Dr Gabriel Pollen CTPD Senior Researcher -Public Finance
The Centre for Trade Policy and Development (CTPD) observes that while the Kwacha has been depreciating over the past decade, the past one year has been unprecedented in terms of the rapidity of the loss of value of the currency against the United States (US) Dollar.
On 7 October 2019, the midrate Kwacha per US Dollar Exchange Rate stood at 13.1, rising to 19.6 by 2 September 2020, representing a 33% depreciation in only 11 months.
Recently, the Bank of Zambia explained that the Kwacha’s rapid depreciation has been attributed to low foreign exchange sales from the mining sector and an increase in foreign exchange demand for the importation of agricultural and medical supplies.
As CTPD, we think the factors driving this are mainly associated with external forces and a production structure of the Zambian economy which is dependent on imported products.
Disruption in international trade and declining global economic growth propelled by the Covid-19 pandemic has contributed to lower foreign exchange sales from the mining sector, while imports of petroleum products, agriculture supplies such as inputs and medical supplies required to address COVID-19.
Additionally, the depreciation of a local currency has wide-ranging implications for an economy, both good and bad, depending mostly upon the productive structure of a country – i.e. underlying structure of production of an economy, including the range and degrees of linkages between sectors – and the nature of policy response to the exchange rate change. There are some upsides to the economy due to a depreciation of its domestic currency.
In general, a depreciation makes exports cheaper, with potential to raise export earnings if followed by a commensurate rise in the scale (and range) of production. A one-off depreciation can attract foreign investment in form of Foreign Direct Investment as it makes an economy cheaper.
However, a depreciation may also impose a range of negative effects on the economy. In Zambia, the critical issues of currency surrounding the adverse implications on the economy of the Kwacha depreciation against the US Dollar relate to its impact on export earnings, cost of imports, cost of energy (electricity and crude oil) and, subsequently, cost of doing business, including transmission to domestic prices, as well as, ultimately, the standard of living.
The Depreciation of the kwacha will also make our debt payment more expensive to service. One of the downsides that has been recently witnessed due to rapid depreciation of the Kwacha has been the reduction in the dollar value of the national budgets despite a nominal increase in Kwacha terms. The 2019 national budget was K86.81 billion equivalent US$ 8.27 billion while the 2021 national budget is estimated at K119.6 billion equivalent to only US$6 billion using current exchange rate.
The Centre for Trade Policy and Development therefore urges the CentraI Bank to intervene in the Foreign exchange market, and buy domestic currency using foreign currency. This would in the short-term cause demand for domestic currency to rise, with an attendant effect of countering a depreciation.
CTPD notes that the long-term solution is to build an integrated structure of production with wide-ranging linkages across and within sectors which will insulate the economy from the vagaries of the external sector while building surplus for the economy.
THE KWACHA WILL ALWAYS DEPRECIATE IF WE CONTINUE BUILDING MOREAND MORE SHOPPING MALLS AND NO FACTORIES AND EXPORT LESS.
WHY DON’T WE GROW MORE MAIZE TO EXPORT TO DRC?
THE ORGANISATION OF AFRICAN UNITY SHOULD COME UP WITH MEASURES TO ALLOW USE OF LOCAL CURRENCIES IN INTER-AFRICAN TRADE.
WHY CAN’T THE KWACH BE ACCEPTABLE IN SOUTH AFRICA AND THE RAND IN ZAMBIA?
THE USE OF SO-CALLED CONVERTIBLE CURRENCIES IS ARCHAIC AND COLONIALISTIC SURELY!!!
Very clear and well written analysis. The last sentence offers a solid solution to the problem which can be summarized in one term – Job creation.
THAT FOOOOL KZ has not commented because he can not FIT IN HH in this article……kikikikiki
Pinky I didn’t comment earlier because I was busy serving my country as a civil servant.
To comment on this article, I say thank you for saying exactly what I have been telling the angry demonic upnd diasporans. We told them that the disruption created by covid had led to the negative economic downturn. We expect to see things improve as Africa is slowly getting out of this pandemic.
This country is headed to doom. The guys are busy making themselves rich at our expence. K2million is small change says one kabova of a minister what a shame!!!
Fellow patriots let us stop this nonsense!! Enough is enough!!!
US monopoly with their dollars is unacceptable. We need a new truly global currency for international trade, one which is transparent. It is time to consider Bitcoin
Please don’t blame Covid19 for your incompetence, economic rot for in this country started way before corona hit China, so don’t use it as a scapegoat.
Just drop two more Zeros while we are looking for solutions. That would psychologically help our Economy to reboot.
K100 can’t buy anything and it can as well be rebased to K1.
No amount of negative reporting will bring Zambia to its knees.
We have head a lot from discredited African Confidential, Moody and other crooked economic narrations from crazy baldhead credit rating tuntembas talking about Zambian economic ‘messy’ or turbulences. Alas this God blessed Country keeps going.
Never on it’s knees, just going.
Just drop two more Zeros while we are looking for solutions. That would psychologically help our Economy to reboot.
K100 can’t buy anything and it can as well be rebased to K1…
The kwacha fears the dollar the way Edgar fears HH, or the way Chiteme fears Binwell and the way Edith hates HH. The truth
PF have lamentable failed, just to fair.
Two key areas not highlighted which have greatly affected the depreciation of the Kwacha are the reduction in tourist numbers and the maize export ban. The country due to the C19 pandemic has been greatly hit resulting in very few tourists coming to spend their Forex here but this is sadly where imagination is lacking in certain departments, why cant the ministry of touristm set up a website from which people abroad interested in Zambia can buy merchandise such as ornaments, chitenges, paintings, photographs of our people, wildlife and countryside etc such a website if run well could earn the nation a considerable amount of Forex. The second point, the export ban on maize has denied this country a collosal amount of Forex which we could easily have earned by exporting the commodity to…
Ctn… exporting the commodity to our neighbours such as the DRC, sadly this has been allowed to only a few milling companies at the economic detriment of the nation and small scale farmers as a whole.
Kwacha depreciation has less to do with whats happening elsewhere as compared to how your leaders are managing the economy. Look at Zambia as long as MMD were governing from 1991 to 2013 the kwacha remained steadfast at K5 to a dollar. In fact at one point even gaining against the dollar to K3 per dollar. Immediately these nincompoops came in starting with madman Sata it dropped 100% to K10 and now the drop continues with another 100% under lungu to K20. If these continue we will see it drop to K40.
The solution is too childish. buy domestic currency using foreign currency? This would work for two weeks. After which you expect the mines to rum up production and save the currency?
Countering a depreciation can happen when fiscal policy supports local production..