By Antonio Mwanza
This week has been dominated by discussions concerning the Performance of the KWACHA.
I have heard a lot of theories from politicians and my fellow Facebook Economists and Keyboard Warriors claiming all sorts of things about why the performance of the KWACHA against major convertible currencies has been weak.
Well, today I have decided to add my voice to this very important discussion. My response is based purely on research and empirical data.
1. PERSPECTIVE
Ever since the Government decided to start using the KWACHA as an official medium of exchange, Zambia’s currency has seen a lot of fluctuations.
At no point has our currency performed better than the dollar since it came into being after a government policy decision to decimalize the national currency in 1967 that saw the birth of the KWACHA and the NGWEE, replacing the Zambian pound, shilling, and pence in 1968.
2. WHY ARE THE KWACHA PERFORMING POORLY?
There are a number of reasons why the performance of the KWACHA has been weak recently. These include:
a) Lower Productivity In The Mining Sector:
The mines account for over 70% of all our export earnings. And the low productivity in the mining sector as a result of a number of factors such as the Covid-19 pandemic, low commodity prices at the international market, the on-going legal and structural problems with huge copper mines such as KCM and now Mopani have all contributed to reduced productivity.
b) Slow Growth Of The World Economy:
The growth of the global economy has significantly slowed with some of the major world economies heading into recession largely due to the Covid-19 pandemic which has seen millions of job losses and the closure and/or downsizing of major companies and production lines.
c) Droughts, Floods and Erratic Electricity Supply:
The continued load shedding is negatively impacting on production and productivity since most businesses rely on electricity for production.
Further, load shedding is pushing the cost of production upwards as people are spending more on alternative sources of energy.
It is important to note that Zambia depends highly on hydropower and the droughts we have been experiencing mostly in the Southern part which is our major source of hydro power has created a huge electricity deficit resulting in the current load shedding.
We are happy that the Government has Continued to diversify the Energy sector to stop over-reliance on hydropower. In addition, the massive investment of around 3 billion dollars which the PF Government has injected in the energy infrastructure development will ease the pressure once these projects are concluded next year and beyond.
Further, the upward adjustments of electricity tariffs to cost-reflective ones will attract the private sector to invest in private power energy projects hence increasing electricity generation and cutting down the energy deficit.
The PF Government has put so much emphasis on Agriculture as we aim high on diversification. This sector has been hit badly with droughts in Southern and Western Provinces and floods in Eastern and Muchinga Provinces which are some of our major agro producing provinces. This has led to reduced agro production hence reduced agro exports which are key in foreign exchange earnings.
d) Debt Servicing:
With reduced production due to Climate Change, low commodity prices, electricity deficit and the Covid-19 the cost of debt servicing has gone up. This has a direct impact on the KWACHA as we spend more dollars servicing debt.
It must be made clear that Zambia’s debt was necessary as we needed money to develop our infrastructure in order to spur economic development.
Contrary to Opposition Propaganda we have borrowed for production and not consumption. We have used the debt money very well and the economic value of our debt is visible for all to see and feel. We have more roads, more universities, more hospitals, more schools, processing plants, improved energy, communication and agro infrastructure among many other things thanks to our debt.
Most importantly our debt levels are within accepted thresholds and we have never defaulted.
By the way there is no single country in the world that has no debt.
Even at the individual level, we borrow, what is important is to use your debt on production and not consumption and that is exactly what we have done.
e) The Central Bank
President Lungu did very well to fire Dr. Denny Kalyalya. It is clear that for five years that our good brother was at Central Bank, he failed to stir a vibrant monetary policy to reduce the volatility of KWACHA.
In case you did not know, the central banks control and manipulate the national money supply: issuing currency and setting interest rates on loans and bonds.
Typically, central banks raise interest rates to slow growth and avoid inflation; they lower them to spur growth, industrial activity, and consumer spending. In this way, they manage monetary policy to guide the country’s economy and achieve economic goals, such as full employment.
It is our founded hope that the new Bank Governor will perform to expectation in line with his mandate.
In conclusion, the issue of the exchange rates is affecting a lot of countries including Nigeria, South Africa, Angola, and others.
We have the tested leadership in ECL and to God be the glory, we as a people will overcome.
The Author is the PF Deputy Media Director
