By Hjoe Moono
I am rather disappointed at Dr. Mbita Chitala’s proposals to the PF in his article that the PF should consider bring back foreign exchange proposals in order to curb the rapidly depreciating kwacha. While I would vehemently agree that our currency isn’t performing well, I disagree that it is in such a dire situation as to warrant the introduction of foreign exchange controls.
If the PF listens to Dr. Chitala’ advice, it would have succeeded in taking Zambia back to the 1970s through to the 1980s when these controls were tried and failed, leading to economic stagnation, emergence of a thriving black market and ultimately political failure of UNIP. These proposals are regressive, archaic and have no place in a modern and open economy like Zambia whose currency’s performance is heavily dependent on copper. I will offer my rebuttal of Dr. Chitala’s recommendation with a bit of history first.
Between 1989 and 1992 Zambia moved from a highly regulated foreign exchange regime with a seriously overvalued exchange rate to a unified floating exchange rate. Today the Bank of Zambia (BoZ) operates a managed float of the kwacha with no predetermined path for the exchange rate. The official exchange rate is determined on the interbank market with the BoZ’s interventions aimed primarily at reducing short-term volatility.
When the proposals that Dr. Chitala is proposing where in place, Zambia had experienced almost 20 years of steady per capita income decline. Per capita income declined on average by around 2 percent a year between 1970 and 1989 mostly caused a heavy reliance on quantitative rationing and price controls, instead of fiscal and monetary policies, to contain inflation and defend the exchange rate.
The fiscal deficit averaged almost 13 percent of GDP during the 1970s and 1980s and the controlled exchange rate was consistently overvalued and export volumes declined sharply. Foreign exchange transactions were highly regulated to conserve foreign exchange and contain inflation; foreign exchange receipts were required to be surrendered to the BoZ, foreign exchange was allocated to priority transactions on a case-by- case basis, and exports and imports were subject to licensing. The controls and seriously overvalued official exchange rate pushed economic activity into the informal sector and depressed exports (IMF, 2013).
However, the price controls and Pegging/fixing of the exchange rate failed to lower inflation—the headline inflation rate was persistently around 50–60 percent in May 1987–October 1988 when the exchange rate was pegged to the dollar(as Chitala is proposing), gradually rising to almost 100 percent in mid-1989,gave rise to a black market, and by 1990s when these failed policies had taken full effect, the official kwacha/U.S. dollar exchange rate increased by more than 3000 percent between June 1989 and December 1992 even in the face of controls!
Key Message: Government has no capacity to consistently manage foreign exchange controls! Such controls, if initiated, are deadly to the economy.
The ability to maintain a fixed exchange rate as being proposed by Dr. Chitala is dependent on the Bank of Zambia’s level of Foreign Exchange Reserves. Foreign-exchange reserves are assets held by the Bank of Zambia usually in US dollar and these have an important role to play in monetary policy formulation and execution.
Under a fixed/pegged exchange rate regime being proposed by Dr. Mbita Chitala, the Bank of Zambia needs to trade domestic currency in the forex market to balance supply and demand, which will keep the exchange rate stable or, where applicable, within the fluctuation bands. To conduct such transactions, the central bank needs to maintain a sufficient level of foreign reserves to maintain confidence in the fixed exchange-rate policy. Smaller reserves should generally suffice under a floating exchange rate—as has been the case since 1992—since the central bank does not need to intervene to defend the currency. We have seen recently the impotency of BOZ to intervene in the foreign market owing to depleted reserves.
The $178million pumped into the economy in the first quarter has failed to yield any results, but has rather actually further depreciated the kwacha. Where would BOZ get the reserves to run a fixed exchange rate as Dr. Chitala is proposing? Let us assume it offloaded all the dollars it has, it will take utmost only two weeks for demand to outstrip supply, and then we would see an explosive depreciation of the kwacha, taking us to levels poorer than we are experiencing now. There is clearly no room nor capacity for BOZ to take the luxury of foreign exchange controls.
Yes, it is true that we haven’t had prudential prudent economic management for a while but we are not in a dire state as to go the Chitala way. Contrary to what Dr. Chitala has romanticised on capital flight, an introduction of forex controls will immediately give an even stronger currency black market and we will have within days people starting to send their forex abroad thereby further weakening our kwacha. With a consistent fiscal deficit, this move will further lead to our economy downgrade and lead to low investor perceptions, leading to a decline in FDI and growth of the economy.
Such a proposal is clearly regressive, and would take us back to the days Zambians thought were behind them—the long gone Kaunda days. Unless Dr. Chitala has an interest in being an active player in the black currency market along Katondo Street, I find such proposals disappointing from a man of his experience and exposure to macroeconomic policy.
In March we wrote with caution to the PF that: There are some ever-present opportunistic and self-serving economists who would claim that they know better than most others and pronounce that those who are giving warning signals about the economy such as we are doing are wrong. These have been seen in the corridors of power before and represent a group that is always hungry for appearance on television and in newspaper columns and to attract the attention of those in power, thereby offering themselves to “serve” the country.
Some may be in government already. The PF should be cautious of such. There is no magic wand to save the economy from the current crisis, and only a determined government that undertakes structural economic reforms will bring some hope of economic recovery, and there is an opportunity for the PF to do this and more.
Dr. Mbita Chitala suits this description, and the PF should be wary of such advice. Here is a man who served in the same MMD that made possible a stable currency after Kaunda’s massacre of the economy in the 1980s, yet, today, out of power and favour, he soothes the PF by saying they inherited such exchange rate management problems from the MMD, and goes on to prescribe deadly recommendations that have the potential to further cripple our ailing economy.
Someone recently commented: You do not stop a fire by pouring petrol into the roaring flames….you will only create an explosion! Dr. Chitala’s proposals amount to total destruction of the monetary system and economy, and should thus not be entertained.
I wanted to reserve my comment on Chitala’s “analysis”. It is the most dull analysis i have come to know coming from a PHD holder! Foreign Exchange controls in the 21st Century! The tried and tested failed policy in Zambia and elsewhere! Anyway, Chitala and his ilk are communists at heart who are in denial about the failure of the system they believed in at University.By the way, what is his PHD in! He was in MMD as one the policy makers, why did he support the decontrol of foreign exchange. In my view, the advice he is giving to PF is to ensure that they make things worse! Be careful PF!
I concur with Hjoe and Mwansa. By the way he holds a PhD in Public Administration and how he has become an economist one wonders. The doc does not understand morden economics in which fixed exchange rate regime renders monetary policy inneffective and adding capital controls also renders fiscal policy impotent. Now one wonders what economic stabilisation policy the country will be using if both fiscal and monetary policy is rendered impotent. This government and those to come should be care with the kind PhD holders they are seeking help from. In addition, our journalists should also check the professional and academic background of their sources expertise information. PLEASE DONT CONFUSE PEOPLE DOC STICK TO PA YOU ARE JUST EMBARASSING YOUR SELF
Chitala’s proposal may not be the best for the country and has been roundly condemned in the above article.
The point is he was being patriotic and progressive by expressing and suggesting alternatives and not merely condemning.
While the writer of the above article who constantly refers to himself as “we” condemns Chitala, he has not offered or suggested alternatives to Chitala’s.
Between the two, the writer of the above article is disingenuous, dangerous an extremist, and an accomplished alarmist
@Gen
Its a pity that you sound intelligent but you lack “can you remember” skills taught back in primary schools. It seems you can only understand the articles fully if the author writes the solutions in bullet points and labels them as solutions.
Mr Mono, a Havard/Cambridge/ Oxford post PHD researcher in London is a well educated young man with vast research experience in economics . When he writes , he embeds the solution to questions many are asking in his articles.
Its unfortunate that PF cardres like you, do not find solutions in his articles because you either simply can not read between the lines or you simply take a partisan view that any solution from a non PF supporter is not good. PF is on its way out,whether you like it or not. They ‘ve done enough damage to our…
Wanzelu, stop lying. You are violating the meaning of your name. Moono has never been to Harvard or Cambridge as you claim. Even if he had been, that does not make what he says right simply because of that. He does not have a PhD and is certainly not a ‘post PHD researcher’, as you lie. Hero worship him. It’s your right, but please do so with facts.
Is Derric’s PhD in economics or political science?
Why do you ask? So that you dismiss Mbita’s views on that basis? Come on, that is cheap! Don’t you know that there is a strong relationship between politics and economics. This probably explains why there are a number of courses titled: ‘Political-Economy’ of this or that. Just share your views without seeking to quarantine others from discussions on the basis of what they have studied or not studied. In any case, who is an economist? This question has become as complicated as who a journalist is today. The definition of an economist as someone whose BA, for instance, was in economics is very narrow, shallow and belongs to the late stone age. Some of the renowned economists who are Nobel winners have never even studied economics at undergraduate level.
The rand is also behaving badly and very badly indeed. The kwacha hit the K7 to the dollar mark and so did the rand hit the R10 to the dollar mark. Most currencies regionare perfoming badly against the dollar. This includes Kenya, Tanzania, Malawi, Mozambique and Namibia. There is nothing strange about this. Those who follow currency performance trends will know about this. So do not just yap yap! Suddenly you have become economists or bankers? And yet most of you know nothing! Just keep quiet!
South Africa’s GDP has fallen and there is fear of the recession now.
its like telling your children that a number of our neighbours sleep without eating just like us. its not just us. mean while you even know that there are other neighbours who are not struggling like you are such as botwana, uganda, nigeria
@Yamba
Perhaps you are not residing in Zambia. In case you missed it the Kwacha together with the Ghanaian Cedi, was the worst performing currency in Africa. In December last year it was K5.40 to the US Dollar and now it is K7.20 a depriciation of 30 percent in six (6) months. Now imagining all the goods that you find in the supermarkets and shops that are imported increasing by the same percent
I STILL VERY MUCH DOUBT THAT IT WAS MBITA CHITALA WHO PROPOSED THAT BECAUSE THOSE WERE VERY DANGEROUS AND REPUTATION DAMAGING REMARKS! I AM STILL WAITING FOR HIM TO EITHER STATE THE CIRCUMSTANCES UNDER WHICH HE SAID WHAT HE IS REPORTED TO HAVE SAID OR FOR HIM TO WITHDRAW THESE PROPOSALS OR REMARKS. STRANGE REALLY!
Imwe, Mbita just made his own personal opinion. Besides most countries including RSA, Namibia have controls so where was he wrong. We do not just have clever economists at the moment most of them were fired with Mwadya Mweka Daddy (MMD). My advise to PF is that lets separate technocrats from politics. Technocrats usually work for the Govt In Power (GIP) and not for a party. I personally think Caleb did well and such people must not be encouraged into joining politics.
Why criticize Mbita when he only gave his point of view, please give yours whether good or bad and some one will analyse and pick the most favourable.
I do not like the idea that is being suggested that because I did not study economics, then I should be excluded from any economic discourse. We live economics daily. Surely if my ideas are wrong, purify them of their weaknesses and share yours without the arrogance of self-righteousness or thinking that because you did economics, then what you are saying is correct. Let our ideas gain currency not on the basis of what we have studied or not studied but their worth, their merit. It is stupid to suggest that because you did not study this or that, you cannot formulate an opinion on a subject particular to that field. Godfrey Miyanda has come with brilliant arguments on law issues but is not a lawyer.
Just to add that even the World Bank President presiding over the world economy is not an economist, but a medical doctor by profession.
And Mr Moono, simply because something has not worked before does not mean it cannot work now. There are so many variables. You should have given us reasons as to why exchange controls failed to work under UNIP and why you think they may fail to work even now. It may well be the case that we have learnt lessons from that experience and are determined to improve this time. The argument that these are ‘modern times’ – what modern times! – is simply not persuasive. Al times are modern for those who live in them! I do not support full exchange controls, but do you know that the US which is said to to the most liberalised economy is also the most regulated economy in the world including when it comes to forex market/financial market?
Furthermore, you say that “There is no magic wand to save the economy from the current crisis, and only a determined government that undertakes structural economic reforms will bring some hope of economic recovery, and there is an opportunity for the PF to do this and more.” But you stop short of making any recommendations at all. In other words, I have not seen the specific structural reforms that the government should undertake. I wish you had made specific proposals, as Mbita Chitala (whom you and other commentators here want to quarantine in silence because he did not study economics) did. Learn to offer alternatives, however unconstructive they may be, instead of simply criticising and making vague statements. Let us raise the level of debate.
Every one is free to give his opinion. To the best of my knowledge, most big economies have got stringent exchange controls. Countries like Japan, China, UAE, USA all hve exchange controls. So bwana dont just critical for nothing.
By the way, can the author define what he means by economic crisis?
..I’m disappointed and disgusted with the economic fraternity…..with their ‘shooting in the dark’ approach…. Chitala is ok……
If there is an outbreak like Typhoid, Cholera…medical personnel swim into action and within no time the disease in contained…
But with the economic world, there seem to be no laboratories, diagnosis, prognosis…..How can you conquer an ‘epidemic’..??
What is happening to our Kwacha can be likened to someone having a headache. In medical circles, headache is not a disease but an indication that something is wrong within you…..Doctors subject you to a medial examination, checking everything…your BP, all internal organs etc until they ‘tumble’ on the source of your headache. Thats what Chitala and group are doing….checking everything…..
The focus should be on moving the economy away (diversifying) from its heavy reliance on copper to other sectors of the economy(such as agriculture). The exchange rate is an “effect” and not a significant “cause” of Zambia’s economic woes since independence.
Chitala belongs to the past. No further comment!
The causes of the fall in the kwacha are many which include falling copper prices but the major cause of the fall in the kwacha is the loss of confidence in the economic management of the Country. Perception of Zambia’s political risk has gone up. Foreign investors are uncertain about the direction the country is taking. Uncertainty is the major enemy of business .Those who planned to bring in dollars are withholding them and those who are here are externalizing big time Measures such as the unprecedented increase borrowing( local -6,400% and foreign debt), the creation of districts, the massive increase in civil servants salaries are bad for economy.One solution is to appoint competent technocrats at both at Bank of Zambia and finance ministry. Exchange controls are not a smart…
Good to read article and nice comments but suffice to say that countries that run persistent current account deficits have over a period of time have had their curricies depreciate overtime bane correction of trade inbalance and capital accounts requires tact to bring back and cement the economy to the strengthing of the Kwacha
Then most countries target the interest rates and most the inflation rate as a factor in the currency rate management
Where as the rand has lost some basis points the investments in commodities like fuel has made prices in such to fall having an indirect effect on the pressure of the rand
We need to move away from management the currency alone as a single asset
Nice write…
From The Post:
WHAT ARE THE LESSONS FROM THE KCM REVELATION?
By THE PRESS FREEDOM COMMITTEE
Mon 02 June 2014, 11:20 CAT
THE PRESS FREEDOM COMMITTEE OF THE POST PRESENTS A PUBLIC DISCUSSION ON: WHAT ARE THE LESSONS FROM THE KCM REVELATION?
DISCUSSANTS:
1. HON. CHRISTOPHER YALUMA – MINISTER OF MINES, ENERGY AND WATER DEVELOPMENT
2. DR. MATHIAS MPHANDE – UNZA LECTURER AND MINERAL EXPERT
3. DR. MBITA CHITALA – PUBLIC POLICY CONSULTANT
DATE: MONDAY, JUNE 2, 2014
VENUE: SOUTHERN SUN HOTEL, LUSAKA
TIME: 18:00 HRS
ADMISSION: FREE FREE FREE!
CASH BAR!!!!
working the sectors and having the FDI savings trickle to the economy helps to cement the economy and reverse the losses of the kwacha and make it more solid to stand on solid fundamentals and not quasi speculative winds.
Lets also avoid the parental effects in resolving the kwacha.Look at the mexican peso of 1994-1995,the asian crisis of 1997-1998 and more recently the us financial amarkets of 2007-2009 and work out the kwacha and redress shorterm to cement for longterm
Then do you target the exchange rate or the inflation or the interest rate I think the bank of Zambia policy committe is correct in its work but the eceonomy must make savings and reserves from investments to trickle to develop and segment other sectors solid in the longterm
Then avoid the parental effect of addressing isolated indicators that may have an effect on the other Address all fundamentals in the shorterm and solidying longterm is important
Lessons can be learnt from the ERM 1992-1993 ,mexican peso of 1994-1995 including the recent us 2007-2009 financial crisis
Whereas the rand has lost some basis points,investments in fuel stocks has had a negative correllation””””
Its not a forgon…
Signs of Recession: Zambia is now entering the recession period. In 2008, Global crunch only affected Europe and USA. Zambia enjoyed massive Copper Prices 2008- 2012. Why? Zambia has a large current account deficit, this is the reason why we might expect this trade deficit to put downward pressure on the currency. The fall in the value of Kwacha in 2014 is partly related to the Zambia’s trade deficit and lack of competitiveness. However, if a country like Germany entered recession, they may be less downward pressure on their currency (the Euro) because Germany have a large current account surplus.
Keep on talking! Talk alone amounts to nothing!