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The free falling Kwacha – What does it mean?

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zambian-kwacha notesIn basic terms the recent free-falling of the Kwacha means that the currency is “depreciating” and losing its purchasing power relative to other convertible currencies, writes Chewe Mubiana.

World currencies such as the U.S. dollar, the euro, the Japanese yen and dozens of others fluctuate in value at some point in the monetary cycle. However, I hasten to add that what we are witnessing with the Kwacha is really depreciation. In this context, I use the term “depreciation” because the Kwacha has been losing value over a sustained period of time.

The problem with the Kwacha is long-term and systemic. The loss of the value of the Kwacha could be because of a number of factors. Allow me to give you some basic facts of what may be causing our Kwacha to be battered so much by other currencies! Remember that the Kwacha was not too long ago the worst performing currency in the world!!! Here are some of the factors which ARE causing the Kwacha to lose its value.

1. Inflationary pressure

Inflation is probably one of the biggest cause of currency depreciation. In general, prices (and the wages people use to pay them) tend to rise rather than fall — and that’s true around the world. When prices are rising in one country relative to others, however, that country’s currency will depreciate.

People there have to spend more money to purchase the same amount of goods and services. One unit of currency (a dollar or whatever) doesn’t go as far as it used to, and it’s losing ground against other world currencies. The pay-rise of the Civil Servants however well-intentioned was presided over by a government which did not really appreciate the inflationary effects of the huge wage bill relative to the goods and services available in the country.

2. National Trade Deficit

Zambia’s total value of imports is far exceeding the total value of its exports (mainly copper). This means that Zambia is buying more from the rest of the world than it is selling to the world. Zambia therefore has what we call “a trade deficit”.  Zambia’s trade deficit has now lead to currency depreciation because it reduces demand for that Zambia’s Kwacha. Since very few people are buying goods from Zambia, no one outside Zambia has any use for Zambian Kwacha.

The basic rule of supply and demand tells us that when there’s less demand for something, its value will fall. Currency markets operate on supply and demand just like other markets. The problem is that Zambia’s economy is not robust enough to make the Zambian Kwacha attractive as a means of exchange.

3. Monetary Policy

One of the ways in which the Zambian Government may have tried to manage the national economy is by adjusting the money supply. The Bank of Zambia is mandated under the BoZ Act to do just that. The BoZ is supposed to try and strike a balance of making sure there’s enough money in the country to accommodate economic growth, without having so much out there that inflation gets out of hand.

It is my suspicion that the Zambian Government has increased the money supply by printing more money or as is evident, Government has bought up Treasury Securities. The net-effect of all these poor decisions at BoZ is currency depreciation. There’s more money out there in Zambia to meet demand, so the value of one “unit” of the Kwacha has declined.

Here is the sad reality…

The issues I have itemised as being the possible causes of the depreciation of the Kwacha are endemic and systemic. In other words, there are no quick fixes to the huge problems Zambia currently finds itself in. Dear country-men and women, our President in his inaugural speech said that Zambians must brace themselves for a rough time. He has asked Zambians to tighten belts. I am quite happy as a Zambian to tighten my belt if I have people in leadership who understand the task at hand and the interventions needed to rectify the problems.

Mr. Edgar Chagwa Lungu and his cabinet are ill-equipped to tackle this huge problem which the country currently finds itself in. Zambia needs a group of people who understand the ECONOMY of the 21st Century. I pray that 2016 comes quicker before we reach the tipping point as a country. Zambia needs salvation. Zambia needs people who can turn-around this economy. The fundamentals of the Zambian economy are all wrong!!! CRY MY BELOVED MOTHERLAND!

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15 Responses to The free falling Kwacha – What does it mean?

  1. Pingback: Kwacha continue fairing badily | Zambian Eye

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