It’s PF rhetoric causing Kwacha depreciation

By G. Usenga

In the Daily Mail Newspaper of 6th of June 2012, Mr. Muchemwa Sinkala tried to explain different reasons why kwacha is depreciating .I wish to concur with him on certain lines not others. My fellow economist, Mr. Sinkala is only showing the general factors why a currency can depreciate and not why our kwacha is depreciating.

Let’s look at the points Sinkala raised.

DOMESTIC POLICY.

Sinkala argues that the good domestic policy of Pf government which he alleges has seen the reduction in the lending rates in financial institutions, could have contributed to the depreciation of kwacha.

This is because more cash has been supplied into the economic system resulting into increased supply of kwacha against its demand. Mr. Sinkala should realize that the large supply of kwacha in the economy will surely not cause the kwacha depreciation but rather cause inflation. Thus I agree with part of this statement from him. I quote,

“The more money you have in circulation, the lesser the power of that currency and the higher the risk of hyperinflation.”

But in Zambia currently, the rate of inflation is reasonably low, meaning that the amount of money in circulation is within the acceptable margins. Today inflation is ranging from 6 to 7.5p.c (single digit).

How can the cash cause depreciation and not inflation in the first place in order to render the kwacha weak and lose the purchasing power? So his plea for the BOZ to reduce the cash supply from 3.1trillion (according to BOZ currency audit) will not assist in appreciating the currency. Let Sinkala know that it is not about supply of the kwacha due to loans by the banks but rather by the increased supply of kwacha due to dumping of kwacha by the investors at the foreign exchange market. It is about the increase in the demand for foreign currency like dollars and not the supply of the kwacha by the bank to customers.

Today BOZ can reduce the kwacha circulation but that will not make the kwacha appreciate as long as people continue demanding for the dollar and dumping kwacha at the forex market.

The point is misplaced because it is not the kwacha given to customers through loans but the supply of kwacha due to serious dumping of this kwacha by the investors at the forex market.

The other point on selling of currency and the behavior of investors in holding the large reserves of dollars is quite true but this doesn’t explain why the kwacha is depreciating. In fact Mr. Sinkala should ask himself why these investors and other players are holding dollars and not kwacha to protect their investment or rather are offloading the kwacha in preference for dollar. The fact is, these investors and traders have no confidence in the kwacha which is fake according to our president and the Economist, Bob Sichinga. For instance, more than 400 billion kwacha has been dumped in several institutions dealing in forex since “the declaration of the fake kwacha in circulation”. The institutions include Burea of Change, Barclays Bank; Standard Chartered etc. have all the information on the amount of kwacha being dumped there in preference for Dollar

INTERNATIONAL TRADE.

On the international trade, Sinkala has shown how international trade deficits cause depreciation of the currency-kwacha. Much as the economist is really true, but the he must know that the factor is irrelevant because Zambia is not recording any trade deficits, and in fact we have been recording the trade surplus which we are export receipts are far much more than trade import receipts. If the bank of Zambia is reaping up the foreign exchange reserves, then it is not because they want to cover up the trade deficit(as it doesn’t exist),but rather trying to control the fast depreciation of the kwacha through provision of scarce dollar at the forex market. So the view on the trade deficit to be causing depreciation in Zambia is very untrue and misleading as we have not recorded any for some time now.

Please let Mr. SINKALA research more on the international trade and finance in Zambia specifically.

FURTHER ANALYSIS

The fact is that political rhetoric against kwacha by the political leaders really accerated the depreciation of the kwacha.

Look at this, how can the president legalize the externalization of the profits accrued here in Zambia and not encouraging the reinvestment of these profits. Granted, externalization of the profits by investors has been taking place all along but steadily and cautiously.

Investors have not been very free to externalize the profits all along but from today the President of Zambia has LEGALISED profit-flights and so will occur freely and with impunity.

Even those who had been keeping part of their profits (in Kwacha) within will start externalizing them freely. For this externalization to occur, investors still having their profits in kwacha, will exchange them for the dollar and send to their home countries for job creation.

When you see that the kwacha has continue to depreciate so fast, then include among the factors causing that, Legalization of the externalization of the profits by the president. I am very the sure most economists are laughing at such pronunciation from the head of state.

Please I want to correct certain sentiments by bloggers that due to the Eurozone crisis is causing kwacha and other currencies to depreciate. It is partly true but not at the rate Zambian Kwacha is depreciating.

The South African Rand has been depreciating marginally and not more than 10p.c like the way kwacha does.

In fact, even the dollar is depreciating against other currencies so we were supposed to see Zambian Kwacha gaining marginally as its comparative currency-Dollar, posts some depreciation as the US economy is still in economic malaise.

Finally, am still emphasizing that our political leaders must be careful at what they say and do.

Most of the happenings such as nationalization of ZAMTEL, unconditional firing of judges which has reduced legal-confidence by the Citizens and others and has portrayed our president to be the dictator and any other factor which our Economist, Mr. Sinkala is ignoring.

I know Sinkala wants to protect the economic ills of the government rhetoric by showing us short-sighted reasoning, but he is not assisting our president.

Our president and other political leaders must know the right reasons behind the fast Kwacha depreciation.

LET CHIKWANDA WRITE A BOOK THEMED, LEGALISATION OF EXTERNALIZATION OF PROFITS BY MCS-STATE HOUSE.

THANKS

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