Early this year, the Zambian government demanded explanations from the central bank with regards to unsteadiness on interest rates arguably caused by the policies enacted.
(WATCH VIDEO: Zambia central bank postpones rates decision)
“They increased the statutory reserve ratio from four per cent to 14 per cent which has happened in a period of six months. The trigger for this was shoring up the Zambian kwacha against the US dollar,” Noel Nkoma, chief officer of Betternow Finance told CNBC Africa.
“When the dollar continued to appreciate against the kwacha, the government decided to implement other monetary measures like raising the minimum statutory reserve ratio on government deposits held by commercial banks,” Nkoma added.
The recent increase in Zambia’s interest rates has puzzled a number of the country’s citizens who in turn have asked the government to intervene.
Nkoma noted that, this has increased the cost of borrowing and the interest rates posing threats of decline that might see the country recede to levels it used to be. He however said the sector would work to stabilise the fragile currency.
“We will work to stabilise the kwacha against the US dollar, we are now seeing stability and marginal appreciation,” said Nkoma.
(READ MORE: Zambia central bank continues to intervene to stabilise kwacha)
This prevailing environment is likely going to raise inflationary pressure that could have adverse effects to one of southern Africa’s struggling economies.
The Bank of Zambia governor, Michael Gondwe has previously noted that inflationary pressures was partly as a result of currency depreciation.
“Factors contributing to these inflationary pressures include the depreciation in the exchange rate from the third quarter of 2013, higher food prices during the lean period between October 2013 and March 2014 prior to the crop harvest and the increase in fuel prices,” noted Gondwe.
He added that the announcement that electricity prices are likely to be raised, was also likely to add to inflationary pressures.
Some of the factors that have contributed to the depreciation in the exchange rate include noticeable reduction in the supply of dollars to the market, particularly from the mining sector, which accounts for the bulk of foreign exchange supply.