Currency Risk Exposure and Its Effect on the Performance of Import-Dependent Industries in Lusaka’s Manufacturing Sector from 2019 to 2023.

Abstract

Currency risk which is also known as exchange rate risk, is a significant factor affecting businesses engaged in international trade. In Lusaka’s manufacturing sector, many industries are heavily reliant on import of raw materials, technology, equipment, machinery, accessories, and components. Fluctuations in exchange rates can have profound implications on their cost structures, pricing strategies and overall financial performance. This study aimed to analyse the exposure to currency risk faced by import- dependent manufacturing industries in Lusaka and its effects on their performance from 2019 to 2023. The objectives of this study were to examine the key drivers of currency risk exposure on import dependent manufacturing industries, to analyse the effects of currency risk exposure on the financial performance of import dependent manufacturing industries in Lusaka, and to assess the effectiveness of risk management strategies in mitigating currency risk for import dependent manufacturing industries in Lusaka by the Bank of Zambia (BoZ). This research employed a mixed method approach. Quantitative data were collected from financial statements, exchange rate records, and economic reports. Key Performance Indicators (KPIs) such as profit margins and return on assets (ROA) were analysed in relation to exchange rate fluctuations. Additionally, qualitative data were gathered through interviews with industry experts and executives to understand their risk management strategies and operational challenges. The 10% rule was used to derive the sample size of 28 respondents from the 280-target population. Purposive and random sampling were used as techniques in which 28 were targeted for questionnaire administration on drop and pick basis. The preliminary findings indicate that significant exchange rate volatility between 2019 and 2023 has had a marked impact on manufacturing sector in Lusaka. Firms with robust hedging strategies and diversified sourcing were better able to mitigate negative effects, whereas those without measures experienced decreased profitability and increased financial strain. Also, this study reveals that external factors such as global economic conditions and domestic policy responses played a crucial role in shaping the extent of currency risk exposure. In conclusion, the analysis underscores the crucial need for effective currency risk management practices in import dependent industries. It also highlights the importance of policy interventions to stabilise macroeconomic environment and support the manufacturing sector’s resilience against exchange rate fluctuations. Recommendations for industry stakeholders include enhancing financial risk management capabilities, exploring alternative supply chain industries and advocating for supportive economic policies.