producer to resort to costly electricity imports.
The country’s households and businesses are facing day-long power cuts, making them dependent on electricity generators that burn imported fuel.
“A favorable rainy season could support a rapid recovery in hydropower generation, reducing Zambia’s electricity import bill,” said Irmgard Erasmus, senior economist at Oxford Economics Africa. However, “we prefer to err on the side of caution and place a higher stake on those meteorological forecasts that warn of a weak and short-lived La Niña.”
The kwacha had a volatile 2024, thanks to central bank action to defend the currency as well as an IMF deal. Its 8% weakening against the dollar over the past 12 months is roughly in line with depreciation of the Gambian dalasi, Rwanda’s franc and the Angolan kwansa — all in the bottom third of the continent’s currencies, according to data compiled by Bloomberg.
Oxford Economics Africa forecasts Zambia’s GDP growth in 2025 to be at a below-consensus 3.4%, given the assumption of a disappointing rainy season.
Flows in the Zambezi River remain well below last year’s levels at 321 cubic meters per second, which compares to 525 at Victoria Falls, according to the Zambezi River Authority. Further upstream at Chavuma, flows are less than half of what they were a year ago, indicating that the recovery is still far from secure.
Another pressure point is the US President-elect Donald Trump’s trade tariffs, which are unlikely to affect the African country directly but could impact China, one of Zambia’s close trading partners.
“Our baseline considers higher imported inflation and further monetary policy tightening,” Erasmus said.
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--With assistance from Taonga Mitimingi and Matthew Hill.
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