ABOUT THE KWACHA’S DEPRECIATION AGAINST THE DOLLAR: CAUSE AND EFFECT
By Sean Tembo – PeP President
1. Evidently, the economics class that President Hakainde Hichilema and his economic tag team at Ministry of Finance attended appears to be totally different from the one some of us attended. The ultimate economic objective of any government, anywhere in the world should be to attain sustainable economic growth. When the economy grows, the private sector thrives, jobs are created, the government collects more revenue for use in providing services to the people, and everyone is happy.
2. However, for sustainable economic growth to happen, certain parameters need to be in place. Out of all the parameters that are needed for an economy to grow, the most important is that economic variables must be stable. These economic variables include the exchange rate of the local currency to other major convertible currencies, the price of key factors of production such as fuel and electricity, etcetera. For as long as there is instability in key economic variables, you can forget about achieving any sustainable economic growth. That is a well established fact of economics which every decent economic manager the world over, knows apart from President Hakainde Hichilema and his economic tag team.
3. It is for the reasons aforesaid that some of us vehemently argued against Government’s policy of reviewing fuel prices on a monthly basis. Because it creates instability in a key economic variable which is a key factor of production. Similarly, we argued against the rapid appreciation or depreciation of the Kwacha against major convertible currencies such as the Dollar. For purposes of economic management, what matters about the exchange rate is not whether it is appreciating or depreciating, no. What matters is the rate of appreciation or depreciation.
4. For purposes of economic stability, a currency must not rapidly appreciate or depreciate. Otherwise it causes uncertainty to economic entities and forces them to postpone the making of certain economic decisions. An economic entity can either be an individual like you and me, or it can be a company or institution. An economy like ours here in Zambia, is made up of millions of economic entities. What allows an economy to grow is the ability of economic entities to make economic decisions.
5. If Mrs. Bwalya had planned to buy a car from South Africa this month-end, but due to the rapid depreciation of the Kwacha, she is forced to postpone her purchase, it means that the car dealer has lost out on a potential profit, Government has lost out on revenue from customs compliance procedures at the border and registering the car at RTSA, an insurance company has lost out on potential premiums, a filling station has lost out on potential profits that would have accrued by selling fuel to Mrs. Bwalya, the bank has lost out on potential bank charges that would have accrued when Mrs. Bwalya made the payment for her car, and so on and so forth.
6. Now, remember that the gross domestic product (GDP) of a country, which is the main standard of measure for economic growth, is defined as the value added to an economy over a specific period of time, normally a year. That means when economic entities such as Mrs. Bwalya postpone their economic decisions such as the purchase of a car, it undermines our country’s GDP, and by extension our country’s economic growth. When the economy is stagnant, it means even Mrs. Phiri who sales beans and kapenta at Chaisa market will suffer because there will be less demand for her products as the general population will have reduced purchasing power. Hence the general saying; “buzinesi yavuta masiku yano”. But not only that, when the economy is stagnant, even Mr. Mukelebai who had a job as a security guard may be laid off because the owner of the lodge where his company was guarding has decided to reduce the number of guards from 5 to 3, in order to cut costs due to a generally poor business environment. All these economic consequences are ripple effects of the instability in economic variables such as the exchange rate.
7. When President Hakainde Hichilema was sworn into office on 26th August 2021, the Kwacha was trading at about K21.20 against the US$. Within two months, the exchange rate had appreciated to about K16.00 against the US dollar, representing about 25 percent. Those in support of the President cheered and ululated, as they thought this appreciation was based on economic fundamentals, until the Deputy Governor of the Bank of Zambia, Dr. Francis Chipimo revealed that the Central Bank had pumped in US$1.3 billion to support the exchange rate. Ostensibly the same $1.3bn that the country had received in SDR allocation from the IMF.
8. But that is not the point. The point is why Government decided to spend so much of our forex reserves to achieve a huge appreciation within a short period of time, which they knew or should have known that they will not sustain in the medium to long-term, there by causing huge fluctuations in a key economic variable? As we speak right now, the Dollar is at K21.70 and will most likely hit K22.00 in the coming week. Instead of spending $1.3bn to drive the exchange rate to K16.00 then letting it go, President Hakainde Hichilema’s Government could have just maintained it at about K21.00 where they found it, there by ensuring stability in the exchange rate and also preserving our hard-earned forex reserves. But evidently, the need for stability in key economic variables as a prerequisite for economic growth, is a class which the President missed during his days at university. And the Zambian people are now paying the price, simply because the President dodged a class during his days at UNZA. But the future is SET ✌️✌️✌️
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SET 02.04.2023