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. The article is absolutely accurate on the causes of the Kwacha’s depreciation.

    All the itemised reasons are valid but the most important of these are Trade deficit and Monetary policy. These two are entirely endogenous in their nature because all they require to manipulate to favour our Kwacha is a team of serious leaders like HH ‘s team, Not this clueless PF bunch of thugs.

    Its gonna get worse under PF before 2016 elections.

    wanzelu
    February 19, 2015 at 7:39 am
    Reply

  2. The PF Govt has failed and should thing of rebasing the Kwacha again. May be this time, they should divide by 10.

    Mr White John
    February 19, 2015 at 7:54 am
    Reply

  3. I meant should “think” and not “thing”

    Mr White John
    February 19, 2015 at 7:54 am
    Reply

  4. Most Zambians who we think are literate don’t understand what is contained in the article.
    How else could you explain the voting par tan we saw in the just ended by – election?

    zuberi
    February 19, 2015 at 9:25 am
    Reply

  5. all three reasons are very correct as the main coz to our currency downfall. but the major causers, are are the ones behind policies

    Isaac Mwanza
    February 19, 2015 at 11:11 am
    Reply

  6. Why should this be a surprise to any sensible Zambian? The writing has always been on the wall that PF are not the right people to govern this country.

    If Sata had no clue on how to drive this country economically, the same applies to Lungu because he has no vision of his own but that of Sata who had no clue in the first place.

    Unfortunately the voters who voted for PF and happened to be the simple majority agreed with Lungu that since he has no vision of his own he will carry on with visionless vision of Sata!

    Zambia will carry on of this path for two FUNDAMENTAL Problems with the majority of Zambians today and until these problems are sorted out, we shall continue in this dilemma and paradox of mediocre leadership:

    1. Poverty – strangely our people have taken a peculiar liking for poverty. Zambians enjoy to be poor and to be pitied. They also don’t like to relate to anyone who is rich, they feel insulted to be in the presence of someone who is doing well…they just fail to connect with anyone who is rich, they developed a complex in this regard. That is why the Western world is happy to see Africans poor because Africans themselves are happy to be poor. To tell an African that you can get out of poverty is an insult because they don’t believe so! So, as long as Zambians remain poor, they will never want to put someone into leadership who can get them out of poverty because that would be a subtraction to them!

    2. Illiteracy – The level of illiteracy in Zambia is so high that it is so difficult to meaningfully engage Zambians on issues of development, good governance (Constitution), economics, etc. In fact an educated person is perceived by majority of our people as an alien, someone very pompous, someone lacking humility! It is very difficult for the majority of Zambians to connect with someone educated…they developed an inferiority complex. So as long as illiteracy remains high in this country, it will be next to impossible to people like HH to be acceptable in terms of national leadership!

    This the tragedy we have in this country! I know I will be criticized on what I have said above BUT it is the truth!

    When you compare HH and Lungu in terms of leadership qualities, HH is by far the best and yet people would rather go for Lungu for the very reasons I have outlined above. HH is able to articulate on issues of economic development, governance, etc far much better than Lungu (and that is the reason Lungu was advised not attend the public debate). When it comes to who is doing well economically, again HH is by far ahead of Lungu. When HH says your children will be educated freely up to university level, people are saying it is not possible because they don’t believe that it is possible since they couldn’t achieve that!

    When HH says the economy can be better managed, someone says it is impossible to turn around this economy because they lack knowledge…they will even label HH as being arrogant and not humble. Humility in Zambia is synonymous with being poor and uneducated!

    Headman Kagoli - Monze District
    February 19, 2015 at 1:59 pm
    Reply

    • Spectator, Blago and, Headman Kagoli I can’t agree more. A lot of us want to hide behind insults when faced with hard hitting facts that describe who we are. The well performing world economies have had leaders who are comparatively well to do in their settings and with a good understanding of economic trends. Our choices for leaders hinge on mediocrity and inconsequential attributes such as a nice smile, nice hair, short, poor like me etcetera! The educated are abhorred as if they are the ones that robbed the illiterates the capacity to excel in education. What is saddening is that I wonder how many would really appreciate your contributions to Chewe Mubiana’s article above.

      FuManchu
      February 19, 2015 at 9:25 pm
      Reply

  7. The article was not analytical enough. They are more factors that can cause depreciation of the Kwacha. I will just list some of them without explaining

    1)Rise in income of people
    2)Capital flight-Zambia could be experiencing capital outflow. Some mining companies are transferring investments to PANAMA.
    3)Down/upward pressure on domestic demand
    4)Budget deficit
    5)Economic/Monetary/trade policies
    6)Decline/increase in exports
    7)Level of imports
    8)Level of foreign debt
    9)Lowering of import taxes

    Gibson Kapili
    February 19, 2015 at 2:41 pm
    Reply

  8. I appreciate your reasons. But the major one is the foolishness of the majority of Zambians who vote for people who have no clue on how to fix the economy. Fixing an economy is not an easy thing in the 21st century. You need sober, highly knowledgeable and sophisticated leadership. That said, you don’t expect Chikwanda’, Lungu, or Inonge Wina to have any clue of how to fix Zambia’s economic situation.

    Blago
    February 19, 2015 at 4:17 pm
    Reply

    • Blago you are talking shit, politicians do not need MBAs or BAs to manage the economy, they need to have civil servants who have such knowledge to advise. USA had George Bush Junior quite a retard in terms of world knowledge or economics and yet was President of USA for 8 years. Our problem in Zambia in the last 24 years since 1991 is that we have reduced our civil servants to spectators and political cadres and thugs to the extent that even HH would find it difficult to do better as he has thugs as well to please and appoint. A one man show is not practicable. Our civil service would take maybe 50 years to rebuild to make any difference.

      Ted
      March 2, 2015 at 6:54 pm
      Reply

  9. Zambians generally don’t thinl with their heads, instead they think with their tummy and as..es. They will still vote for PF in 2016 till they start to eat yellow maize again. Edgar lungu should re-employ Guy Scott so that he buys us yellow maize from texas!

    Spectator
    February 19, 2015 at 7:31 pm
    Reply

  10. The Hyenas have just waken up from slumber after cerebrating their victory only to rearise that the carcass they were expecting to feast on is too rotten to be eaten.It requires human intervention to first roast it,in order to be consumed. This economy can only be managed by hh flight not the least.

    kasongo
    February 20, 2015 at 7:54 am
    Reply

  11. Pingback: Kwacha continue fairing badily | Zambian Eye

  12. I for saw this coming. Zambians wanted change but didn’t know wether it was change for the better or the worst. immediatelly I herd the change of names, rabasing of our currency, introduction of districts and province, within a shortest period of time, I knew that a biggest problem is yet to come. Let us just pray the who ever come into power next, will change our country for better.

    mastung
    September 5, 2015 at 8:05 am
    Reply

  13. lungu should try to be reasonable enough

    mcmillan munkumba
    November 3, 2015 at 4:47 pm
    Reply

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