Stabilise exchange rate - think-tank
The monetary policy should focus on shortterm support to smooth fluctuations in the exchange rate market as has been done in the past, says Zambia Institute of Policy and Research Centre (ZIPAR).
ZIPAR has emphasised that it was now necessary for fiscal policy to take on some of the burden of working to contain the exchange rate depreciation in the short term.
The Kwacha has depreciated by a massive 42 percent against the United States (US) dollar to K20.30/20.35 this month from K14.05 at endDecember 2019.
“A lot of the depreciation of the kwacha is down to a structural imbalance given Zambia’s high import dependency and the limited range of exports for earning foreign currency.
“To this end, it is of utmost importance that prudent fiscal management and fiscal consolidation is put into practice,” ZIPAR said in its analysis of the 2021 national budget.
ZIPAR said budgeting for a large fiscal deficit to support high expenditure through external borrowing jeopardised prospects to attract Foreign Direct Investments (FDI) and in particular. The institution indicated that fiscal policy must therefore strengthen its focus on external debt re-scoping to mitigate the high foreign currency denominated debt service payments.
“In terms of short-term measures to address the exchange rate depreciation, monetary policy will be neither appropriate nor permanently potent to defend the persistent structural fall of the Kwacha,” ZIPAR said.
ZIPAR said the remedies proposed to deal with the depreciation were largely medium to long-term in nature.
This, ZIPAR said, included the diversification of exports, attraction of the FDI, import demand management through import substitution, and securing of balance of payments support through an International Monetary Fund (IMF) programme.
Meanwhile, ZIPAR said the 2021 Budget would require positive and patriotic responses from all sectors of the economy to ensure implementation.
It explained that feasible policy options to rescue the economy were becoming scarce as it was now time to make the tough decision Zambia had previously avoided. “Implicitly, the Budget sets out to protect and benefit more vulnerable persons from deprived households.
“However, with the severe shrinkage in the fiscal space due to a narrow revenue base and increasing debt service, it is hard to conceive how the increased social sector spending will be financed,” ZIPAR said.