Observations special: The fall in value and the volatility of the Kwacha is not good for our economy

Musamba Mumba

By Barbrah Musamba Chama Mumba.

In past and recent weeks our local currency the Kwacha has depreciated and has become so volatile. This occurrence is detrimental for a country that is seeking to bolster its manufacturing and agricultural base in order to do away on the overly reliance on the copper or mining sector.

The current behaviours of the Kwacha could discourage Foreign Direct Investment, another aspect the government intends to encourage.

Additionally, the current government came in on the premise of more money in the pockets and an improved cost and standard of living. These cannot be achieved with a weakened and volatile Kwacha, un-established productivity and weak manufacturing bases.

In this article I will look at the detriments of a weak Kwacha and its volatility in relation to our current economic situation.

It is incredible to see how quick our national currency the Kwacha has depreciated so much in recent weeks against foreign currencies. Comparing it with the United States Dollar the Kwacha has deteriorated or fallen in value at astonishing 33 per cent within the last two and half years of the Patriotic Front (PF) government.

The Kwacha reached its lowest ever value a couple of weeks ago when it traded at K6.40 to US$1 and this is against a background of the Patriotic Front (PF) government promising good economic management and an improved manufacturing base.

The low value of the Kwacha has a great negative impact to the business sector and to the ordinary people in that Zambia is heavily reliant on imported goods and services whilst our export base needs to be grown to match up or better our imports.

It is cardinal to note what the country desires to achieve in the long term and what are the mitigating factors required to reach the desired goal.

Our country as a whole is endowed with vast natural resources such as minerals, fertile soils and a good pattern of rainfall suited for crop farming. We also have vast lands also suited for animal farming.

Unfortunately, our country is not gifted or is not technologically advanced to support the full utilization of the resources that we have from within hence the need to import implements and machinery.

We need modern technology or equipment to extract minerals from the earth and these are not locally sourced but all comes for from nations afar that are advanced in technology.

The country needs to import fuel to support both the mining and agriculture sectors of the economy. We as a country do not produce any oil at the moment, so we have to import this.

To compound to this, Zambia is a landlocked country and is no where near to any sea port. This means that any imported machinery or any other goods will incur additional transportation costs also bearing in mind that at the moment we as a country cannot move goods in bulk using the most efficient means that is available on this earth, that being by rail as our railway system is almost none functional.

These factors add to the cost of production. Zambia’s cost of production is extremely high and it cannot be compounded further by encouraging a weakened Kwacha when at the same time our manufacturing base is not yet deep rooted or set in stone.

Only recently he electricity tariffs have increased further pushing the cost of production higher.

I am highlighting the above so that we know where we at as a country so that we should put it into context as to why we need our currency to be stable and slightly stronger.

Basically, we import most of the things that the country uses both at macro and micro levels of the economy.

The government endeavours to push for a broad based economy and one that is not overly reliant on the mining sector which is deemed as a diminishing sector. All this is done to the desire of making our economy robust.

In order to bolster the manufacturing industry and to compete favourably on the global stage our cost of production should be very competitive and the quality of goods should be extremely high.

By trying to bolster the economy the government seeks to encourage the agriculture and manufacturing sectors of the economy.

This can only be done if the country is stable both economically and politically.

On the economic side of the bolstering the economy this could be done either by encouraging foreign and local investment which are dependent on machinery from abroad that require foreign exchange.

Hence, a weakened Kwacha will mean that imported machinery and goods will become expensive and that will push the cost of production high and in turn would make our goods and services uncompetitive on the global stage.

If goods and services are very expensive in Zambia it makes our country unattractive both for business and to live in.

Note that I have mentioned depreciation and volatility of the Kwacha. Depreciation of the Kwacha relates to the value of the local currency in relation to those of other countries, in the Zambian context we normally compare it to a few most important ones these being the United State Dollar, the British Pound, the South African Rand and the Euro.

Volatility of a currency refers to the amount of uncertainty or risk involved with the size of changes. This relates to the dramatic changes of a currency over a short period of time thus fluctuations in both in the rate and frequency of the change.

In normal circumstances if our manufacturing base or export base was grounded and strong it would be ideal to celebrate a weakened currency as our goods would be cheaper on the global market.

Zambia unfortunately is so reliant on imports at the moment because we are to investing in machinery for the new mines and new industries that are being set-up. Whilst Foreign Direct Investors are bringing in machinery that is financed abroad, these in the short run may not feel the direct effects of foreign exchange fluctuations and weakening of our currency.

Equally for the mining companies they immediately may not the feel pinch of the fluctuations as receipts are done abroad when they sale the copper, though other local inputs such as fuel, smaller equipment, local supplies and fuel would eventually affect the business through increased cost of production.

Companies that conduct businesses within our boundaries such retailers, oil companies and manufacturers for example cement producers will immediately feel the effects of both the depreciation and volatility of the Kwacha as their receipts are local but they have to bring in supplies or machinery from abroad.

A summary of the effects:

Effects of a devalued Kwacha;

1.       Inflation: A devalued currency is at risk to imported inflation if the country is so reliant on imports.

2.       Cost of Production: it increases the cost of production as the cost of imported goods such fuel and machinery become higher.

3.       For Zambians who import almost everything from food, clothing and cars, the cost of living is increased.

4.       Interest Rates: Bank interest rates are increased as result of inflation and thus rendering borrowing expensive in turn increasing the cost of doing business or it becomes harder to borrow.

Effects of volatility of the Kwacha;

1.       Erodes foreign investor confidence as the currency is unstable for business planning

2.       Distorts and makes business planning difficult for the local businesses as well.

3.       Price fluctuations in the market

Government recently revoked Statutory Instruments (SI) 33 and 55 in order to mitigate the downward slide of the Kwacha which has not seemed to have helped. The truth of the pertaining situation is the depleting foreign currency reserves of which the government should work on by improving the reserves and increasing the availability of the Dollar.

Conclusion

Whilst this is a wide subject area, I decided to give you just the few that would provide for this space.

The effects of a devalued and volatile Kwacha will in the end affect the common man on the streets as the cost of living goes up. Unemployment levels would also increase as businesses tend to reduce their costs by first knocking of the labour cost.