Zambia Central-Bank Head Kalyalya Faces Another Tough Test

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Zambia Central-Bank Head Kalyalya Faces Another Tough Test

  • President Edgar Lungu extended the governor’s contract
  • Kalyalya seen as a steadying hand at the Bank of Zambia

Bank of Zambia Governor Denny Kalyalya can’t seem to catch a break.

When he took leadership of the central bank in Africa’s second-biggest copper producer three years ago, the economy was on the brink of a crisis, with inflation rapidly accelerating to reach 22.9 percent. Now that he’s had his contract extended for five years, a new set of problems are emerging.

The kwacha has fallen almost 7 percent against the dollar over the past month to the weakest since December. Inflation is at the highest in more than a year. Foreign-exchange reserves have plunged to the lowest in eight years. And Zambia’s Eurobonds are the worst-performing in emerging markets in 2018.

“If there’s one central-bank governor in the last 15, 20 years who I can give full kudos to, it’s Kalyalya,” Oliver Saasa, chief executive officer at Lusaka-based Premier Consult Ltd., said by phone. “We have seen the monetary policy as a part of the equation really being praised, not only internally but also externally.”

President Edgar Lungu renewed the contract effective February, the regulator said in an email on Thursday. This will see Kalyalya, who was first appointed in 2015, oversee the nation’s monetary policy until at least 2023. The only other governor to serve longer was Caleb Fundanga between 2002 and 2011.

Steady Hand

Kalyalya, 60, has been seen as a steadying hand at the central bank, not afraid to criticize the government’s loose fiscal policies at times. He led the institution through one of the most turbulent economic periods in the country’s history after a power crisis and a collapse in copper prices prompted Zambia’s currency to drop by around 50 percent the year he took over from Michael Gondwe. Economic growth decelerated to 2.9 percent in 2015, the slowest this millennium.

Kalyalya’s monetary policy committee responded by raising the central bank’s key lending rate to 15.5 percent, and held it there until early last year before cutting as inflation slowed to 6.1 percent by December.

While foreign reserves dwindle, the government is grappling with increasing external debt servicing costs. The International Monetary Fund already classifies the nation at high risk of debt distress. The government has been working to secure a $1.3 billion lifeline from the Washington-based lender, but talks have stalled.

The central bank’s local-currency debt auctions have also started showing signs of strain, as the amounts raised at the last two plunged. This will make it difficult to fund the government’s budget deficit, targeted at 6.1 percent of gross domestic product for 2018.

Kalyalya’s biggest challenge is the government’s “lack of a sufficient shift towards fiscal balance and debt sustainability,” Gregory Smith, sovereign debt strategist at Renaissance Capital, said in reply to emailed questions.

“The job of the central bank would be made easier if the government were willing to calm down the rate at which it is borrowing, and with such a signal rekindle talks with the IMF,” said Smith, a former economist with the World Bank in Zambia. “At the current low levels of international reserves, and without an IMF program in place, the economy remains vulnerable to a slide in the copper price or further rally of the U.S. dollar.”

— With assistance by Paul Wallace

(Updates with analyst comment in final two paragraphs.)