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The Fallen Kwacha: Sata Economics in Action?

Filed under: Business,Special Comments |
Hjoe Moono

Hjoe Moono

By Hjoe Moono

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 depreciationwill 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 chibukuetc 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.


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