By Hjoe Moono
Yesterday, HE. MCS took the pain to address the growing concerns of a weak kwacha and cited among others the US Federal Reserve’s decision to reduce the amount of US dollar in circulation, the ripple effect of which is a legitimate fall in value of all currencies, kwacha inclusive. For all pessimists, whether PF or not, this is as certain as night and day, and when it happens, we as an economy, small and open, are on the receiving end. So perhaps I should commend HE. MCS for speaking, albeit briefly, on this subject matter which has become political hot air.
That said, when we complain about a weak kwacha, is the argument that we need a stronger kwacha? Currently, we are comparing what is happening to the 2005-2006 era under Levy Patrick Mwanawasa when the kwacha reached its all-time strong since being floated and market determined from 1991. But then, even then, sectors of the economy heavily complained and petitioned the government to intervene and ‘weaken’ the kwacha a little bit so as to encourage exports.
We all saw the grounding of ZEGA limited when exports of roses, our non-traditional exports died and jobs were lost. But then, we also saw the increase in the number of imports such as cars from Japan, manufacturing equipment etc. So then, what should governments do? There are always losers and gainers from an exchange rate movement, and this is a fact! All a government can and should do, if possible, is to maximise the gains, and thus justify the minimal loses to be suffered: This is a trade off, and if implemented well, is the mark of a true economic statesman. However, it is not easy at all, and ultimately, there is the temptation to ‘let the market play-demand and supply prevail’.
Is a strong Kwacha necessary
So, do we need a strong kwacha? Probably not! And before you accuse me of anything, here are the benefits of a devalued kwacha such as ours today:
1. Zambia’s largest export for the past and next 100 years will be Copper. Currently, our mines, most of them, are foreign owned and trade in international markets. Copper sales, invoices and deposits are not in Zambian kwacha, they are in US dollars, and these are rarely done in Zambia. Infact, Zambia is a ‘price-taker’ when it comes to the pricing of Copper, i.e., it is so small a country to influence the price of copper on the market hence ‘takes’ the price at the London Metal Exchange as ‘given’ and trades at the same. So, a stronger kwacha would not lead to much growth in exports at all, the copper would continue to be traded at an external price, and proceeds receipted in foreign accounts(we currently run a 100% profit repatriation of mining proceeds). So whether the kwacha is strong or not, its effects on copper exports is almost negligible.
2. When the kwacha appreciates-becomes strong- it negatively affects the proportion of exports that actually come from Zambian production processes such as fruits and vegetable, flowers, maheu, chibuku shake shake and all middle level manufacturing products that Zambian firms produce and export to neighbouring countries. This is the catch: Should we kill our understories by a strong currency? No. Employment will fall, and the gains to be had from industrial development will wither away! Zambia now exports steel, yes, we make steel in Zambia. We also export Cement, and with Dangote coming in soon more Cement will be produced and exported. A weaker currency like currently being experienced will make the export of such, which we call Non-Traditional Exports (NTEs), increase. The beauty of NTEs is that they are exported by Zambians, so the proceeds will come into Zambian banks, and further fuel production, thereby growing the sectors further. You may be aware that China was deliberately running a devalued currency against the dollar just so its exports could be made competitive and attractive on the international markets. When the Chinese Yuan was at its lowest, exports skyrocketed, and we all marvelled at the growth of China, didn’t we? What matters, like I said, is what you do to maximise the gains from a weak kwacha. Coupled with removal of export restrictions by ZRA, we will see a rise in the exports of all sorts of commodities for which there is an external demand.
3. While we may argue that there are few Zambians in diaspora, the role of remittances cannot be ignored in fuelling growth and local investments in our country. In 2013, the developing world received $414 billion in remittances. The World Bank estimates that by 2016, remittances will be around $560 billion. In 2012, $60 billion in remittances was sent to support more than 120 million family members back home in Africa. While the link between migration and remittances is significant, the kwacha equivalent of these remittances is of extreme importance in defining the local purchasing power. So while it may now be expensive for us in Zambia to send our children to school in the USA, UK etc., when our brothers and sisters abroad send us those dollars and pounds, they are worth more than before, and since we are still faced with low inflation levels, surely we shouldn’t complain much. The local purchasing power is still high and un-eroded. So rather than wish our colleagues in diaspora bad when they do even the odd of jobs, we should encourage them to send the few monies they may be saving to develop our country. That said, remittances’ role, like those of social cash transfers, cannot be under-estimated in helping to reduce poverty in Africa—they are an important safety net. With the weakening of the Kwacha, an increase in remittances is expected as non-resident Zambians take advantage of the cheaper goods, services and assets back home. Let us see opportunity here. Perhaps it is high time we reconnected with our colleagues in diaspora and started a business!
4. A freely floating exchange rate like ours, if devalued like is the case now, will notionally, as earlier stated, help improve exports, but by raising the cost of imports, it adds to input inflation, which, in turn, damages living standards, hampering domestic demand and ultimately hitting the cost competitiveness of exporters. It should be the government’s deliberate policy therefore to help stop the spiral of price increase from hitting the exporters who are now benefiting. This will help further drive the industrialisation agenda for middle manufacturing local firms. Remember, whenever you hear about competitiveness, it is all about a devalued currency!
5. High Kwacha Equivalent Foreign Direct Investment (FDI). We cannot emphasise the need for increased FDI to fuel our economy. Devaluation makes feasible high levels of kwacha equivalent FDI. Growth in FDI is key to national development, so if it could be maximised, the better for our economy’s continued growth. We may therefore not need to borrow further.
Given all the above, how we manage the proceeds from these gains, however, should be key. Fiscal prudence must be emphasised, while keeping an eye on need for local content development in manufacturing and industrialisation as well as maintaining sane competitiveness. No governments, ever, everywhere, given the freedom to spend what it likes would know when to stop. So we must exercise caution on the fiscus.
In conclusion, perhaps this is also the best time for our economists in government and academia to actually check for the equilibrium level of the kwacha. We may be too harsh on ourselves when we may actually be where we ought to be with regards the optimum level of the currency. That the inflation rate as given by the consumer price index has remained below single digit may signal potential for realignment within feasible fiscal bounds. But furthermore, this is also an opportunity for the PF to institute future corrective measures through its monetary policy instruments to help make the exchange rate stable. For the banks, this is an opportunity to introduce hedging financial instruments that would enable exporters and importers transact at set future exchange rate prices. The more global we become, the higher the need for certainty in transactions across currencies, and that is an opportunity for financial innovation.
depends. A weak Kwacha will attract exports. unfortunately only copper our main export regulated by the international market …. so in conclusion weak kwacha no good !!
If you are living in diaspora probably.
If you are a business man and live in zambia improbable
Overall I would care less really, Scotland is having independence and
we are being asked to even have our own currency.
Thanks
Remittances! Financial regulations get a huge chunk that is received. First reform the financial regulations then we can be sending money back home! To send $300 from Zambia I pay $120 to the bank why? To receive $300 from outside am charged close to $100!
I am confused as to why you would be charge so much. Can you not do a cash transfer from you account to the receiver’s account? Online banking should have the charge at a fraction of what you are being charged. Western Union or MoneyGram certainly do not take such a high fee on 300$.
@mwewa max
TO send money to Zambia using either Westernunion or Moneygram costs less than the amounts you mentioned. I have just checked: to send £300 through Westernunion it will cost you £19.90. To send same amount through Moneygram it will cost you £9.99. Can you explain where your figures come from?
the kwacha is weak a sign that the economy is failing. No amount of jargons will mitigate the suffering of high cost of living baba. So weak kwacha simply means trouble to the majority
Mwewa max you are lying
I am not an economist, but what we need is a stable currency. It can be weak, but should be stable.
Spot on. What we need is certainty. I want to be sure that if I save K150 000 to pay for my child’s school fees at say U$1 to K5000, I will have the hoped for US$30 000 come time to remit the fees to Australia or USA.
Movements are acceptable as long as they are not wild. So a range of say 4950 – 5050 would stili be acceptable.
Oh come on, surely, you can’t be arguing that the way our currency has been flactuating is good. The equilibrium level of the Kwacha has log been regarded as being at K5 to $1. Therefore, the Kwacha is only defined as ‘strong’ if it is able to remain within this region over a long period of time. The current devaluation may be good for exporters, but these are very few, and most of them are happy with K5 to $1.
And Mr Sata blaming the Federal Reserve is dishonesty at its best. The Kwacha has actually lost more ground against the GBP and the EUR. What is happening in these regions to warrant this? In fact, with the Ukraine crisis, the Kwacha should be doing better because of this impasse.
Our Kwacha is tumbling mainly due to the inconsistent statements and policies from the Govt.
Do we need to shift the blame for the depreciation on to other countries really?????
we are growing thus we need to really on imports.with weak K imports are expensive m sure you can finish that…. your write is good for academic and non realistic papers like the post
Y didn’t H.E MCS understand the market forces during other presidencies and yet he used it as a campaign tool.
The author of this article lives in DREAMLAND.He read from a book and wants to show he knows something.
rather than make such a blanket statement, why don’t you give us your take on the Zambian economy and what YOU would do if you were in HEMC’s shoes…..one thing that I know is that economists differ very widely and profoundly on this topic and non-economists are sometimes left baffled as to what the country needs to do. I am looking forward to the day when someone will strip this debate of all the gobbledygook jargon that professionals throw around and talk to the nation in simple easy language as the author has TRIED to do…..we may not agree with some of the things you may say but am sure somewhere there is a gem of wisdom we can run away with and implement….Even presidents are left with such an option because there is never full agreement among economists.
All knowledge is acquired baba. Either from a book or teacher.
As Mbuzi says, it all depends but remember that the real devil lies in who has that currency. The Japan Yen has always been trading in hundreds to the US Dollar and they want it that way – why? Remember that money has always been a man-made creation which is subject to manipulation by the most powerful. My understanding of money is that it is a derived value of a physical capital like a house, a car, etc. Keeping Gold in reserves symbolises the wealth of a nation and a similar idea is called a pegged fixed exchange (so much Kwacha to a USD). I can go on and on here.
Please do note as well that there is nothing like “free” markets where supply and demand decide. If there was such a thing then there would be chaos in countries because of manipulators and the US FR would not have…
The govnt is gaining if they borrow USD they can paymore services for less dollar. Plus they have frozen the wages so it means that they need less dollar to pay workers.
@Ine wine: Ine wine please clarify how? When does the government gain? Is it when the Kwacha is weak or when the Kwacha is strong? What is also the relationship between the frozen wages and USD? Do workers gt paid in USD?
Please educate me
Kapolyo, in every field the’re always differences in the way people in that field interpret things. Even drivers cannot agree on how they would have handled a pothole when driving! President FJ Kennedy once said that he did not want an Economic Advisor with two hands! The reason he gave was that an Economic Advisor would never give you a precise answer but would always say, “On one hand while on the other … bla, bla, bla!”
The only simple advise you will ever get from a honest economic advisor is to make sure that you consider every aspect of your being (self) before deciding on anything because some decisions may be economically sound/viable but socially unjustifiable. A road into uneconomically justifiable area may be undertaken by the government for very socially justifiable…
Good one Kalumba…just one hand please lol
@KALUMBA , precisely, that is the nature of economics. It has always been a balancing act.
ECONOMICS IS ABOUT BALANCING HOW YOU MEET THE DIFFERENT AND THE NEVER-ENDING NEEDS AND WANTS OF HUMAN BEINGS WITH LIMITED RESOURCES.
IN ECONOMICS, YOU TRY TO FIND THE MIDDLE ROAD. IF YOU ARE A GOOD ECONOMIST, YOU FIND THE ROAD THAT GIVES MARGINAL BENEFITS UNDER ANY GIVEN SET OF CIRCUMSTANCES.
The kwacha performance in the Zambian mind reflects the economic perfomance as most goods are imported. No amount of books and explaination will change that, this population is in desparate need of proper education… lets talk about the next thing…
Probably the best article i have read on LT.This is dope,even countries like Denmark and Norway deliberately devalues their currencies for the sake of their economies.You are so spot on bro.
Your second point is incorrect.
Your second point is incorrect unless the inputs were imported. As the case, is a stronger Dollar is actually a good thing for them.
ya the weak kwacha will attract more chinese who will come with little dollars to invest and pay us peanuts.
Zambia recently deleted three zeros from its currency. Now that it is in the free-fall again, any claim that a weak currency is good is sheer ghost humour. It’s like a wrestler who claims that he is adept at wrestling when he lands thunderously on his stomach in a wrestling tussle.
Probably the dumbest economic argument in history; the author can’t even differentiate between currency depreciation and devaluation. Zambia has a free floating currency, so the China comparison is mute, since the Yuan is not free floating. The value of the Zambian currency is driven by current and projected economic conditions. Since Zambia is a net importer (excluding copper), a depreciating currency increases the cost of imports, further deteriorating the current account balance. Imagine what a depreciating currency does to your savings and asset prices (house). In short, if Zambia had a strong/competitive manufacturing industry, a slight depreciation of the currency could make the industry more competitive. Who in their right mind can conclude that Zambia is in that position now.
ECONOMICS IS ABOUT BALANCING HOW YOU MEET THE DIFFERENT AND THE NEVER-ENDING NEEDS AND WANTS OF HUMAN BEINGS WITH LIMITED RESOURCES.
IN ECONOMICS, YOU TRY TO FIND THE MIDDLE ROAD. IF YOU ARE A GOOD ECONOMIST, YOU FIND THE ROAD THAT GIVES MARGINAL BENEFITS UNDER ANY GIVEN SET OF CIRCUMSTANCES.
That is CHOICES. SO YOU HAVE TO HAVE WISDOM AND A GOOD SENSE OF JUDGEMENT TO KNOW WHICH STEP TO TAKE. ECONOMICS CAN NEVER BE LIKE PHYSICS OR CHEMISTRY!
Just to follow up on what the Matrix said, Zambia is better off with a strong kwacha because most of the goods are imported, capital goods we use such as machinery and equipment used to produce are also imported.Our external debt that the country owes on which we are servicing interest is in mostly in dollars making Zambia worse off whenever the Kwacha weaken.All the perceived advantages gained from a weak Kwacha are out weighed by these facts.
China is an export driving economy and it is actually the world’s manufacturing center thus benefits from a weak local currency. Japan also export many of the goods they produce as it is the technological hub of the world and thus benefits tremendously to a local weak currency.
Thus comparing Japan, China and Zambia’s benefit from a weak currency is preposterous!
the article has a grain of truth and some economical sense
Wow a sensible article from this author is a surprise
we also need imports trade is not a one sided thing. local import suppliers will inflate their prices as imports are getting expensive and this affects us the public who need both loth local and intenational goods. this is only sensible if you haven’t had the chance to pick up a book to read and understand how trade truly works. ba zambo kungo tinam sochabe!!
The conclusion should just be that if we want to benefit from the poor state of our currency, then there is need to have more exports than imports. Otherwise, as long as we import mor, a weak kwacha is and will still be a problem.