Deeper insights into the depreciation of the kwacha

THE depreciation of the Kwacha against major convertible currencies in recent times is unprecedented. Market analysts have complained of the lack of information and assurance from the Central Bank and the Ministry of Finance which has fuelled speculation. The depreciation may further be exacerbated by the political risks associated with speculations on the heath of the republican President.

Bloomberg News reported late May that Zambia’s kwacha retreated to a record low against the dollar, depreciating more than any other currency in the world in the month of May. They attributed this slump to lower copper prices and a tax dispute with mines which curbed foreign-exchange supply. The last time the Bank of Zambia explained the depreciation they attributed it to external factors. In a statement released on 29^th May, 2014 by the central bank indicated that the weakening of the Kwacha was temporal considering that copper prices were already creeping upwards. The supply of Foreign Exchange on the interbank market had on average exceeded demand and that the country’s foreign exchange position had significantly improved.

The central Bank advised the public to desist from taking speculative positions on the kwacha as this may result in huge financial losses on their part when the kwacha reverts to an equilibrium position consistent with economic fundamentals.

The rapid fall of the Kwacha continues to puzzle many people. Despite widespread praise for the revocation of SI 55, the impact of the decision on the kwacha has not been positive if anything it has worsened. A few analysts had actually warned that the abolishment of SI55 would only make things worse not better.

This was because SI55 prevented politicians and big multinational organisations from taking money out of the country illegally and without prior authorisation. Zambian Economist Chola Munkanga observed that the removal of SI 55 would result in worsening position because with the currency being vulnerable already, it will lead to even more leakage from our financial system. Except now no one knows where the money is going and by whom. Indeed without the procedures there is little incentive for some companies to even bring the money back to Zambia.

It is worrying that the few mild statements coming from central bank are not making reference to the large political risks associated with Zambia, increasing erosion of investor confidence, widening fiscal problems, rising external and domestic debt, poor global forecasts for copper, tapering of US credit, increased outflow of money made by construction companies (the revolving door phenomenon), rising demand for imports, and so forth. The list is endless.

Earlier on Bank of Zambia Governor Michael Gondwe commenting on the depreciation of the kwacha made the following remarks:

“...In the first quarter of 2014, the Kwacha depreciated by 10.0% to K6.09 per US dollar. This development was largely attributed to a high demand due to a higher growth in imports relative to exports, as well as investor sentiments associated with the tapering of quantitative easing in the United States of America coupled with falling copper prices on the global markets. Similar weakening of currencies was observed in most emerging market economies such as Ghana, South Africa and Turkey.
(Source : Bank of Zambia

Lusaka businessman, accountant and aspiring parliamentarian Brian Kambita points to negative political statements as driving the currency wild. He says politicians should not want to gain mileage from it

“...the statements so far are running the exchange rate crazy. What should we do? (a) Consider positive publicity of Zambia's business opportunities without declaring an exchange rate crisis to those who have already invested here (b) The Minister of Finance should regularly make policy statements that give adequate confidence to the investing party. This move will guard against the unrealistic demand for the $ emanating from panic ideas of trying to beat the expected rise in exchange rates, mainly announced by rumour and careless talk. I remain neutral on this."

Most Zambians feel the government is not doing enough to steer the country in the right direction. Munkanga feels there is need to restore policy confidence by immediately firing Gondwe and Chikwanda. He says in any other country they would have stepped down and allowed people with fresh ideas to have a go at restoring policy and economic credibility. Without a change of personnel there cannot be any new changes.

The Bank of Zambia (BOZ) governor must be employed through a competitive process under competition. The UK has a Canadian bank governor. The point is not that we should copy them. Rather we need to put national interests above petty politics. That means putting the job out for competition and let those who want to apply go for it. The President can then appoint from successful candidates. We need a competent man or woman in charge.

There is need to take forward legislation that will guarantee operational independence of the central bank. This will immediately signal improved policy credibility. It does not require change in constitution. This should also be accompanied by a new Debt Management Bill that gives greater authority to parliament on domestic and external borrowing.

The President should send a clear signal that the era of unsustainable borrowing and rising fiscal deficits has come to an end. This is really at the heart of our challenge. Many investors and ordinary Zambians do not believe PF understands the scale of the challenges facing the country. It is therefore important that a new "austerity programme" is instituted that focuses on identifying current public sector waste (e.g. close embassies, reduce size of cabinent, get rid of the new government bank for civil servants, cut CDF spending, halt plans for new stadiums, re-targe the roads and rail programmes, etc). No more new excessive spending until the current road and rail infrastructure programme is complete.

There is also need for Zambians to be prepared for the benefits of a weak but stable Kwacha. The problem is not the level of the Kwacha per se. There are significant competitive benefits to a weaker currency. The problem is stability. And politically the public has to understand why a weak but stable currency is potentially good for a developing country. This requires PF to accept that they were wrong to champion a strong Kwacha at all costs during the elections. They sold a lie and now they are being held hostage to it. Kazhila Croffat Chinsembu commenting on Facebook said, “I think now is the time to expand local manufacturing, increase value addition, and incentivise exports. Let's move away from being import dependent. Boz has to balance the strength of the Kwacha carefully or as it is the Kwacha will find it's own equilibrium.”

Chola recommends a complete rethinking of our economic policy. The President needs to appoint a new independent economic commission that will come up with new policies to guide Zambia forward. Crucially such a body should be tasked with coming up with a clear policy on mining taxation that is fully consulted on with the public. In the long term the Economic Commission could be given wider remit on other areas e.g. industrialisation. This discussion is healthy and must continue.