ZBT Ed­i­to­rial :Who will claw back lost Kwacha value?

Zambian Business Times - - FRONT PAGE -

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.

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