ZBT Editorial :Who will claw back lost Kwacha value?

Zambia’s local monetary unit, the Kwacha, is perhaps the best barometric indicator on how the economy is fairing at global comparison. The Kwacha like any monetary asset can be traded in exchange for goods and services within the jurisdiction of Zambia, a proverbial medium of exchange.

The Kwacha just like any other currency, has one other key function which is being as a store of value. Our brothers and sisters who own appreciating assets that include livestock, land and buildings know too well that these assets are a good store of value. The Kwacha on the other hand should offer a more versatile store for value, which clearly hasn’t been the case in light of perpetual fluctuations and depreciations.

This is what begs the question of who the custodian of the Kwacha is and what its value on behalf of the Zambian people is supposed to be. This mammoth responsibility squarely lies with the Bank of Zambia Governor Dr. Denny Kalyalya from the monetary policy side and the Minister of Finance Mrs Margaret Mwanakatwe from the fiscal policy side. We say so because the lack of intimacy in the two policies – fiscal vs monetary - manifests in currency instability. Fiscal imbalances manifest in many ways such as trade deficits, balance of payment gaps, ballooning fiscal deficits which exert undue pressure on the macroeconomic indicators, thereby corroding value in the local currency unit. In developed nations like Germany Central Bank Governors and Ministers of Finance performance score cards are tight to currency strength and the level of interest rates. Failure to achieve the requisite balance, triggers resignation by the overseers of both fiscal and monetary policy.

One would question why this has not happened before or yet. It may be attributed to the low level of savings culture that most of the eligible Zambians have after opting to put their extra cash into other more stable assets such as livestock, land ( plots and farms) and buildings with tend to be a better option to preserve value. Opening direct dollar ‘savings accounts’ just to make sure that their hard earned assets are hedged from volatility is another viable option for most.

We are almost tempted to shelf the blame on Dr. Kalyalya and his team at the Bank of Zambia – BOZ to lead the important responsibility of looking out for the Kwacha. However, we vividly are aware that Dr. Denny has done his part in trying to stimulate this economy to grow out of its mess but fiscal policy clearly is the biggest challenge Zambia is facing. Clawing back the Kwacha to acceptable levels will be a function of the right regulations which arguably cuts across fiscal and monetary policy. At this point all odds point to fiscal policy need to realign back to pre – levels. All fiscal consolidation steps must materialise to ensure the nation is out of the woods then can we comfortably say the currency alongside other key macros can realign to acceptable levels.

Monetary policy alone will not manage to fix the quagmire but there is need for synchronisation with fiscal policy interventions - government spending. The biggest challenge has been that Ministers of Finance are politicians as opposed to being pure technocrats hence execution of fiscal policy is always the biggest head ache.

They have to strike a balance between appeasing the electorate and taking stringent measures to correct anomalies. The fact that the current Finance Minister is a seasoned banker could only be a plus to the degree of allegiance she places to the nation or her political ambitions.

A review of the Zambian Kwacha to the United States Dollar trading pair in 2012/2013 shows trading levels of ZMW5 for US$1. The nation was made to understand and rightly so that the slide of the local unit from 2014 to 2015 was a result of the global financial system credit crunch. Since the world’s financial system is interconnected, the price of Zambia’s major export earner, copper, plummeted to levels of US$2,600 per tonne from highs of above US$8,500 per tonne.

The imported inflationary pressures partly due to depleted forex inflows into Zambia as well an import dependent economic structure saw the Kwacha lose value to trade at all-time lows of about ZMW16 per 1US$ with year on year inflation skyrocketing from October 2015 reaching a peak of about 22.9% in February 2016 before starting to decline.

With the reversals that have been seen in an improved copper price on the LME, improved forex inflows and conversions from the mining/quarry one can start to wonder when the Kwacha will revert to pre – depreciation levels. Inflation is now single digit and has been contained within the 6% to 8% band. There is need for the Ministry of Finance to be true to fiscal consolidation as part of the medium term expenditure framework to bring back the nation to its medium to low debt levels alleviating most pressures that are impacting the Kwacha. There is urgent need to return what was lost for local Zambia’s who have kept faith in the Kwacha.

It may be impractical or too much to ask for USD1 to ZMW5 Kwacha range but we do believe that the Kwacha can actually trade for stronger than where it is now. Suffice to say there exists latitude to claw the local unit back to stronger levels. The reason for this ask is that those in the formal sector earning a salary in Kwacha, have lost value with no compensation. All their purchases which are forex related such as most consumer goods which are imported mostly from South Africa are depended on the exchange rate of the Kwacha against the Rand, a direct correlation to the Kwacha against the US$ which is a defacto medium for International trade.

For those who held savings accounts with say K100,000 in 2013 at then exchange rate of US$1 to ZMW5, this was equivalent in a global economy to US$20,000. At today’s exchange rate which we can estimate for easy computation to US$1 to ZMW10, this same savings balance of K100,000 is worth only US$10,000.

Since this is a moral issue in a way, the Central Bank, financed from tax payer’s money which they use to well remunerate their staff is expected to do its part. These men and women are also educated at the best global universities and institutions at a great cost to the nation and are obligated to pay back to Zambia by doing the right thing which is getting back the value of the Kwacha lost during the financial crisis. After all it is the same Central bank that told the nation that global conditions eroded the local currency value.

The excuse of blaming it all on politicians is tantamount to an ostrich approach, of dipping the head in the sand yet leaving the whole body exposed. Technocrats and leadership at BOZ have the requisite education, influence and most importantly the ability to rally behind the treasury to put in place adequate measures on spending, issue the necessary fiscal instruments to get the icing on the cocktail of monetary actions that BOZ needs to put in place to restore parity and claw back the value of the Kwacha to its erstwhile ZMW5 per 1US$.

We are aware that this move will prove costly to the major forex suppliers - the copper mines that need to repatriate some extra forex to pay for their local statutory obligations, salaries for local staff and some minimal local supplies, but this action is needed first for sending a strong signal that the Kwacha is legal tender in Zambia and that the country will always put its interests first. The copper mines also have an obligation to Zambia which issues them their licenses that are enabling them make millions, if not billions of dollars in profits. In the long run, it is a viable proposition for a win - win deal between foreign investors and the local Zambian people.