By Hjoe Moono
Yesterday, HE. MCS took the pain to address the growing concerns of a weak kwacha and cited among others the US Federal Reserve’s decision to reduce the amount of US dollar in circulation, the ripple effect of which is a legitimate fall in value of all currencies, kwacha inclusive. For all pessimists, whether PF or not, this is as certain as night and day, and when it happens, we as an economy, small and open, are on the receiving end. So perhaps I should commend HE. MCS for speaking, albeit briefly, on this subject matter which has become political hot air.
That said, when we complain about a weak kwacha, is the argument that we need a stronger kwacha? Currently, we are comparing what is happening to the 2005-2006 era under Levy Patrick Mwanawasa when the kwacha reached its all-time strong since being floated and market determined from 1991. But then, even then, sectors of the economy heavily complained and petitioned the government to intervene and ‘weaken’ the kwacha a little bit so as to encourage exports.
We all saw the grounding of ZEGA limited when exports of roses, our non-traditional exports died and jobs were lost. But then, we also saw the increase in the number of imports such as cars from Japan, manufacturing equipment etc. So then, what should governments do? There are always losers and gainers from an exchange rate movement, and this is a fact! All a government can and should do, if possible, is to maximise the gains, and thus justify the minimal loses to be suffered: This is a trade off, and if implemented well, is the mark of a true economic statesman. However, it is not easy at all, and ultimately, there is the temptation to ‘let the market play-demand and supply prevail’.
Is a strong Kwacha necessary
So, do we need a strong kwacha? Probably not! And before you accuse me of anything, here are the benefits of a devalued kwacha such as ours today:
1. Zambia’s largest export for the past and next 100 years will be Copper. Currently, our mines, most of them, are foreign owned and trade in international markets. Copper sales, invoices and deposits are not in Zambian kwacha, they are in US dollars, and these are rarely done in Zambia. Infact, Zambia is a ‘price-taker’ when it comes to the pricing of Copper, i.e., it is so small a country to influence the price of copper on the market hence ‘takes’ the price at the London Metal Exchange as ‘given’ and trades at the same. So, a stronger kwacha would not lead to much growth in exports at all, the copper would continue to be traded at an external price, and proceeds receipted in foreign accounts(we currently run a 100% profit repatriation of mining proceeds). So whether the kwacha is strong or not, its effects on copper exports is almost negligible.
2. When the kwacha appreciates-becomes strong- it negatively affects the proportion of exports that actually come from Zambian production processes such as fruits and vegetable, flowers, maheu, chibuku shake shake and all middle level manufacturing products that Zambian firms produce and export to neighbouring countries. This is the catch: Should we kill our understories by a strong currency? No. Employment will fall, and the gains to be had from industrial development will wither away! Zambia now exports steel, yes, we make steel in Zambia. We also export Cement, and with Dangote coming in soon more Cement will be produced and exported. A weaker currency like currently being experienced will make the export of such, which we call Non-Traditional Exports (NTEs), increase. The beauty of NTEs is that they are exported by Zambians, so the proceeds will come into Zambian banks, and further fuel production, thereby growing the sectors further. You may be aware that China was deliberately running a devalued currency against the dollar just so its exports could be made competitive and attractive on the international markets. When the Chinese Yuan was at its lowest, exports skyrocketed, and we all marvelled at the growth of China, didn’t we? What matters, like I said, is what you do to maximise the gains from a weak kwacha. Coupled with removal of export restrictions by ZRA, we will see a rise in the exports of all sorts of commodities for which there is an external demand.
3. While we may argue that there are few Zambians in diaspora, the role of remittances cannot be ignored in fuelling growth and local investments in our country. In 2013, the developing world received $414 billion in remittances. The World Bank estimates that by 2016, remittances will be around $560 billion. In 2012, $60 billion in remittances was sent to support more than 120 million family members back home in Africa. While the link between migration and remittances is significant, the kwacha equivalent of these remittances is of extreme importance in defining the local purchasing power. So while it may now be expensive for us in Zambia to send our children to school in the USA, UK etc., when our brothers and sisters abroad send us those dollars and pounds, they are worth more than before, and since we are still faced with low inflation levels, surely we shouldn’t complain much. The local purchasing power is still high and un-eroded. So rather than wish our colleagues in diaspora bad when they do even the odd of jobs, we should encourage them to send the few monies they may be saving to develop our country. That said, remittances’ role, like those of social cash transfers, cannot be under-estimated in helping to reduce poverty in Africa—they are an important safety net. With the weakening of the Kwacha, an increase in remittances is expected as non-resident Zambians take advantage of the cheaper goods, services and assets back home. Let us see opportunity here. Perhaps it is high time we reconnected with our colleagues in diaspora and started a business!
4. A freely floating exchange rate like ours, if devalued like is the case now, will notionally, as earlier stated, help improve exports, but by raising the cost of imports, it adds to input inflation, which, in turn, damages living standards, hampering domestic demand and ultimately hitting the cost competitiveness of exporters. It should be the government’s deliberate policy therefore to help stop the spiral of price increase from hitting the exporters who are now benefiting. This will help further drive the industrialisation agenda for middle manufacturing local firms. Remember, whenever you hear about competitiveness, it is all about a devalued currency!
5. High Kwacha Equivalent Foreign Direct Investment (FDI). We cannot emphasise the need for increased FDI to fuel our economy. Devaluation makes feasible high levels of kwacha equivalent FDI. Growth in FDI is key to national development, so if it could be maximised, the better for our economy’s continued growth. We may therefore not need to borrow further.
Given all the above, how we manage the proceeds from these gains, however, should be key. Fiscal prudence must be emphasised, while keeping an eye on need for local content development in manufacturing and industrialisation as well as maintaining sane competitiveness. No governments, ever, everywhere, given the freedom to spend what it likes would know when to stop. So we must exercise caution on the fiscus.
In conclusion, perhaps this is also the best time for our economists in government and academia to actually check for the equilibrium level of the kwacha. We may be too harsh on ourselves when we may actually be where we ought to be with regards the optimum level of the currency. That the inflation rate as given by the consumer price index has remained below single digit may signal potential for realignment within feasible fiscal bounds. But furthermore, this is also an opportunity for the PF to institute future corrective measures through its monetary policy instruments to help make the exchange rate stable. For the banks, this is an opportunity to introduce hedging financial instruments that would enable exporters and importers transact at set future exchange rate prices. The more global we become, the higher the need for certainty in transactions across currencies, and that is an opportunity for financial innovation.