ABOUT CHICKENS COMING HOME TO ROOST: A CASE OF THE DEPRECIATION OF THE KWACHA- Sean Tembo

ABOUT CHICKENS COMING HOME TO ROOST: A CASE OF THE DEPRECIATION OF THE KWACHA

By Sean Tembo – PeP President

1. When Robert Southey composed and presented his poem entitled “The Curse of Kehama” in 1810, and introduced the phrase “…curses are like young chickens; they always come home to roost…” it is like he had peered into the future more than 200 years later and was describing the economic policies of the UPND administration and how they would boomerang, hardly two years after ascending to office in 2021.

2. As we speak right now, the Kwacha is in a free fall against all major convertible currencies, having crossed the psychological barrier of K26 to the dollar last Friday. Since we are an import dependant nation whereby we do not only import finished goods, but even the few goods that we manufacture locally, the bulk of the raw materials used are imported, this rapid depreciation of the Kwacha directly drives inflation and the shelf price of goods and services are shooting out of the roof. Therefore, every Zambian is feeling the pinch of the rapid depreciation of the Kwacha through the increased cost of living. Last week, my wife went to buy Christmas presents for our children. She decided to buy them phones this year to replace their old and ailing handsets. The phones she wanted to buy were fetching K3,000 each on a Monday, and we made a budget accordingly. By Thursday when she went to make a purchase, the price had changed to K4,200 each handset and the shop owner was blaming it on the depreciation of the Kwacha. I told my wife that I’ll buy the phones in Chachacha road as l believe that the shops at shopping malls sometimes exploit us as they want us to foot the bill for their expensive rent, but to my horror, the price in Chachacha road was even higher. So l gave the money back to my wife so that she can buy from the initial shop, and when she went there the following day, the price had moved from K4,200 to K4,600 !!! These are the hardships that the Zambian people face on a daily basis as a result of the rapid depreciation of the Kwacha.

3. This has exerted pressure on the policy makers in the UPND Government to do something to arrest this rapid depreciation of the Kwacha. Firstly they decided to pump in dollars from the strategic foreign reserves maintained at Bank of Zambia in an effort to mechanically support the Kwacha, but after depleting more than $1.6 billion in two years, the Kwacha remained resilient in it’s loss of value. In fact, the entire Special Drawing Rights (SDR) allocation that we received from the IMF on 24th August 2021 was depleted by mechanically supporting the Kwacha! They then decided to increase the Statutory Reserve Ratio (SRR) at Bank of Zambia in an effort to reduce the amount of liquidity in circulation, but to no avail. The Kwacha kept on depreciating. Then they decided to increase the monetary policy rate (MPR) again in an effort to reduce the amount of Kwacha in circulation, but again this policy measure had no positive impact. This meant that the depreciation of the Kwacha is not necessarily caused by an excess of Kwacha on the market, but rather due to a shortage of forex.

4. Subsequently, a few days Government announced and widely circulated the fact that they had received a $187 million disbursement from the IMF, in an effort to move the market and arrest the continued rapid depreciation of the Kwacha, but the market simply ignored that announcement. Two days later, Government made another announcement, amidst much pomp and fare, that they had received a $125 million grant from the World Bank, but again, despite the disproportionate publicity that was attached to this announcement, the forex market was unmoved, and the Kwacha kept on depreciating thereby breaching the record K26 psychological barrier last Friday, having breached another record psychological barrier of K25 barely 16 days ago.

5. So then the inevitable question that arises is; why is the Kwacha losing so much value against major convertible currencies, and what can be done to stem this tide? Well, the best way to describe the economic situation in which the nation finds itself is by borrowing the words of Robert Southey when he said in his 1810 poem; the chickens have come home to roost.

6. When the UPND ascended to office in August 2021, they implemented a number of strange and unsustainable economic and financial policies which favoured the mines and disadvantaged the nation. Firstly, they gave huge tax holidays to the mines, and the argument made by the Minister of Finance then was that this will attract further investment into the mining sector with a target of increasing copper production from about 850,000 metric tonnes per annum in 2021 to more than 3,000,000 metric tonnes by 2024. However, two years along the line, annual copper production has fallen to a record low projected at about 645,000 metric tonnes for the year 2023. So evidently, the Finance Minister’s argument that tax holidays to the mining sector will drive production did not and does not carry water. It is a frivolous argument.

7. Additionally, the VAT Refunds to the mining sector means that at any given time, mining houses have a more than sufficient supply of Kwacha such that they do not need to sell any of the dollars that they earn from mineral exports, on the forex market, for them to have Kwacha needed to meet their local currency obligations such as salaries. This has further killed activity on the forex market. In fact, our forex market is so thin at the moment that it can easily be significantly moved by a sale of say $10 million. The Kwacha can move from K26 to K25.5, albeit just for a few hours.

8. Then there is the issue of market confidence. Markets in all jurisdictions tend to be moved by major Government pronouncements. And indeed, even our forex market here at home was moved by pronouncements from the UPND Government at the beginning, but not any more. Why? Because there is usually no follow through by Government on the pronouncements that it makes, which has resulted in loss of trust. About a week ago, the President held his End of Year Press Briefing. One thing that was notable about that Press Briefing is that he kept on emphasizing that Government has closed the deal for an investor in Mopani Copper Mines and that the KCM investor agreement with Vedanta had also been finalized. Ideally, those are supposed to be major pronouncements which are supposed to move the forex market and bring about an appreciation of the Kwacha, at least even a small one. But guess what? The forex market was not positively moved by the President’s grandiose pronouncements. In fact, the Kwacha depreciated further after the President’s 4-hour speech! That, country men and women, is evidence of a total loss of market confidence in the nation’s political and economic leadership. This, of course, did not happen overnight but is a culmination of a series of unfulfilled policy actions by Government in the past two years. As Robert Southey said in his 1810 poem; the chickens have finally come home to roost. The only solution to our economic woes lies in a new SET of political and economic leadership for this nation. In the meantime, may God help us all.

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SET 31.12.2023