Zambia's currency, the Kwacha, tumbled to a record low as a severe drought drives up power costs and threatens the nation’s economy.

The Kwacha weakened for the 11th straight session, trading at 28.1200 per Dollar on Tuesday. The 0.4% decline marked its steepest decline in three weeks. 

The currency's slump is largely attributed to Zambia’s heavy dependence on the Kariba Dam for electricity generation. While water levels in the dam have risen slightly, they remain critically low at just 2.6% of usable capacity, forcing mining companies, key players in Africa's second-largest copper producer, to rely on expensive imported power.

Households and businesses across Zambia are grappling with prolonged power cuts lasting throughout the day, forcing many to rely on electricity generators powered by imported fuel, Bloomberg reports.

“A favourable rainy season could support a rapid recovery in hydropower generation, reducing Zambia’s electricity import bill,” according to Irmgard Erasmus, senior economist at Oxford Economics Africa. That said, “we prefer to err on the side of caution and place a higher stake on those meteorological forecasts that warn of a weak and short-lived La Niña.”

The Kwacha experienced a turbulent 2024, influenced by central bank interventions to support the currency and an IMF agreement. Over the past 12 months, it has depreciated by 8% against the Dollar, a decline similar to that of the Gambian Dalasi, Rwanda’s Franc, and Angola’s Kwanza, all ranked among the weakest-performing currencies in Africa, according to Bloomberg data.

Furthermore, Oxford Economics Africa predicts Zambia’s GDP growth for 2025 will be a below-consensus 3.4%, based on expectations of a lacklustre rainy season. 

Flows in the Zambezi River are currently significantly lower than last year, measuring just 321 cubic meters per second, compared to 525 at Victoria Falls, according to the Zambezi River Authority. Whilst at Chavuma, the river's flow is less than half of what it was a year ago, suggesting that the recovery remains uncertain.

Another source of pressure is the trade tariffs introduced by US President-elect Donald Trump. While these tariffs may not directly impact Zambia, they could have repercussions for China, one of Zambia's key trading partners.

“Our baseline considers higher imported inflation and further monetary policy tightening,” Erasmus added.