The Free Falling Kwacha_Media Called to Account

THE Kwacha has continued to depreciate, hitting a historical low of K7 - 1$ this week. Some bloggers and analysts have accused the media in Zambia of not doing enough to explain to the public what is truly at stake with the economy. A blogger recently said that Bank of Zambia Governor Michael Gondwe has only survived because of the poor journalism and party opposition in this country describing him as a lucky man.

Here is what Bloomberg reported on the Kwacha.

Zambian Kwacha Falls to Record Low for World’s Worst Drop in May

By Matthew Hill May 27, 2014 2:08 PM GMT+0200

Zambia’s kwacha retreated to a record low against the dollar, depreciating more than any other currency in the world this month, as lower copper prices and a tax dispute with mines curbed foreign-exchange supply.

The currency of Africa’s second-largest producer of the metal, used for electrical wire and water pipes, weakened as much as 2.3 percent, the biggest slide in two months, to 7.035 per dollar. The kwacha was trading at 6.9610 as of 2:03 p.m. in Lusaka, the capital. That extended losses in May to 9.4 percent.

The price of copper, which accounts for about 70 percent of Zambia’s foreign-exchange earnings, has declined 6 percent this year. Zambia Revenue Authority withheld more than $500 million in value-added tax repayments to mines, saying they didn’t comply with rules requiring import certificates from the countries their copper ends up in. The dispute is close to being resolved, the Chamber of Mines said on May 23.

“Supply of foreign exchange from the mines just hasn’t been up to the usual levels,” Razia Khan, head of Africa research at Standard Chartered Bank Plc (STAN) in London, said by phone today. The mining companies may be retaining foreign currency in expectation of receiving the VAT repayments, she said.

The slide in the kwacha seems “overdone” as relatively high yields on government securities may attract foreign buyers, Khan said.

Yields on Zambian 91-day Treasury bills rose 50 basis points, or 0.5 percentage point, to 9.5 percent at an auction on May 15. Rates on the nation’s Eurobonds due April 2024 dropped 9 basis points to 7.63 percent.

To contact the reporter on this story: Matthew Hill in Lusaka at mhill58@bloomberg.net

To contact the editors responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net Vernon Wessels, Emily Bowers

The Bank of Zambia has identified the source of its free falling kwacha to the factors outline in their brief statement below:

The Kwacha has been relatively stable in the last few years. However in 2013, the Kwacha was characterised by a depreciating trend against most major trade partner currencies, except the rand. The Kwacha depreciated against the US Dollar by 4.9% to an annual average of K5.39/US$ from K5.14/US$. Similarly, the Kwacha depreciated against the Pound Sterling and Euro by 3.6% and 8.3%, respectively.

This was partly on account of the US dollar appreciation following the strengthening of the US economy during the latter part of the year. The Pound and Euro weakness moderated on the back of optimism that their economies would continue to rebound. The Kwacha, appreciated against the rand by 10.7% to an average K0.5596/ZAR, reflecting the slowdown in mining output, following continued labour unrest in the South African mining sector.
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

Zambia Economist Chola Mukanga is of the view that the Bank of Zambia is not been sincere on the matter:

He accuses Gondwe of practicing intellectual prostitution. First of all, the Kwacha has been falling since 2011 not since 2013. Everyone can verify this for themselves. He ignores that.

Secondly, the sharpest depreciation Zambia experienced in 2013 was due to the credit downgrade which was caused by the worsening fiscal position. He ignores that.

Thirdly, though Zambia continues to suffer from liquidity tightening in the USA, like all frontier markets, it has performed WORSE than all other African economies. This is why the IMF has singled it out in its latest report. He ignores that.

Fourthly, if the effects of the Kwacha are purely external, then why is the IMF, World Bank and every economist with a basic diploma pointing to the worsening fiscal position as part of the problem? He ignore that!

Fifthly, GRZ's policy response is at odds with Gondwe's own superficial diagnosis. If the effects are purely external - why did the Government abolish SI55 & SI33? Why abolish an instrument that is so critical to monitoring our balance of payments position and deal with illicit flows? He ignores that!

Finally, given the external risks and the fact that many of us warned as early as late 2012, why did Gondwe and Chikwanda not heed those warnings? Why was the risk of falling copper prices, Chinese slowdown and tapering of credit not factored into the economic planning? Why did GRZ go ahead with fiscal recklessness and borrowing despite these early warnings? And why are they pursuing the same policies now? He ignores all these issues!

The country cannot move forward as long we have people like Gondwe in charge of sensitive institutions. His statements reinforce the view held by many that he lacks credibility. Look around the world and see the calibre of people who occupy central banks. People matter in policy making. And Gondwe is the wrong person

There is need to promote more dialogue and quality discourse on the matter and to ensure the media plays a role in ensuring confidence is restored in our economy.