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Saturday, August 15, 2020

Mbita Chitala proposes Prudent Capital Controls to Save the Kwacha

Columns Mbita Chitala proposes Prudent Capital Controls to Save the Kwacha


By. Dr. Mbita Chitala – Public Policy Analyst


Why is the Kwacha falling like a domino? The answer is not because of the eight months rule of President Lungu as some would like us believe or a creation of any Zambian. These economic problems have their genesis in the global economy. Kazakhstan’s Tenge tumbled more than 20% on Thursday against the dollar when the country said it would adopt a free-floating currency (pretty the same as Zambia).

Vietnam devalued its currency for the third time this year. And this phenomena is evident in all so called free markets.

For the past decade or so years, Zambia has enjoyed positive growth in excess of 8% of GDP spurred by global growth, high copper prices, low interest rates and a weak U.S. dollar.

Kazakhstan’s Tenge tumbled more than 20% on Thursday against the dollar when the country said it would adopt a free-floating currency

But now, Zambia’s main stay copper and other commodity prices are dropping. There has been an economic slowdown in China and the prospect of the Americans hiking interest rates soon mean our economy will be in deep trouble.

Early in September, 2015, China allowed its currency to devalue, sending the year down about 2^ against the dollar. Currencies in other countries such as South Africa, Brazil, Russia, Turkey and so on have also plunged down this year.

Furthermore, uncertainty surrounding China’s economic growth and the impeding interest rate hike in the US could send our currencies even lower, especially so in the case of Zambia, as our growth estimates of our copper export prices continue to fall.

This global economic debacle has in some cases led to currency wars in which countries compete to devalue their currencies against other countries to boost their exports.

In our country Zambia, we are experiencing a currency crisis – a situation where the value of the Kwacha has depreciated in a very short time and has continued to adversely affect the wider economic woes with long lasting repercussions.

it is generally agreed that a currency crisis emerges when a nominal depreciation of a currency of at least 25% but it is also defined at least 10% increase in the rate of depreciation. Our Kwacha has suffered both.

This Kwacha crisis has emerged because many citizens now doubt that the Bank of Zambia has sufficient foreign reserves to maintain our exchange rate. The Bank of Zambia has tried to fend off this Kwacha crisis by satisfying the excess demand using our country’s reserves by releasing foreign currency on the market. But, this is temporary and it has not worked.

There is no widely accepted definition of a currency crisis but it is generally agreed that a currency crisis emerges when a nominal depreciation of a currency of at least 25% but it is also defined at least 10% increase in the rate of depreciation. Our Kwacha has suffered both.


There are at least three things that can bring about a currency collapse:

First, is the speculative attacks in which people perceive that there will be a drop in the value of the Kwacha in the future and they tend to opt to sell their Kwacha to avoid a loss. As they sell their Kwacha, the value of the Kwacha begins to decline and the Bank of Zambia is forced to buy up excess Kwacha to keep the exchange rate stable. As the value of the Kwacha declines, people may begin to panic, selling off more of their reserves and causing the Kwacha to fall even further.

This speculative attack as we are witnessing it now, may be because of the huge public debt that is growing and people may suspect that it is not sustainable.

The result of this speculative attacks can be fatal to our economy and if not addressed can cripple our government because, in due course, the government may fail to service its debt, since the Kwacha will have devalued so much that it is impossible to pay the debts when they fall due. It is important that our Minister of Finance must work smart and hard to address this potential challenge.

Secondly, runaway inflation can also lead to a currency collapse. The case of our sister neighbour Zimbabwe is most telling of a country that suffered political turmoil, hyperinflation and the collapse of the ZIMDollar. The Zimdollar was the official currency of Zimbabwe until January 2009 when the government legalized the use of other foreign currencies. This currency substitution is currently happening in Zambia.

This measure for Zimbabwe led to the sharp drop in the usage of the Zimdollar and by April 12, 2009, the Zimdollar was abandoned as an official currency.

The Zimbabwean government has undertaken that they will only re-introduce the Zimdollar or some such national currency if industrial output would average 60% more of its current output capacity. In April, 2009, the output was 20%. It is important that Zambia ensures that we do not return to the runaway inflation before 1992 and that we increase our nation’s output by seriously diversifying our economy.
Thirdly, the government policy moves such as altering interest rates can also lead to Kwacha collapse.  Once a currency collapses, it is difficult for a nation to recover. Citizens will find that their savings are devalued. The cost of goods and services will rise as the nation is forced to pay much more for imported products. This is so for Zambia since our privatization destroyed our then buoyant manufacturing sector and our country has become a profitable market for imports.

On account of the Kwacha devaluation, foreign direct investment will be reluctant to come to Zambia or to invest in our Kwacha. From Germany in the 1920s to Argentina in early 2000 and Zimbabwe in 2009, the scene is the same: prices will sky rocket as personal savings are destroyed. Our government together with all well meaning citizens must combine their efforts to forestall this potential tragedy.


As for me and many progressives, it appears our country has no option but to introduce some capital controls. It is not helpful for those charged with this responsibility at the Ministry of Finance and the Bank of Zambia to remain mum and think that the challenges will resolve themselves.

Capital controls are measures such as transaction taxes, other limits or outright prohibitions that a government can use to regulate flows from capital markets into and out of a country’s capital account. These measures may be for the whole economy or sector specific (e.g the Banking Sector) or industry specific (e.g. the Mining Industry)

Until the early 1970s, almost all countries had capital controls until the IMF and the World Bank persuaded all of us wrongly that capital controls were harmful.

Until the early 1970s, almost all countries had capital controls until the IMF and the World Bank persuaded all of us wrongly that capital controls were harmful.

Presently, particularly after the global financial crisis of 2008, many countries have adopted capital controls alongside macroeconomic and prudential capital controls to damp the effects of volatile flows in their economies.

This has also been accepted by both the IMF and the World Bank as necessary policies directions.

If our Minister of Finance A.B. Chikwanda and his team were now to seek advice from the IMF, they would be advised to consider introducing prudential capital controls to deal with our current economic crisis.

Failure to recognize this necessity, is not helpful to Zambia.

During the 2008-2012 Icelandic financial crisis, the IMF proposed that capital controls on outflows should be imposed by Iceland. In 2009, Brazil imposed a tax on the purchase of financial assets by foreigners and Taiwan restricted overseas investors from buying Time Deposits.

The Financial Times has reported tightening of controls in Indonesia, South Korea, Russia, Peru and so on. Indonesia implemented a one-month minimum holding period for certain securities.

In South Korea, limits have been placed on currency forward positions. Taiwan has restricted foreign investors to certain bank deposits.


As everyone knows, Zambia has in recent years, experienced huge capital inflows resulting from the expansionary monetary policies of our governments.

These capital inflows are both good and potentially bad. Many countries that experienced similar inflows, adopted prudential capital controls to reduce the risk of financial crisis and prevent the associated externalities such as currency collapse.

Prudential capital controls is a process where a country regulates its capital account inflows to mitigate systemic risk, reduce business cycle volatility, increase macro stability and enhance social welfare of the people.

During the 2008-2012 Icelandic financial crisis, the IMF proposed that capital controls on outflows should be imposed by Iceland.

Prudential capital controls are necessary for Zambia. The doctrine of free capital movement as demanded by right wing ideologists does not correlate positively with economic growth.
That is why Joseph Stigliz and his colleagues have written to President Obama to repeal the law in America that punishes those nations that adopt capital controls.

Capital controls as India and China have shown, are a progressive policy paradigm as for instance, by limiting Zambians to own foreign assets, this would ensure that domestic credit is available more cheaply and Zambian businessmen would have an inexpensive source of loans.

Large uncontrolled capital inflows and unabated outflows mostly as illicit outflows as Zambia has experienced in recent years have damaged our country’s economic development.

The inflows have become loans dominated in forex and the repayments will be very expensive as our Kwacha continues to depreciate.

This is what is called the “original sin”- a situation where our country will not be able to borrow abroad in our Kwacha or to borrow long-term even domestically.

The illicit outflows is known as capital flight where companies instead of exporting only dividends earned also are allowed uncleverly, to export all their gross earnings every day.
Our country faces many challenges but providing confidence and inspiring our people is the first policy direction that our government must address first.


  1. Hahaha sorry sir but you save the sinking titanic , that’s what happening with the kwacha . just wait this are getting more worse end of this month .Pf supports enjoying finishing the kwacha and your load shedding

    • It is laughable! These are the so-called intellectuals who were the scatterbrains behind Sata in 2011. Socialism is dead. Just ask the Cubans, Chinese and Russians. Forex controls are the route to another Zimbabwe. PF are thoroughly to blame for the current economic problems.

    • Ba Chitala, Edgar don’t want these kind of “suggestions” or indaba, just go and attend national prayers.

  2. Nice application letter for job. Hopefully Lungu will give Chitala a job. Mbita, the problem with night school PhD is exactly been exhibited by a serious lack of coherent thinking by recipients. If your currency is among the worst out of 150,surely the is local noise. Serious countries in such a situation adopt austerity measures, what do we see Edgar doing? Increasing expenditure by creating 5 new Ministries when existing ones are all inefficient and just a drain to the treasury. The truth is Rdgar has failed to inspire. The markets have no confidence in him.

  3. you cant save your sinking boat , that’s your titanic of the kwacha . things are getting more worse Mr lungu and your bandits .

  4. Its a good way of asking a job in government, just let the currency collapse like the soviet union . people need to learn and stop the tribal ideas , I hope it gets worse and people learn . kwacha is a sinking titanic you can’t do anything and things are getting worse. ladies and gentle put on your seat belts and enjoy the collapse of the kwacha.

  5. And in all this nobody is to blame in the Zambian scenario; even in the unprecedented borrowed captial inflows? What a contradiction!

  6. Mbita Chatala has points.I have told bloggers that the solution is to put control measures.Let the govt put controls of how much a person can change dollars per day.Otherwise if it’s free market all dollas will be gone coz everyone whants to keep dollas.Let govt immediately put exchange rate controls otherwise there will be hunger in this country.This is why Lungu should fire Kalyalya and finance team .If Lungu wants power next year the depreciating of kwacha should be stopped now.Inflation will be too high if he can’t stop it unless ba mudala tabatontokaya.Govt will not stop anyone to increase the price of anything coz of depreciation of kwacha.

  7. The IMF background and success in advising Governments in emerging and success of solutions has been not successful GOVERNMENT SHOULD BE CAUTIOUS THOUGH TO ENGAGE IMF

  8. Kandetta was probably right
    Prosecutors in Italy are preparing to reopen the wounds of the eurozone debt crisis as they fight a crisis-era downgrade that put Italian creditworthiness level with Kazakhstan’s.

    Five employees from global credit rating agency Standard & Poor’s and one from Fitch are accused of inflicting unjustified damage to Italy for their role in credit rating decisions in 2011 and 2012.

    The case is a late addition to the global lawsuits that have been raised against the world’s largest credit rating agencies for their role in the financial crisis.

    What marks the trial sought in Trani, southern Italy, as unusual is that individual employees are being accused alongside the agencies, although given the time lag since Italy’s rating downgrade a number have…

  9. Whatever else people may think of Chitala, it must be admitted that he knows his economics or financial markets. He has sounded a warning on where the country is headed and offered solutions. He has even cited examples of where exchange controls have been introduced and are helping financial markets of those countries. It doesn’t pay to blindly follow American doctrines on no exchange controls when even the IMF says it is prudent to put in place certain controls to save economies. We need to open our ears and eyes and listen to all these voices of wisdom. So what Amos proposed wasn’t wrong afterall, we may actually need it.

    • The are two major reasons why the Kwacha is loosing value which Dr Chitala has for reasons of looking for a job avoided to mention.

      1. Poor management of the budget by the current PF government has resulted in a huge budget deficit. Budget deficits result in currency devaluation as this means the country can not produce enough revenue to finance its budget. Who is to blame for that? Its PF

      2. Development at any cost so as to sustain political life. PF was warned and as been warned about the consequences of huge debt in the face of a world recession. The story is the same AB Chikwanda was minister when he over borrowed in a face a recession and copper price collapse in the 80’s what has changed today nothing. Doing the same thing over does not change the result.


  10. Excellent analysis and I hope the government is listening. Am extremely disappointed with “Dr” Kalyalya over his performance. First and most importantly, a depreciating currency can be a source of inflation in the country. With currency depreciation, imports become more expensive, which can drive the aggregate price level higher. Therefore, CBs have an incentive to make sure that the currency does not depreciate to a level at which it starts to threaten domestic price stability. You cant just allow dollar to be bought anyhow as if we manufacture it. Nigeria has had the Naira been depreciating due slump in oil prices but they have put up stringent measures in place. The issue of offloading dollars on the market does not work when therez volatility in the market. You will just end…

  11. How can you save dollars when you import everything including chickens and eggs of which that ka miles sampa only found out the other day despite him even heading the responsible ministry. Our ministers are all hopeless and are not accountable for anything, be it corruption, dereliction of duty. This behaviour has permiated to all levels of GRZ. No amount economic theories and measures can work if the work force is not up to the job. The only ministry that lungu should create is a ministry of economic diversification.
    The current structure has failed to work.

  12. Are the controls Mr Chitala is suggesting much different from the shortlived statutory instruments(can’t recall the digits) the finance minister had once effected but only to be shot down by some make believe economists and imperialist quarks?Much as the country may wish to move on progressive path as outlined by Dr Chitala the larger part of the obstacle are some know it all local sellouts condescending to the exploitative whims of foreign corporates.Very frustrating

  13. Well, they say you cannot hold the son responsible for the sins of the father. But is this not the same Mbita and company who advised Chiluba to sell mines for peanuts? Wasn’t he part of the team that was negotiating with the IMF on the wrong life span of our mines? In short I would not take his advise seriously. He belongs to the group that think the IMF has the best interest of Africa and African when the contrary is true.
    Mbita is a dinosaur whose time is long gone.

    • Do not talk about what you don’t understands , it is quite shameful to do so in a public media like one. The mines were sold after 1996 by then Chitala was in ZADECO. Shaaa!

  14. Mbita is one of the few id!ots still standing. He should explanin how Dean Mung’omba died before I can listen to him.

  15. Dr. Chitala,
    Great theoretical exercise.
    But, how can you explain that Singapore, tiny City-State without ANY NATURAL RESOURCES what-so-ever, not even water, whilst loosing 22% in value of local currency against USD, it has managed 21% of budget surplus ( that is 66 BILLION USD)?
    Please, “old fashion economics” are only good for anno domini 21 and not for 21st century.

  16. For those people that missed out on brains when they were being issued and suffer from a serious deficiency in logic I will try and put it in simple words that even a bungling id!ot can understand.



    Now which part of that do you dullards not understand?

  17. Serious why did this full even write this article? i thought he was clever than this…….well for a start why does he give example on countries which are doing bad??? 2. why not give example on countries like botswana, Australia etc and thirdly , as a parent do you have to give example to your kids that you failed to feed them becoz bashi musonda has also failed?????? answer is no! these are the same people who expect zambians to be clapping every time they construct a road or bridge…… thats stupidity coz thats the responsibility of the government to do that ,,,lts like you expect your kids to clap and praise you everytime you take bread home…….no damn ass! its your job as a parent

  18. I thought this character was long dead, so Derrick akali moyo ka! Anyway, this article all stinks of someone looking for a job. And this voodoo economics they study in old age under candle light nauseates me deeply. All these problens of the kwacha were easily predictable, the Euro Bonds, period. Since 1964, we have always known the price of copper fluctuates on the London Metals Exchange. Now, Lungu cancelled that statutory instrument that sought to raise taxes from the mines without figuring out where the finance to bridge the resultant gap in govt funding was going to come from. To make matters worse, the bonds matured for repayment at the same time copper prices plummeted! Instead of scaling down on govt expenditure, the fool escalates in by creating more ministries and gallivanting…

  19. Alah, I thought this lumpen kicked the bucket a long time ago! Or is this Derrick’s ghost!

  20. I agree with @TheEngineer and @Ask Joe, capital controls will only make things worse, especially over the medium to long term. If your toilet is leaking you do not seal the bath tub. The problem is in the current account of our balance of payments, it is not a capital account problem. Capital controls will ‘cut’ demand for the dollar, but will create a black market for that demand not met by the formal market.

    The solution lies in cutting the deficit which is pushing the current account deficit, opening up tourism, calling on diaspora funds supporting agric exports.
    But PF do not have the intelligence to pursue these and other options. So I’ll keep my expertise for another country instead.

  21. Thank God Mr Chitala is not the Finance Minister! As Ask Joe has aptly put it,



  22. Dr. Chitala has a point. In simple terms, he is saying like, if your water tank is taking out more water than you are putting in, and you want it not to run empty, reduce the outflow apart from other measures. Is that not sense?

    • No. It is NOT sense! Why not fix the leak? Govt have been told to “reduce govt expenditure”! What have they done? 5 more Ministries, increased Districts, new DC’s (All these with new cars, etc); Charter a plane to USA; Make 18 Foreign trips. Does that make sense?

  23. my parents were feeding us on beans,cabbage,and meat twice a week,some days buns and cup of tea in the evening,after 6 months they bought a plot and within 6 months we moved into our house,so we stop paying rent.if my parents had opted to take the easy route of kaloba and keeping up appearances,we will have been doomed by now.Making decisions for the sake of appeasement shows your lack of compassion to your country.CHITALA has contradicted himself,he said pf is not to blame and he goes on mentioning huge debt($9 billion both dom & inter)and the failure to pay debt servicing,all this was acquired under the nose of PF.how did RB managed whn will had globall recession and left $ 3.5 billion in reserve.

  24. This is a great article. I wish Gov was listening to such valuable free advice, but unfortunately they are not. For those folks who think that this is a joke and will hurt only the PF, you are living in dreamland where no political rhetoric of any kind will save you. We are yet to feel the PINCH and it will HURT!

    Our country isn’t doing well right now, from load shedding to a collapsing economy and most patriots here will agree with with me that it’s high time we kicked some A55. Prayers alone will not do anything, actions will.

    The following procedure should work!

    1. FIRE CHIKWANDA and hire functioning young brains either through ads or someone who understands the
    pillars of economics and finance.
    2. Stop load shedding, you are hurting economic output…

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