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.
