Zambia: Kalyalya looks beyond the copper crisis
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Zambia: Kalyalya looks beyond the copper crisis

As Denny Kalyalya’s first term as Zambia’s central bank governor draws to a close, he reflects on the need for IMF support, the currency and debt crisis that engulfed the country two years ago and his efforts to deliver a recovery for the long term.

Zambia’s central bank governor Denny Kalyalya

Things are finally looking up for Zambia’s central bank governor, Denny Kalyalya, after a volatile few years for the southern African country. Reforms and economic recovery are under way, and the country has moved beyond the commodity-driven crisis of 2015. As his first term in office draws to a close, Zambia is in talks with the IMF about a possible $1.3 billion loan. “This year we see more prospects,” Kalyalya tells Euromoney Africa. “In 2017, things are looking a lot better.” 

Factors outside the country’s control have contributed to a more upbeat mood. Copper prices have recovered, recently trading at over $6,500 a tonne for the first time in two and a half years, and abundant rainfall has filled the reservoirs for hydro-energy and bolstered agricultural output.

It is all helping confidence return to the market for Zambian risk, even in local currency.

“This year we’re beginning to see the portfolio players coming back,” Kalyalya says. “They had pretty much exited the short end of our government securities in the money market. Now we see that they are coming back – more tilted toward longer-term paper, three-, five- or even 15-year government paper.”

Local currency sovereign debt issuance, which occurs every two months, is attracting more investor interest, a sign that investors’ mistrust of Zambia in 2015 is abating.

“We have seen a lot more healthy appetite, and the interest rates have also started to come down,” he says. 

It was very disruptive and there was really a threat to the effectiveness of monetary policy - Denny Kalyalya, Bank of Zambia

IMF support would further help Zambia’s recovery, bolstering the country’s reserves, which stand at about $2.3 billion in the wake of the currency crisis. Having the IMF on board would enable Zambia to cope with the high cost of servicing its debt and make the burden more sustainable, Kalyalya says.

“We pay twice a year, so it’s quite a hefty bill,” he says of the interest rates on the country’s three Eurobonds, which total $3 billion. “In a depreciating currency, that really puts a toll on the reserves.”

Yet two years ago, soon after taking up the position of governor, he says he felt helpless and disheartened. As Zambia’s currency, the kwacha, spiralled downwards, shopkeepers would constantly erase and rewrite price tags, updating in real time the cost of the items they sold.

“It was very disruptive and there was really a threat to the effectiveness of monetary policy,” Kalyalya says now of that brief period when the central bank seemed to have lost control of the situation. 

People started calling the kwacha the zimkwacha, a reference to Zimbabwe’s virtually worthless currency.

“We had to act to stem that,” he says.

Kalyalya, who was an executive director at the World Bank with oversight of 22 African countries including Zambia before he returned home to take up the job of central bank governor, says he wanted to prevent Zambia from going the way of its troubled southern neighbour. Two years on, that worst-case scenario appears to have been avoided. Kalyalya says the reforms Zambia is now pushing through will make its economy, currency and banking sector more resilient to stresses in the future.

The crisis in 2015 stemmed in large part from Zambia’s economic dependence on copper, which is the country’s main export and accounts for a whopping 70% of Zambia’s foreign exchange earnings and close to 30% of government revenue. 


Copper had fuelled the country’s economic boom, generating an average annual GDP growth of 6.4% over the previous decade. But when copper prices fell, because of lower demand from China, one of the main consumers of the commodity, the Zambian economy took a severe hit.

The kwacha fell, and the central bank’s move to raise the statutory reserve ratio in 2014 was not enough to ease the pressure.

Early on in his tenure, Kalyalya said he would deal with currency volatility with measures including tightening liquidity. But while that helped the kwacha recoup some of its losses against the dollar, the challenges facing the central bank soon became even greater, culminating in Zambia’s Black Monday on September 28, 2015, when the currency fell about 16% against the dollar in a single day.

“It’s like you are driving and you see the needle going,” Kalyalya recalls of the speed at which the currency fell. 

Zambia’s woes on that day were aligned with those of mining group Glencore, the second-largest employer in Zambia after the government.

Glencore plunge

Glencore’s share price plunged 30%, ostensibly in response to a research note that had suggested that in a worst-case scenario Glencore’s equity value “could evaporate”, because of low commodity prices and the company’s high indebtedness.

Copper had fallen to a six-year low of under $5,000 a tonne, and Glencore had already said the week before that it would lay off 3,800 workers at Mopani Copper Mines, prompting investors to conflate Glencore’s prospects with those of the entire country.

“People were looking at Zambia as if it were Glencore,” Kalyalya says.

The depreciation also made it harder for Zambia to service its $3 billion of Eurobonds, which it had issued to fund infrastructure projects but which now placed a heavy burden on government spending and the broader economy. 

Word spread that the central bank would put up exchange controls, a rumour that Kalyalya says was utterly false but that caused further market panic.

“As if that was not enough,” Kalyalya says, “we had an electricity shock, rising from low water levels in our reservoir, because Zambia is dependent on hydro for its electricity generation. We had along with that big fiscal challenges – expenditures were running ahead of revenues. This just compounded the problems, in that export earnings came down very significantly, which meant the companies operating in that space were also affected.”

With just $4 billion of reserves, some wondered how long the central bank would be able to prop up its currency. Inflation was 10.1% in 2015, up from 7.8% the year before, and hit 21.1% in December 2015.

In response, Bank of Zambia tightened monetary policy by raising the policy rate from 12.5% to 15.5%, restricting commercial banks’ access to the Overnight Lending Facility to once a week and providing foreign exchange to the market. 

The central bank also strengthened the foreign exchange market code of conduct: price discovery had been opaque, so the central bank made it more transparent by asking commercial banks to submit their exchange rates three times a day and then publishing those rates so that banks could not deviate from the prices they had given.


Caps on lending rates were lifted to allow for a more flexible credit market that might give greater support to the real economy. These measures were in addition to the increase in the statutory reserve ratio in the first quarter of 2015, up from 14% to 18%.

Bank of Zambia’s action helped to mitigate the damage and calm the markets. By the end of 2016, inflation was back down to a more reasonable 7.5%.

Inevitably the currency depreciation had a wider impact, reducing economic activity and hurting the banking sector, although this is now recovering, Kalyalya says. “In terms of the non-performing loans, the sector was affected, but profitability was still quite positive.”

However, Zambia remains highly dependent on commodity exports and still suffers from the cost of too much debt.

Five years ago, just 8% of government expenditure went on servicing the country’s debt, according to the World Bank; now the figure is an unhealthy 20%. The IMF puts the ratio of gross debt to GDP at nearly 58% for Zambia.

Interest rates on bank loans are still prohibitive for the average customer. “That’s one of the major problems,” says Kalyalya. “You are talking mid-20s for retail loans. Corporate loans are much lower because they are negotiable, but for those guys who can’t negotiate, you are stuck with it.” 

With the monetary policy rate at 12.5%, he would like retail loan rates to be closer to that level. 

They were running arrears, they were printing money from the central bank, they were doing a lot of things that were very unorthodox, because they didn’t have many alternatives - Stuart Culverhouse, Exotix

However, Kalyalya does not want Zambia to impose a cap on commercial interest rates. Zambia had such a cap until 2015, when he decided to remove it.

Kenya has recently introduced a cap of its own – to the despair of that country’s central bank governor. Far from improving access to credit, such caps cause banks to reduce the amount they lend, further hurting those who struggle to get credit, Kalyalya says.

“We had a cap but it didn’t work,” he says. “You see a rationing in credit. It’s the wrong direction to go.”

Still, Kalyalya thinks solutions to Zambia’s many problems are within reach. When he spoke to Euromoney Africa in the middle of the year, he expected support from the IMF to be imminent, citing $1.3 billion as a possible figure for an IMF loan to Zambia. “We have been in those conversations for some time now.”

Stuart Culverhouse, head of research at boutique investment bank Exotix, says that investors have been supportive of Zambia recently because they expect it to sign a deal with the IMF soon. 

“The markets were very content to be optimistic about asset prices etcetera on the hope that there would be an IMF programme. They’ve had that frame of view for the past 18 months,” he says. 

By late September, there was still no agreement with the IMF over an aid programme. Talks were to resume in October.

Vulnerable recovery

Without IMF support, Zambia’s recovery would be vulnerable because it is still largely contingent on the rising price of copper. What the country needs, in Culverhouse’s view, is not just the IMF money but also the oversight and the discipline that come with an IMF programme.


Stuart Culverhouse,

“They were running arrears, they were printing money from the central bank, they were doing a lot of things that were very unorthodox, because they didn’t have many alternatives,” he says of the country’s response to the recent crisis as money ran out. “Under the context of a programme, they are going to have to start adjusting. And some of those measures are going to be tough, but they will adjust in an orthodox way and the markets will like that.”

Based on its assessment of the state of the Zambian financial sector, the IMF has already recommended a number of changes to banking regulation, and the central bank too, Zambia wants to introduce a deposit insurance scheme and digitize most of its payment processes.

Parliament has also passed a law introducing a central collateral registry, which enables banks to determine if an asset has already been pledged as collateral against another loan. It also broadens the range of what can be used as collateral to include livestock, for example, which would help farmers to obtain credit.

As for the central bank, Kalyalya says the quick spread of panic-inducing rumours at the height of the crisis convinced the institution to be more transparent in the way it communicates with the market, the public and the press. 

“If there are shocks, we stand ready to make that known and what actions we will take. We want predictability so that people see we don’t ambush anybody.” The central bank plans to hold educational seminars for the media, he says.

More broadly, Kalyalya is adamant that the Zambian economy has to expand the range of sectors on which it depends, beyond copper. 

“One of the lessons we are learning is we really need to diversify our economy, in terms of export earnings and also to really help increase growth,” he says. “If growth is driven by the mines, really you don’t have much linkages to the domestic economy and employment. Mining is highly automated; that is a concern.”

Areas where Zambian business could grow, he says, include agriculture, the renewable energy sector – the country is developing solar – and manufacturing. He mentions leather as an example of an export that Zambia has made attractive to foreign buyers. 

“Zambia exports hides for Mercedes Benz. If you buy a Mercedes Benz, the chances are the leather is from Zambia.” 

As for Kalyalya himself, his three-year term ends in early 2018, but he gives no clues as to whether or not he expects to be reappointed, a decision made by the president with parliamentary approval.

“It’s not for me to say. Let people judge whether I’m contributing effectively,” he says when asked about his future in late June. “Let’s put it this way, I’m turning 60 in August.” 

He won’t clarify whether he sees that as the right age to retire, but he says that he is confident that whoever takes the job will continue to implement reform. 

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