Zambia’s currency and Eurobonds plunged after President Edgar Lungu’s shock dismissal of central bank Governor Denny Kalyalya raised questions about the independence of the institution.
The move comes at a critical time for the economy of Africa’s second-biggest copper producer, which is forecast to contract by 4.2% this year with annual inflation lingering near 16%. Debt is soaring and the fiscal deficit rapidly increasing as the coronavirus pandemic curbs revenue. Lungu’s decision drew criticism from economists, and even South African Finance Minister Tito Mboweni.
Zambia’s kwacha fell 0.7% by 5:46 pm in Lusaka to a record low 19.20 per dollar. The yield on the nation’s $1 billion of Eurobonds due 2024 surged 190 basis points to 30.34%, the biggest jump since April.
Lungu on Saturday named Christopher Mvunga as Kalyalya’s replacement. The former deputy secretary to the cabinet and deputy finance minister will have to contend with the world’s second-worst performing currency, which has lost more than a quarter of its value against the dollar this year. He’ll also need to limit the government’s growing dependence on the central bank to cover funding shortfalls.
"It is quite surprising because Dr. Kalyalya has performed sterlingly under very extreme circumstances," Trevor Simumba, an economist based in Lusaka, the capital, said by phone. "To fire him in this manner sends a very negative signal. I’m shocked."
Lungu didn’t give a reason for removing Kalyalya, who repeatedly urged the government to cut the fiscal deficit amid ballooning debt and falling foreign-exchange reserves. His dismissal could raise concerns among investors who saw him as a credible governor trying to keep a spendthrift government in check.
"It is imperative that central banks’ operational independence and credibility is maintained, particularly at this critical time when economic stability is threatened by the Covid-19 pandemic," the International Monetary Fund, which is considering a loan request from Zambia, said in a statement.
Isaac Chipampe, Lungu’s spokesman, didn’t respond directly on the decision, saying: "Let’s allow people to debate," and re-iterating that Mvunga’s appointment is subject to parliament’s ratification. Kalyalya didn’t respond to a text message seeking comment.
The move might be a response to the government’s failure to push through a constitutional amendment that would remove the responsibility of printing currency from the Bank of Zambia, according to Grieve Chelwa, an economics lecturer at the University of Cape Town’s Graduate School of Business.
"There’s been a struggle for control over the central bank," Chelwa said on Sunday.
The government had been increasingly relying on the Bank of Zambia for financing, even before the pandemic struck. Central bank holdings of government bonds increased to nearly 20 billion kwacha ($1 billion or over R17.6 billion) in July from 2 billion kwacha (R1.7 billion) at the start of last year. There are fears that Kalyalya’s removal could push Zambia toward the soaring inflation seen in Zimbabwe in the 2000s, according to Chelwa.
"You need to remember the decisive role Gideon Gono played in ruining monetary policy," he said of Zimbabwe’s central bank governor when hyperinflation began. "Mvunga is that kind of an appointee. He is too close to the presidency."
Mvunga declined to comment in a text message to suggestions from economists that he isn’t qualified for the position or has too close a relationship with Lungu to be independent.
Kalyalya previously served as deputy governor and spent years at the World Bank. Mvunga is an accountant who has worked for lenders including Standard Chartered Plc and Standard Bank Group. He doesn’t have the necessary experience in central banking, Simumba said.
"Christopher Mvunga is not capable of being central bank governor," Simumba said. "Let’s be very clear about that."