As the country inches towards closure of the tobacco market, Alliance Capital Limited predicts tough times ahead for the economy with rising food and fuel prices on account of a depreciating exchange rate.
Going into the fourth quarter, the firm foresees the kwacha depreciating to unprecedented levels after months of stability.
Preparations for the next growing season and festivities are also expected to exert pressure on the county’s foreign exchange reserves.
The kwacha has remained relatively stable to the dollar in the last few months and the stability of the exchange rate created easiness in the market extending to the commodities, foreign exchange and money markets.
But in its Third Quarter Economic Report for 2016, Alliance Capital said it expects the kwacha to depreciate considerably in the next quarter fuelled by speculation and market sentiment soon after the official closure of the tobacco market.
“The tobacco market will close soon and government has already started making arrangements to have fertiliser and other inputs imported. Looking at the level the exchange rate is at currently, we expect it to depreciate considerably in the next quarter to unprecedented levels,” Alliance Capital said in the report.
The dollar is trading around K780 in most forex bureaus and as high as K795 on the parallel market.
The depreciated exchange rate is expected to drive inflation and fuel prices leading to escalating prices for goods and services.
“Although inflation eased off in the third quarter by registering a disinflation, we expect the price level to go up in the coming quarter.”
The firm also anticipates monetary policy to remain tight to curb inflation which is expected to be made worse by weather shocks which negatively impacted agricultural output.
“Since we expect the tight monetary stance to continue, we, therefore, expect the benchmark interest rate and the policy rate to stay unchanged. We also expect the interbank the interbank rate to remain elevated as tight liquid conditions continue in the market,” the firm said.