By Hjoe Moono
K6000 -1 US$ lowest
On Wednesday 5th March the year of our Lord 2014, the Zambian Kwacha touched a lifetime low of K6 (or K6000) per US dollar. This is the largest fall and loss in value the Kwacha has hit since the time it was introduced as the Zambia currency in 1964. Since 2013, the kwacha has lost more than 20 percent of its value, making it one of the biggest loser among the African currencies.
While there may be no denying that Zambia is not the only country which is experiencing a decline in its currency’s value, that this is the lowest the kwacha has ever hit since 1964 raises serious concerns which cannot be ignored.
The republican president’s explanation of ‘demand and supply’ a few days ago during his state of the economy address on his face book page regarding the fall of the kwacha is unfortunately not satisfactory, but since he is the head of state, we will be guided by his wisdom and his man of action persona. However, if the historic fall in the kwacha is the miracle outcome of our supreme leader’s wisdom then we may suspect that he requires more guidance to enhance his economic wisdom and experience. We also suspect that the 10 Commandments upon which his governance of our nation is based may be misplaced at this moment, and what we actually need is clear well thought policy responses to the crisis ahead of us.
We have stated before that the Kwacha was headed for doom due to the country’s twin deficits problem– current account and fiscal deficits. The IMF in 2013 raised concerns over the higher budgets deficits the PF was creating without precautionary measures to sustain nor reduce the deficit. Coupled with higher domestic and foreign debt denominated in foreign currency, we are yet to see more of what our man of action has to offer.
Our role today is to highlight the consequences that this continued loss in value will have as well as offer potentially feasible options which could be implemented by our supreme leader’s government in their pursuit of action to develop our country. While not exhaustive, we hope that you the reader may find these useful.
Immediate Dangers:
Should we worry about this depreciation? Yes! We should, infact, we should more than worry, we must do something about it as soon as possible! Why?
Firstly FDI may fall: Pledged and existing foreign direct investments would be paused by a continued fall in the kwacha as foreigners’ investments lose value. While FDI had increased consistently over the past years, the continued depreciation of the kwacha will send chills and hold outs to investors who are concerned about the dollar equivalent returns to their investments. With FDI being a major engine of growth in Zambia, chasing this FDI through a continued depreciation will stop the huge inflow of funds Zambia receives on its capital account that is vital in financing its ambitious infrastructure investment e.g., Link 8000. If this FDI continues to decline, we may see some of these commissioned projects becoming White Elephants!
Secondly, a massively depreciated Kwacha will substantially increase the cost of Zambia servicing its foreign debt and increase the cost of borrowing for government and thus ultimately increase the chance of further rating downgrades.
The recent Fitch downgrade for Zambia’s economic outlook should have been enough a warning of the brewing ‘bads’ in our economy, so we should expect further down grades, and when that happens, let us prepare to either fail to raise more foreign debt to finance our infrastructure such as the Municipal Bond or if we do succeed, it will be at an extremely huge cost, further taking us closer to a debt trap.
With a depreciating currency, imports become expensive, and may reduce thereby fuelling local inflation. Inflation that arises from here is called ‘Imported Inflation’- Inflation due to an increase in the price of imports.
As the price of imports increase, prices of domestic goods using imports as raw materials also increase, causing an increase in the general prices of all goods and services.
Domestic firms such as those the produce our mealie meal, our drinks like maheu super no.1, our chibuku etc and our own households can no longer afford to buy the domestic goods, as well as imported goods due to the higher inflation. Consequently, when we price high our home produced goods, ultimately, foreigners won’t be interested anymore in buying our now overpriced goods, and as such, firms must fire—in national interest—its employees to reduce the cost of labour, and this leads to an increase in unemployment.
So, then you will end up with many unemployed youths roaming the streets, and those that work will have to accept low salaries or wage freezes such as those already in place in our hard working government employees.
We had stated in our previous treatise of this matter that Zambia’s ’s exports from the mining sector, which account for about 80% of exports, are priced in US dollars as they are determined by global resource prices.
With this, the perceived gainers from a depreciation will be those engaged in non-traditional exports such as agricultural exports. With a weakened kwacha, local producers, including millers, will prefer to sell agricultural products abroad. This will result in escalating food prices and an associated demand for more money in workers’ pockets through increased wages to afford these high costs.
Consequently, the ensuing increase in labour costs and to compensate for higher wages demanded because of the higher cost of food and other living expenses, will erode any competitive benefit from the kwacha’s weakness. We also suspect that the continued depreciation of the kwacha will cause cost of oil imports and capital equipment to rise, and the demand for exports then drops off as the input costs of labour, and other factors of production such as electricity and transport rise, driving up the cost of exports and driving down their competitiveness.
That said, we should brace ourselves for higher costs of fuel. Higher costs of transport and higher electricity and water tariffs as a result of this depreciation. Even talk time is expected to rise! Clearly, the weakening of the kwacha will ultimately result in a substantial lowering of living standards of Zambians. Here, the economics of our supreme leader seems to be failing him.
What can be done?
Not all hope is lost yet for our government to commandeer our economy back on track. Firstly, however, let us be clear that there are no easy solutions, no quick fixes and no magic wands. The PF government should learn from history and not repeat it. Slogans should be replaced by deep thinking and mere politicking by statesmanship.
That said, we have the following options:
1. Firstly, the government can and should take urgent policy measures to curb unnecessary imports which put pressure on the demand for foreign currency. In addition to higher custom duties which will also serve as a revenue measure, strict quantitative restrictions on the importation of non-essential items should be imposed. We should be clear and cautious, however, on how we define and classify these non-essential items. The government should also consider imposing higher custom duties on those consumer goods which are locally produced. This will in turn boost local production as demand shifts to local products. However, all this should be done in line with the provisions of COMESA & SADC to which Zambia is a member.
2. Reduce on the appetite to borrow. Issuing dollar-denominated sovereign bonds in the midst of a crisis-like situation is a risky endeavour, and the government may do well to curb their seemingly insatiable appetite to borrow. The Zambian government will have to offer a higher rate of interest to attract investors which in turn would further increase country’s external indebtedness. This will further increase the local interest rates and render the BOZ policy rate ineffective.
3. To avoid capital flight, if pervasive, the Zambian government should consider the imposition of capital controls as a macroeconomic policy tool to protect the domestic economy from a sudden capital flight. An examination of Malaysia’s capital control imposition may be a good start to check its feasibility.
4. The importation of oil should be carefully examined as this has the greatest potential to trigger local inflation and social discomfort among citizens. A careful treatise on Indeni will be presented later in our discourse.
5. To curb further rise in the price of mealie meal, the government would do well to continue improving storage infrastructure and monitor the export of maize which is likely to sell profitably abroad as the kwacha continues to be worthless.
With the above, let us all accept that our economy is in a mess with a large budget and current account deficit, a huge external and internal public debt, and potentially increasing unemployment. These problems are the product of narrow-visioned economic planning (if any) and bad economic governance and as such, cannot be overcome by gimmickry. They require a thorough, consistent and comprehensive long-term economic policy framework. The PF would do well to have such.
While the explanations given by the president through his state of the economy address on his face book page was a good sign of attempts to address these concerns, and while it may be politically expedient in the short run to underestimate the magnitude of these problems, such an approach, if left unchecked, has the potential to create bigger economic and political problems in the future where the youths ought to live.
Finally, for those in the opposition, while the current Policy Failures of the PF government may be political capital for your campaigns, it is important that you explain clearly how you would rescue the country from the economic mess should the PF fail. You need to be realistic and tell the nation that the solutions to the current problems may not be attractive, and as such, we should all be collaborating to save us from ourselves.
Depreciation and quantitative easing is too complicated for Sata who only knows Mpika village economics.Will he follow Uhuru Kenyatta’s good example and cut his pay by 20% too?
Qualitative and Quantitative analysis can take care of the Kwacha. First, PF should be kicked out of power.
Every one is complaining apart from PF cadres who don’t understand the difference between demand and supply, for a country without productions,, expect worse with PF at the helm of squandering.
Pity for Zambia.
this advising this govt on economic matters is a shear waste of time. They makeup has little to do with proper economics. They do not understand the production sector of the economy and how to manage this sector in order to keep the economy afloat. All they or he know/s is how to spend and eat as well said by Sanda a few weeks ago. Our Kwacha will soon start to regain the zeros and PF will continue passing policies which gives them short term benefits for increasing popularity base like borrowing from the local market, which will further destroy the private sector and agriculture in general. All these are pointing to serious high cost of living in Zambia by end of 2015.
Well written article. Those who are able to listen must listen.
I have never been comfortable with the current Finance Minister being in that position. The President must make reshuffles quickly, including at BoZ.
Well writen article, i hope the president will see this article to unable him make the necessary decision. I have also never been comfortable with the current finance Minister nor the guys at BOZ. Let our leaders stop politicking and concertrate on working before Zambia becomes a laughing stock.
ALL CURRENCIES THE WORLD OVER HAVE TUMBLED AND CONTINUE TO TUMBLE AGAINST THE DOLLAR.
THE SOUTH AFRICAN RAND FOR EXAMPLE HAS FALLEN FROM 8 DOWN TO ALMOST 11 AGAINST THE DOLLAR IN JUST 2 YEARS.
@ brainless and clueless tweet called Luapula premier
USD 1.00 = SGD 1.45 in January 2013, now 1.26
or if you want to look more in to detail, what about Canada or Australian Dollar?
All currencies have depreciated?
Be realistic, have you checked the British Pound?
Luapula Premier, but the £ (pound) is still pounding!
Which currency is written in the headline?
Just like in Zimbabwe ,we might as well soon starting to use american dollars. at the the rate the kwacha is depreciating zambians will be carrying bundles of kwacha just to buy a loaf of bread.
@142
PLEASE TALK ABOUT EMERGING PARTICULARLY AFRICAN ECONOMIES!
TUNE TO CHANNEL 410 OR CNBC ON DSTV FOR BALANCED ANALYSIS & NOT ONLY TO CHANNEL UPND OR MMD.
ZAMBIA IS DOING PRETTY FINE.
SINCE WHEN DID ZAMBIA EVER RECORD TRADE SURPLUS?
ZAMBIA HAS EMBARKED ON MASSIVE INFRASTRUCTURE DEVELOPMENT COUNTRYWIDE WHICH IS GOBBLING UP OUR EARNINGS?
ARE YOU MYOPIC?
PLEASE LET VOTERS PASS A VERDICT IN 2016!
Why the hell are these guys attributing the Kwachas depreciation to the quantitative easing in the USA. This quantitative easing has not started now, if anything other currencies are performing better eg the pound. Who are they fooling. The problem we have is the Finance Minister who does not understand the economics but is very efficient at appending signatures to loans without understanding their long term impact. This guy has been recycled from the UNIP government which pushed the country into severe debts because of his failed policies. We are in for a long haul with these clueless guys who have adopted a ‘BORROWING’ as their buzzword. I’m pretty sure by the time we get to 2016 we will have learnt serious lessons about voting wisely.
@ Luapula Premier
142 is challenging your assertion where you said “ALL CURRENCIES THE WORLD OVER HAVE TUMBLED AND CONTINUE TO TUMBLE AGAINST THE DOLLA…”
The misleading word there is “ALL” and we’re right to point out that anomaly is your statement because it’s not all currencies that have tumbled.
I think the author is worrying unnecessarily about the so-called depreciation of the kwacha. The kwacha is still the Goliath or King Kong of all the African currencies at this very minute in time. The greatest problem the author should dwell on is the precarious situation where the nation depends on one single commodity (copper),to supply its foreign currency exchange needs. 80% of all foreign moola is financed by copper sales. Imagine the catastrophe the country would instantly find itself in if (God forbid) the price of copper suddenly dropped by half. It could happen. This is the constant nightmare I worry about. The solution to foreign currency in-flows seems to me an obvious one, to develop a diversified and export oriented economy, not just FDI. Zambia imports even simple things…
continued…
that could easily be manufactured locally.
Actually they want a cheap kwacha, because it lowers their local cost. Their profits are in US dollars anyway, which is what they sell copper for.
The fall of the kwacha comes from this idea of borrowing, instead of taxing the mines. This is how they tranfer the costs of their economic model onto everyone.
With a higher kwacha, everyone is now paying for their neoliberal borrowing policy.
actually thats what we all said back then in 1984 when the kwacha was falling due to auctioning of the currency that was taking place that time. History has shown us differently.
sataN comes to kill,still and destroy.John 10:10
steal
Mr Moono, You are mistaken on several points.
1. Firstly, the government..should take policy measures to curb unnecessary imports which put pressure on the demand for foreign currency.—
This is a no-go. Was tried before. The net result of this is an increase of bribery and corruption of officials to get import licences.
2. Reduce on the appetite to borrow.
HERE is the solution! Unbudgeted and unaccounted for expenditure is a disaster now, waiting to kill us in the future. Fix this and 99% of the job is done.
3. To avoid capital flight…the Zambian government should consider the imposition of capital controls..
This is playing with explosives! Unrestricted capital flows (both in and out) gives investors confidence. Just TALK of forex regulation sends them running.
The analysis of the article on the macroeconomic activity in Zambia is not only worrying but if left without financial strategic intervention may land the nation a prolonged economic disaster that will take several years if not decades to recover. The economic growth having experienced in the last 15 years took almost 30 years after the IMF bitter prescription as a cure to the economic woes that befell Zambia.
This where as a nation need to learn lessons that its not every villager who speaks English to parade themselves to lead the nation. This is a bitter pill for PF cadres who believe people like Kambwili, Nsanda, GBM, Kabimba and the likes can take over from Sata as president. Zambians should demand quality leaders to avoid these economic mismanagements of our country.
We told you re-basement of kwacha was not going to give it strength, now you see what is happening with the CNPs.
online.wsj.com/news/articles/SB10001424052702304585004579417822045597450?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304585004579417822045597450.html