The foreign exchange market is affected by several factors which lead to the deterioration of the exchange rate of the local currency against other major currencies. The factors stretch from economic, social, political etc.
The current prevalence in the Zambian economic situation is also hit with these factors. I will surely explain on the actual factors that are causing the fast depreciation of the kwacha.
(a) Post-election rhetoric by the government officials
The 2011 elections which saw the rise of the current president, Michael Sata, raised a lot of fear and anxieties among ordinary Zambians, local and foreign investors. The kwacha was also affected by the event as some of the portfolio investors and other investors started pulling out of the country as they expected the post-election confusion which would have messed up their investment. As a result the foreign exchange market started experiencing liquidity problems characterized with the shortage of foreign exchange. The kwacha had started depreciating a little bit fast.
However, after the emergency of the new government, instead of working towards strengthening the exchange rate by giving it some economic life, it was exactly the opposite. The situation was worsened by what I call “economic sabotage” by the government officials. Look at this:
The President, Mr.MC.Sata, from nowhere forgot that he was no longer an opposition leader, made a serious and terrible “knee jerk” economic sentiment which no president in the world has ever spoken against his own currency.
“In Zambia, there is fake money, fake kwacha”. He strongly denounced the kwacha as being fake and this was excitedly broadcasted on the ZNBC news for everyone including investors and would-be investors to hear. Yes they heard clearly on how fake kwacha was.
What did these investors start doing?
Both local and foreign investors in Zambian including some few traders started offloading the kwacha from their accounts in exchange for the foreign currencies. Kwacha holders weren’t sure as to whether the cash they were holding was alright or not. But they believed it more as this pronouncement came from the mouth of the President himself directly.
The situation was worsened with one member of the Parliament who ignorantly alleged that the fifty-thousand kwacha note he had was fake as it was not printed by and written on it DE LA RUE instead by GIESECKE & DEVRIENT.He even surrendered it to the Speaker during parliamentary session.
For sure who can blame the serious investor for pulling out his investment or offloading the fake kwacha to safe guard his investment and cash?
(B) Mr. Bob Sichinga’s (Minister of Commerce) Announcement
While the kwacha was fast gaining depreciation speed due to the above careless talk from the Head of State and MP, the Minister of Commerce, Bob Sichinga who is thought to be an economist, announced that the previous regime MMD, printed more than 3 trillion kwacha which is in circulation. Remember this figure is far beyond the Bank of Zambia (BOZ)’s announced circulating currency in the economy( about 3 billion Kwacha).This means according to Mr.BOB,the Zambian economy has an excess of more than 2trillion kwacha. The excess of 2 trillion kwacha is too much money for this economy so much that the aggregate demand will rise due to “more money in people’s hands” and most likely will cause the increase in the inflation levels(which from the experience we economist have can lead to hyperinflation-check on effects on OVERPRINTING THE CASH TO THE ECONOMY).
The Honorable minister (economist) took it casually in the quest to justify the Rebasing of Currency (which I will talk next) but the impact was “salt on the wound” of the local currency. There was accelerated dumping of kwacha in preference for other major currencies which are not fake.
Even though the BOZ and Finance Minister denied the allegation (because they knew the impact of the pronouncement), the economic injury had already been done especially that the words came from the Minister Of Commerce who is known to be an economist.
(C)Rebasing Of the Local Currency-Kwacha
The much fancied new macroeconomic policy by the politicians but highly criticized by the genuine economists, Rebasing of Kwacha has pushed the last nail on the coffin-carrying-Zambian Kwacha.
The rebasing of the currency has no economic value to both the currency itself and the entire economy. Even though BOB Sichinga argued that once rebased, Kwacha will gain the value it had in 1964,it must be clear that this is causing panic and anxieties to the investors who are sure about the impact of the new rebased notes to their investment.
Many investors are aware that the rebasing especially done hastily done will cause inflation and raise the interest rates in the financial and money market.
Check on why Rebasing is inflationary…Many retail outlets especially large ones like Shoprite, game stores, Spar and other wholesale firms will have to change their numerous price tags(or menu tags in food outlets)on their goods in line with the new rebase currency. Do you see those many beautiful MENU/Price tags nicely displayed in different shops? All those tags and pictures displayed will have to be suddenly reprinted. But this must be done at a cost. Any extra costs incurred will have to be passed on to the consumer(poor consumers will feel this greatly).These are called MENU COSTS and will cause real or “on-the-ground” inflation and the common person in the street and village will feel it soon after(mark my words-prices of some essential goods will increase).
How about some companies which have already signed contracts? The contracts have already been signed and quoted in billions or trillions of kwacha. For instance companies like ZAMBEEF,COCA COLA,TRDE KINGS,CALIFORNIA BEVERAGE etc. have already signed contracts to supply goods to different retail outlets throughout Zambia. These contracts are mostly quoted in Millions/Billions of kwacha. So rebasing the kwacha suddenly will make the companies “re-sit to re-sign”these contracts in rebased form. Do you think this will be a costless exercise? No! Any costs accrued will be passed on to the consumers-and this will raise the inflation levels..
Do you know that investors are allergic to high inflation rates? Due to the fear of inflationary-Rebasing of Kwacha, investors are slowly losing confidence in investing in this country and since this will raise the interest rates and other many costs in the financial markets, investors are unable to keep their profits in our local banks, they are and will continue externalizing their profits. In fact local investors will find it expensive to borrow cash from banks.
Finally, people must know that kwacha depreciation would have been worse this period of economic sabotage if the BOZ had not intervened by providing liquidity to the foreign exchange market to stabilize the kwacha.
BOZ has been trying to mop up the excess kwacha being dumped by investors in the forex market and injecting some few foreign currencies to create a short term demand for the kwacha(I only hope BOZ is not reaping from the reserves-otherwise more trouble later). But for how long will this go on?
Please I advise our politicians to be very cautious of the sentiments and actions being unleashed in their quest to win peoples applause.
Moving around like the way honorable Kambwili used to do to intimidate investors embarrassing them on Televisions and blasting them instead of taking diplomatic stance to solve labor disputes is surely a negative signal to the economy which will prevent new investment or take away investment which can assist the almost-worthless “fake” kwacha(find out from the president).
The government MUST NOT blame anyone for the mess caused on the foreign exchange market due to their CARELESS TALK AFFECTING THE ECONOMY AND CURRENCY DIRECTLY.YOU ARE SURELY THE ONES TO BLAME.
Take heed or else the cheers will turn into jeers later.
God Bless this Great nation.
ECONOMIST AND PHD STUDENT AT UNIVERSITY OF ZAMBIA