A Voice, crying in the wilderness: dual currency

A Voice, crying in the wilderness: dual currency

By Bruce Danckwerts

I ended last week by promising to discuss the Statutory Instrument that banned the parallel use of the US dollar in the Zambian Economy.

I am not normally inclined to believe in Conspiracy Theories – unless the theory happens to propose a conspiracy amongst bankers.

Those readers who are following the international finance news will know that there is a new scandal in the banking sector almost every month. And so it was, that when this Statutory Instrument was announced (that prevented my being paid in US dollars for my tobacco (which was sold for US dollars) and then using some of those US dollars to buy imported inputs – like fertilizer and machinery) I immediately suspected that the banking sector may have been behind it. I surmised that, when the government put pressure on the banks to bring down their interest rates, the banks agreed, provided that the government restrict the parallel use of the dollar within the economy.

This would give the banks an alternative stream of revenue from the margin on buying and selling currency and from selling Hedging Instruments to customers who wanted to reduce the risk of currency fluctuations.

My suspicions were initially confirmed because, when the Ministry of Finance issued a statement, explaining the interpretation of this SI, it included the recommendation that businesses should use a Hedging Instrument to lower their risk.

Since then the Government has limited the margin (between buying and selling currencies) to just 2% – as opposed to the 4.5-5% that some banks had been charging in the past. Although this does not entirely destroy my Conspiracy Theory (the government may still have agreed to force us to change currency with the banks (in exchange for lower Interest rates) but may have brought in this 2% limit as a belated means of trying to reassure the business community) it does mean that the cost to my (and other businesses) is less than it was.

However, the cost to Zambia’s credibility remains huge.

Zambia has been operating a dual currency economy for many years – since about 1995, if not before. It seems to have worked well for Zambia, and certainly cannot be blamed for the weakening of the Kwacha from October 2011 to June 2012 as the Dual Currency Economy was operating in exactly the same way in 2006 when the Kwacha revalued. If that is the case, then why change it and why change it in such a manner?

A country’s credibility is one of it’s most valuable assets; it is also it’s most fragile. HongKong, Singapore and Switzerland have very little by way of natural resources, but they have a reputation for outstanding efficiency and this reputation attracts large amounts of investment. Despite Zambia “graduating” to Lower Middle Income Status, we are still perceived as a high risk, inefficient country in which to do business. The way this SI was implemented, without warning and without prior consultation, must have done almost incalculable damage to our reputation. I said ALMOST incalculable because we shall be able to see during the next few months what change there has been in Direct Foreign Investment into Zambia. If we see the trend is downward, and if we assign one third of that decline to this SI (and the other 2/3rds to other causes) we will get some idea of what it has cost this country.

I should end with a quick discussion on that 2% margin. It may not sound like much, but for those companies earning foreign exchange but denied direct access to it, that 2% loss every time they convert Kwacha back into dollars to buy their foreign inputs, is a cost – a cost that has to be financed by less investment elsewhere within the business. Where does that 2% end up? With the banks, who will be remitting their profits back to their headquarters overseas. So, no matter how small the cost, it is a transfer of resources from Zambian companies to foreign banks. And I have not even mentioned the added inconvenience.

Next week it will be time to start discussing the bigger, long-term future of this country and I intend to start by discussing the most serious issue of all – population growth.

Bruce Danckwerts

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