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Saturday, August 15, 2020

Depreciation of Zambian Kwacha: Which Way for Zambian Business

Economy Depreciation of Zambian Kwacha: Which Way for Zambian Business

New Kwacha Notes

The Zambian Kwacha has lost its value to unprecedented levels ever witnessed in this country. The swift and violent loss of value has brought about untold misery to both businesses as well as consumers.

Hot on its heels is inflation which has soured to 14.3% from 7.7%, a feat which was expected anyway. At the time of putting ink to paper, the exchange rate between the local currency and the US Dollar is K13.80 having traded earlier in the day at K13.10 to a dollar. Who knows, by the time the ink dries up, further devaluation could take place. This hair spinning state of affairs sends cold chills in the spines of business decision makers making it impossible for them to plan, and as you and I know, failing to plan is planning to fail.

In this discourse, I will bring to fore some of the proactive measures that business people and consumers at large may employ to avoid loss or erosion of their hard earned resources through depreciation of the Kwacha. I will explore the efficacy of the use of one of the financial instruments which businesses can use to plan. While Zambian companies may not be able to stop the volatility in the short-term, they are at least able to hedge using over the counter forward exchange contracts or indeed exchange traded currency contracts.

Forward exchange contracts (FEC) hedge against exposure by allowing the importer or exporter to arrange for a bank to sell or buy quantity of Dollars, Pounds or Rand at a future date, at a rate of exchange determined when the forward contract is made. The customer will know in advance either how much Kwacha he will receive (if he is selling US Dollars, British pounds or SA Rand to the bank) or how much Kwacha he must pay (if he is buying dollars, pounds or rand from the bank) to their suppliers.

FECs enable companies to fix in advance future exchange rates on an agreed quantity of foreign currency for delivery or purchase on an agreed date. These are generally set up via banks and are non-negotiable, and are legally binding contracts. The advantage of these FECs is that they can be tailor made with respect to maturity and size in order to meet the requirements of the company. A FEC is an immediate firm and binding contract, between a customer and a bank, for the purchase or sale of a specified quantity of a stated dollar, Pound and Rand foreign currency, at a rate of exchange fixed at the time the contract is made. It is entered into for performance (delivery of the dollar, pound or rand and payment for it) at a future time which is agreed when making the contract.

FECs allow you to buy and sell currencies at a fixed exchange rate for a specified time period. They are a straightforward way to protect against adverse fluctuations in exchange rates and guarantee the value of future transactions. Their benefits include budget for large cash outflow projects with more financial security, the business knows exactly what the costs or income will be and can be arranged in most major currencies.

Further, since the rate of exchange is fixed on foreign currency transactions for a specified date or time period of your choice, they enable the customer or importer/exporter to have peace of mind and concentrate on strategies on expanding the business. You pay the foreign exchange rate which is based on the spot rate on the day of the deal. FECs are binding and will have to be cancelled if you do not use them. This may result in a profit or loss depending on the exchange rate on the day of cancellation.
In the next article, I will endeavor to explain another form of foreign currency hedging that businesses and individuals can use to protect their financial assets in this volatile financial environment.

By Sidney Kawimbe


    • Let us not beat around the bush. The markets have no confidence in Chagwa. Chagwa and his minions in PF have no clue on how to run an economy …and Kambwili will come shouting it’s grobal , it’s grobal !!

    • When I went to Zambia in April this year it was k10 to the pound and now it’s over k20. Great news for us in UK who are building houses there.

    • Things will worsen when the ERB announce the new price for fuel which I believe may double. This will push prices for commodities high and squeeze our pockets. That is when kwacha will dive further to K30 per dollar. Bwana president and your team please manage this economy with the little resource we have. Because once the stock of fuel depletes (which we bought at a lower dollar rate) then misery will hit us.

  1. for sure life is becoming unbearable now. i consider myself to belong to the middle class but i am slowly seeing myself being downgraded to lower class all because from january to date, i have lost more than 30% of my earning power. in January, if i spent 1000K on goods, i now need at 1300K to buy the same things. the suggestion being put forward may work but it will even erode the confidence that people may still have in the Kwacha. awe sure mob psychology during voting should stop. ati this tribe or that tribe – are we not all suffering except for thieves?

  2. Great leaders ARE created for times like this, unfortunately none of them are in PF! Just look at our new PS. Any chance of this Bishop fixing Zesco before the second coming of Christ??

    I don’t think so.

    He will be too busy planning the next “DAY of PRAYER”…………………

  3. I sometimes wonder whether the Government, Bank of Zambia and the people of Zambia are in the same country. It would appear we’re all meandering slowly towards a slow, painful but natural death where common sense left this country a long time ago. We all know what needs to be done to address the economic slide but are too timid to do it.

  4. Who knows where senile ABC is? BOZ governor shows up once in a while but quickly crawls back to his cave. ST Yamba is no show. Mvunga’s voice is so faint. In the meantime their boss the drunk is busy politically posturing.
    Who’s running the economy? Have we been left to the hyenas to speculate?

  5. People are being hoodwinked to make the same mistake that was made when they voted Sata. In 2011 people seem to have voted with their stomachs, now some people are suggesting that we do the same again. Well, for me, I promise to vote HH if and only he can tell me how he will improve the price of copper. Short of that he is no better than a swindler trying to defraud me of my vote with flashy and sweet language, exactly the same as the Donchi kubeba of 2016. But need we be surprised? No, HH has copied and applying Sata tactics to the full, knowing well that in this situation some people will believe. Please HH or his cadres, tell me that you will buy all the Zambian copper and offer a price of Usd7,000 per ton and I will be all yours come 2016. Please napapata, njala yani nyokola na kwacha…

    • I don’t agree with you. PF mismanagement is the cause of all these problems. HH does not need to increase the price of copper or buy all the copper. The underlying cause of all this kwacha demise is PF. Copper prices have only aggravated the situation. The mines are closing because of no power, prices are increasing because of EURO Bonds. You can have a Govt that borrows and spends so recklessly and expect inflation to remain the same. But of course I know you need to check economics books to understand. Look at Chile for example, is their currency the worst performer in the world due to low copper prices?

    • I don’t agree with you. PF mismanagement is the cause of all these problems. HH does not need to increase the price of copper or buy all the copper. The underlying cause of all this kwacha demise is PF. Copper prices have only aggravated the situation. The mines are closing because of no power, prices are increasing because of EURO Bonds. You cant have a Govt that borrows and spends so recklessly and expect inflation to remain the same. But of course I know you need to check economics books to understand. Look at Chile for example, is their currency the worst performer in the world due to low copper prices?

    • Sad,
      No one is saying HH will improve the price of copper, what he is saying is why should Zambia depend on the global price of copper when we have so much potential in other sectors?? HH has talked a lot about adding value or products especially agriculture products and support for cottage industries.

  6. usele—ss president .How do u keep quiet like that when things are bad.We need to kick Lungu out as PF from Power. Guy scott told us Zambia will be dead when lungu rules.Mwelesa help this Chakolwa

  7. In 2011 the Kwacha was 5 to the Dollar, and we could buy the SA Rand for 35 Ngwee.

    Today the Kwacha has overtaken the Rand, and you need MORE than K1 to buy R1!

    Thank you Sata, thank you Lungu. You are really doing a wonderful job!

  8. Contribute to the article in question not vosabaila chabe. The author is talking sense about hedging the currency in this volatile situation but you are simply insulting as per your every day routine. Kulanikoni munzelu

  9. Good articulate article, but when such financial measures come to the attention of lay-men like myself, then we know we are fcuk*d as a nation and our economy is in the dumps. Good luck to us..

  10. This should not be perceived as an economic disaster…the kwacha will gain value in due course after the stability of the market forces. Many people will be tempted to invest in the dollar thereby saturating the market with the dollar leading to a reduction in the price of the dollar in the long run, all things being equal. This is the simple rule of supply and demand unless there are other external factors which are fertilising the volatility of the market forces.

  11. Ha ha ha great one dream on. The Kwacha is falling because of leadership, that’s the people in charge. They are clueless, kept quiet and they not explaining any tangible solutions to this problem, coupled up with their inexperience. Good leaders will step up and put measures to control the situation, none of this is being done instead they are focused on swinging at everyone and winning elections that are like a year from now.

  12. Zambian deserve what they are getting. the writing was on the wall for all to read before 2011.

    Sata said quite clearly his hero was Mugabe. He even told us that he named his Party PF to copy from Zimbabawe.

    Lungus first trip was to go and see Mugabe and learn from him. Obviously he has picked up some of Mugabes tricks.

    Now he is telling the main foreign exchange earners, the Mines, that they can go, and he will take over and run them. Just like Mugabe did to the main forex earners in Zim, the Farmers.

    Are you now surprised that our currency is following the Zim Dollar into extinction?

    If you kill the goose that lays the eggs what are you going to eat? Expect starvation to raise its head soon. Corrupt road contracts from Satas bedroom are definitely not edible, and do not…

  13. Thanks Sidney for your analysis which is food for thought. The kwacha depreciation is telling on all and sundry. The price of tissue was 2 kwacha, now it is 4 kwacha. It is even expensive to shit. Bread is now a luxury as the price has gone through the roof from 5 kwacha to 10 kwacha. But need we blame the government always? The strength of the kwacha is based on demand and supply. If our trading position was stronger and we had plentiful supply or reserves of dollars, then our kwacha would be stronger. We are too import-dependant, because of our tastes and lifestyles. Also because of lack of diversified economy. Our vulnerability to external or exogenous supply shocks is greater. Besides, if policy direction seems fuzzy, inconsistent, and we play tartuffe with MNCs such as the mining…

  14. poor leadership, lack of proper institutions, and many more. Zambians, we need to change our mentality if we want development, democracy has surely lost its meaning in this country. i love my country, but my heart bleeds for the us, citizens. That’s why i support authoritarian regimes.

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