By Hjoe Moono

I am rather disappointed at Dr. Mbita Chitala’s proposals to the PF in his article that the PF should consider bring back foreign exchange proposals in order to curb the rapidly depreciating kwacha. While I would vehemently agree that our currency isn’t performing well, I disagree that it is in such a dire situation as to warrant the introduction of foreign exchange controls.

If the PF listens to Dr. Chitala’ advice, it would have succeeded in taking Zambia back to the 1970s through to the 1980s when these controls were tried and failed, leading to economic stagnation, emergence of a thriving black market and ultimately political failure of UNIP. These proposals are regressive, archaic and have no place in a modern and open economy like Zambia whose currency’s performance is heavily dependent on copper. I will offer my rebuttal of Dr. Chitala’s recommendation with a bit of history first.

Between 1989 and 1992 Zambia moved from a highly regulated foreign exchange regime with a seriously overvalued exchange rate to a unified floating exchange rate. Today the Bank of Zambia (BoZ) operates a managed float of the kwacha with no predetermined path for the exchange rate. The official exchange rate is determined on the interbank market with the BoZ’s interventions aimed primarily at reducing short-term volatility.

When the proposals that Dr. Chitala is proposing where in place, Zambia had experienced almost 20 years of steady per capita income decline. Per capita income declined on average by around 2 percent a year between 1970 and 1989 mostly caused a heavy reliance on quantitative rationing and price controls, instead of fiscal and monetary policies, to contain inflation and defend the exchange rate.

The fiscal deficit averaged almost 13 percent of GDP during the 1970s and 1980s and the controlled exchange rate was consistently overvalued and export volumes declined sharply. Foreign exchange transactions were highly regulated to conserve foreign exchange and contain inflation; foreign exchange receipts were required to be surrendered to the BoZ, foreign exchange was allocated to priority transactions on a case-by- case basis, and exports and imports were subject to licensing. The controls and seriously overvalued official exchange rate pushed economic activity into the informal sector and depressed exports (IMF, 2013).

However, the price controls and Pegging/fixing of the exchange rate failed to lower inflation—the headline inflation rate was persistently around 50–60 percent in May 1987–October 1988 when the exchange rate was pegged to the dollar(as Chitala is proposing), gradually rising to almost 100 percent in mid-1989,gave rise to a black market, and by 1990s when these failed policies had taken full effect, the official kwacha/U.S. dollar exchange rate increased by more than 3000 percent between June 1989 and December 1992 even in the face of controls!

Key Message: Government has no capacity to consistently manage foreign exchange controls! Such controls, if initiated, are deadly to the economy.

The ability to maintain a fixed exchange rate as being proposed by Dr. Chitala is dependent on the Bank of Zambia’s level of Foreign Exchange Reserves. Foreign-exchange reserves are assets held by the Bank of Zambia usually in US dollar and these have an important role to play in monetary policy formulation and execution.

Under a fixed/pegged exchange rate regime being proposed by Dr. Mbita Chitala, the Bank of Zambia needs to trade domestic currency in the forex market to balance supply and demand, which will keep the exchange rate stable or, where applicable, within the fluctuation bands. To conduct such transactions, the central bank needs to maintain a sufficient level of foreign reserves to maintain confidence in the fixed exchange-rate policy. Smaller reserves should generally suffice under a floating exchange rate—as has been the case since 1992—since the central bank does not need to intervene to defend the currency. We have seen recently the impotency of BOZ to intervene in the foreign market owing to depleted reserves.

The $178million pumped into the economy in the first quarter has failed to yield any results, but has rather actually further depreciated the kwacha. Where would BOZ get the reserves to run a fixed exchange rate as Dr. Chitala is proposing? Let us assume it offloaded all the dollars it has, it will take utmost only two weeks for demand to outstrip supply, and then we would see an explosive depreciation of the kwacha, taking us to levels poorer than we are experiencing now. There is clearly no room nor capacity for BOZ to take the luxury of foreign exchange controls.

Yes, it is true that we haven’t had prudential prudent economic management for a while but we are not in a dire state as to go the Chitala way. Contrary to what Dr. Chitala has romanticised on capital flight, an introduction of forex controls will immediately give an even stronger currency black market and we will have within days people starting to send their forex abroad thereby further weakening our kwacha. With a consistent fiscal deficit, this move will further lead to our economy downgrade and lead to low investor perceptions, leading to a decline in FDI and growth of the economy.

Such a proposal is clearly regressive, and would take us back to the days Zambians thought were behind them—the long gone Kaunda days. Unless Dr. Chitala has an interest in being an active player in the black currency market along Katondo Street, I find such proposals disappointing from a man of his experience and exposure to macroeconomic policy.

In March we wrote with caution to the PF that: There are some ever-present opportunistic and self-serving economists who would claim that they know better than most others and pronounce that those who are giving warning signals about the economy such as we are doing are wrong. These have been seen in the corridors of power before and represent a group that is always hungry for appearance on television and in newspaper columns and to attract the attention of those in power, thereby offering themselves to “serve” the country.

Some may be in government already. The PF should be cautious of such. There is no magic wand to save the economy from the current crisis, and only a determined government that undertakes structural economic reforms will bring some hope of economic recovery, and there is an opportunity for the PF to do this and more.

Dr. Mbita Chitala suits this description, and the PF should be wary of such advice. Here is a man who served in the same MMD that made possible a stable currency after Kaunda’s massacre of the economy in the 1980s, yet, today, out of power and favour, he soothes the PF by saying they inherited such exchange rate management problems from the MMD, and goes on to prescribe deadly recommendations that have the potential to further cripple our ailing economy.

Someone recently commented: You do not stop a fire by pouring petrol into the roaring flames….you will only create an explosion! Dr. Chitala’s proposals amount to total destruction of the monetary system and economy, and should thus not be entertained.

The Young African Leaders initiative (YALI) has urged the Zambian Judges to emulate the Malawian Judiciary when determining petitions from elections if the Zambian Judiciary is to regain the confidence of the public and stakeholders.

YALI wishes to commend the Malawian Judiciary for expeditiously determining petitions that come before it as a way of complaints from stakeholders in the electoral process. We take note of the landmark decision in the Malawi High that compelled Malawi Electoral Commission (MEC) to announce election results in accordance with the provisions of the Malawian Constitution and the quick interpretation of the Constitution by the Court must serve as an example to the Zambian judiciary that is struggling to deal with electoral petitions within the reasonable timeframe.

Apparently, we note that the Zambian public including President Sata has accorded much respect to Malawian Judges because of the manner in which they dispense justice devoid of joining political battles among electoral stakeholders. We are convinced that this could be one of the reason why President Sata appointed the Malawian Judge Chikopa to preside over the tribunal of three senior judges in Zambia, which tribunal has not taken place due to the continued legal battle in the Zambian Courts.

The Zambian people and politicians have less faith in the Zambian Judiciary because of delays by Judges to dispose matters including electoral matters that come before it. While it only took one week for the Malawian Judiciary to dispose the controversial interpretation of the Malawian law on elections, it has taken months for the Zambian courts to deal with similar interpretation of electoral laws as is the case with the case involving Dora Siliya and two others. The Zambian Courts has contributed towards the disregard of the Zambian law that demands that once seats are nullified, an election must be held within 90-days. We therefore call on the Zambian Judges to emulate the actions of their counterparts in Malawi by quickly determining election petitions.

By Isaac Mwanza
YALI Governance Advisor

By Hjoe Moono

On 29th May, 2014, amidst pressure to soothe the nation on the rapidly depreciating exchange rate, the Bank of Zambia(BOZ) issued a statement warning the public to desist from taking any speculative positions against the kwacha as this may result in heavy financial loses once the kwacha reverts to an equilibrium condition consistent with the economic fundamentals. Funny enough, it is not known who issued this statement as there is only a signature without a name, and we wonder how authentic this is, or whether it was done under duress against the author’s will so they opted not to have their name.

The statement says the BOZ remains committed to implementing appropriate monetary policy aimed at maintaining inflation low, as can be seen from its previous policies of increasing the bank reserve ratios from 8% to 14% and the BOZ policy rate from 10.25% to 12% in April 2014. What the statement doesn’t say, however, is that these policies have not yielded the desired results, and thus the BOZ monetary policy is effectively impotent in this regard.

What is clear is that BOZ’s monetary policy has been heavily flawed, and has not been able to reduce the volatility of the kwacha nor its rapid depreciation. This has clearly hurt our economy, and it is disappointing that BOZ would issue such a shallow and hollow statement.

It is strange that the central bank can base its strength to run the economy on borrowed funds from the Eurobond. The admission that the disbursement of the euro bonds proceeds will put the bank of Zambia ‘in an even stronger position to allow the economy to absorb any real economic shocks’ implies that BOZ seems to have run out of international reserves to effectively conduct prudential monetary policy, and like the central government too, its operations now have to be debt dependent.

Clearly, the disbursement of $178 million to help ‘strengthen the kwacha’ as announced last month was a waste of foreign reserves, a waste of national resources that could have channelled to development concerns facing our population. The $178 million BOZ pumped into the economy has been lost, never to be recovered, and the kwacha has continued to depreciate, even further and faster than before. And now the BOZ is taking pride in more borrowed funds to enable it perform its functions?

Clearly there has been a deliberate attempt all along to conceal the fact that these poor developments in the economy are reflecting the poor governance concerns in the country, as well as the disjointed and inconsistent polices of government, as well impotent monetary policy by the Bank of Zambia. The so-called anticipated improvements in the exchange rate do not reflect an improvement in the fundamentals of the economy but the impact of massive inflow of foreign exchange made possible by begging and borrowing and that it is not a sustainable situation in the long run.

It seems the only thing BOZ has been doing lately can be likened to that of the Energy Regulation Board: Announcing increase in fuel prices and claim that ‘external forces are at play’. BOZ on the other hand is monthly announcing the BOZ Policy Rate, always adjusting it upwards on the pretext that ‘the low copper prices on the international market are putting pressure on the kwacha’. That all these policies have failed to curtail the volatility of the kwacha signals one thing: That monetary policy is not an ordinary public policy issue that can be handled by non-professionals!

One is made to conclude that the BOZ itself has begun to equate monetary policy with the policy rate in its monetary policy statements forgetting that the policy rate is one of the many instruments of monetary policy and not monetary policy in itself—the policy rate by the way is the rate at which banks can borrow from BOZ. The policy rate affects the cost of credit and thereby it affects private sector demand and is effective only if private sector credit is the main borrower from the banking system. If government borrowing is the main determinant of money supply, then changes in policy rate will neither affect government borrowing nor regulate money supply.

This is what has been happening: Government has increased borrowing from the banks thus making the policy rate impotent! With the 6400% increase in government borrowing from the local banking sector, clearly we expect such an impotent outcomes from the monetary policy, and perhaps that could explain such weak and speculative statements from the Bank of Zambia.

But then, what would we expected when there is a disjoint on policies among all government departments? We have said it before that the government is looking at each problem in isolation from others – without fully grasping the interlinks in economic policies, and without taking into account the side effects on other areas and objectives of a particular policy prescription to tackle a given problem. This is partly due to the fact that most of the economic policy advice is taken from nonprofessional bureaucrats, administrators, accountants, lawyers running the central bank and vested interest groups from the private sector who have no grasp of, or interest in, macroeconomic links.