Finance Minister Alexander Chikwanda has attributed the depreciation of the Kwacha to the strengthening of the US dollar against all currencies as the American economy has grown at a faster and higher pace than other advanced economies following the 2008 global financial crises.
The kwacha has since end 2013 depreciated by 24.3 percent against the US dollar while the Euro has depreciated by 20.5 percent, the Rand by 11.7 percent and the pound by 7.9 percent. Of course, Zambia being a commodity exporting economy is more affected than other economies.
In a ministerial statement to Parliament, Mr Chikwanda said the US economic strength is largely premised on quantitative easing, a sophisticated way of purchasing existing bond obligations and unleashing huge resources to create new commitments which triggers economic stimulation.
Mr Chikwanda said this includes cheaper mortgages that spur booms in housing construction, a process that can only be salutary for any economy.
‘Sir, on the domestic front, the major reason for the weakening of the Kwacha is the palpable demand/supply disequilibrium. In other words, the demand for dollars principally and other currencies exceeds supply. At the beginning of the year, the foreign exchange earnings inflows are slow because of the time lag effects in the realization of export earnings, while lower copper prices have further constrained supply conditions. In general, net monthly supply of foreign exchange in 2014 exceeded us$100 million. However, at the beginning of 2015 this fell to around us$85 million,’ he stated.
He said the hard currency earnings will improve as the fiscal year progresses, especially from the mining sector as volumes increase and copper prices continue to trend upwards as has been the case in the last week.
The Finance Minister said Government will continue to monitor the situation and will through the Central Bank take the necessary measures to forestall excesses in exchange rate movements.
‘Any intervention by the Bank of Zambia can only be, per force or of necessity, a measured response. The bank has to strike a delicate balance between preventing drastic slippages in the kwacha parity and preserving our reserves, which are not lavish. On the fiscal side, we will compliment the efforts of the bank by continuing our fiscal consolidation process that will assist in moderating demand conditions for foreign exchange.’
He said over the long-term horizon, increased export earnings will never be a matter of fiat adding that as a country, Zambia must just put its act together to increase and quicken activity in sectors such as agriculture, which have relatively shorter and bearable gestation periods.
‘The tourism sector has potential to contribute, but this will require reinforcing infrastructure and services in this sector. It cannot be a one-day wonder,’ he said.
Mr Chikwanda added, ‘Sir, exchange rates have a relation to the economic status of any country. In Zambia, the participation of our nationals in the economy, except for small-scale agriculture, is uncomfortably low. We import a lot of goods that can be produced locally. The absence of even scanty processing outfits is mind-boggling. This is a big challenge to our many entrepreneurs. Import substitution, when the volumes are adequate to ensure reasonable unit costs, is as good as exporting for purposes of foreign exchange.’
The Finance Minister said, ‘let us look at the Kwacha parity in a wider global context because we are not an island but an integral part of the wider global economy. The government will always be mindful of the possible injurious effects of a weakened national currency. A robust and diversified agricultural sector can generate export earnings to furnish the country with enough and reliable hard currency to permit assured kwacha stability. This is the only conceivable way forward for the longer-term.’
He said the nation should not to be unduly alarmed by movements in the exchange rates as this has the effect of inducing speculation, which in turn artificially sways the exchange rate away from fundamentals.
‘In a market economy such as ours, movements in the rate are the order of the day. It is not too long ago when we paid 70 ngwee (or k700 in un-rebased currency) for 1 South African rand. We can now buy a rand for less than 60 ngwee.’