By Given Mutinta
PRESIDENT HICHILEMA’S PRAGMATIC ECONOMIC SHIFT
President Hakainde Hichilema’s administration has initiated pragmatic economic shifts to stabilize Zambia’s fiscal situation. Key measures include permitting mining companies to remit tax obligations and service certain debts in Chinese Yuan (CNY), reflecting Zambia’s reliance on Chinese investments, especially in the copper mining sector, and the need to restructure significant external debt.
Accepting CNY for commercial transactions, especially in mining, provides several advantages. Zambia’s copper, the mainstay of its foreign exchange earnings, is predominantly sold to China. By enabling payments in CNY, the government mitigates currency conversion risks and transaction costs linked to USD transactions. Mining companies like Konkola Copper Mines benefit from streamlined tax compliance and reduced demand for US dollars, preserving hard currency for essential imports priced in USD or Euros.
Additionally, utilizing CNY is strategically aimed at fostering economic integration with China, potentially unlocking further investments or favorable loan conditions amid ongoing debt restructuring with China, Zambia’s largest bilateral creditor. Committing to repay part of the external debt in the lender’s currency signals a willingness to fulfill obligations while easing tensions in negotiations overseen by international bodies like the Paris Club and G20 Common Framework. This approach might stabilize repayment schedules by alleviating exchange rate risks associated with CNY purchases using converted USD earnings.
Despite these transactional merits, the policy necessitates careful management. Key risks include potential depreciation of the Zambian Kwacha (ZMW) and depletion of foreign exchange reserves if CNY is poorly managed. If the government accepts Yuan only to sell them for USD needed for imports or non-Chinese debt servicing, it merely shifts currency risks.
Therefore, establishing a transparent mechanism for utilizing or hedging CNY reserves is critical. The government must disclose the volume of CNY accepted and its intended uses while enhancing its capacity to trade CNY internationally, ideally through increased bilateral trade in ZMW or barter arrangements. Without effective management, accumulating Yuan may lead to hidden liabilities.
Long-term, Zambia must safeguard its economic sovereignty and avoid over-reliance on a single trading partner’s currency beyond transactional necessities. The decision should maintain transactional flexibility, ensuring it does not signify a structural shift from the US dollar as the principal international reserve currency for emerging markets, while pursuing broader strategies to diversify exports and reduce dependence on Chinese financial support.