SOLVING A NEW PROBLEM USING SAME TOOLS: KWACHA DEPRECIATION
The Kwacha has been on a continuous depreciation trail, now trading towards K23. This is despite perceived good economic news as follows:
1. Best budget ever for 2024
2. Successful MoU on Paris Club debt as part of debt restructuring
3. Imminent agreement with Eurobond Debt – private creditors
4. Resolution of KCM being handed back to Vedanta and agreement signed
5. Potential resolution of Mopani mines in sight
6. $15 billion ZNS investment in a new smelter which construction will begin in next 2 months
7. Increased investor confidence resulting in $8.7 billion investment pledges disclosed by ZDA
8. Stabilisation of mealie meal prices using ZNS
9. Further disbursement of $188 million on the IMF ECF following signing of Paris Club creditors MoU
10. Good and transparent governance as proclaimed by Mr Hakainde Hichilema
11. Several progressive MoUs signed during presidential trips of Mr Hichilema
To mention but a few ‘positive pronouncements and positive economic developments’!
One would have expected a strong Kwacha performance given these good pronouncements. Alas, the Kwacha is instead going South as the second worst performing currency as reported by Bloomberg.
The Bank of Zambia after a long time decided to increase the Statutory Reserve Ratio in February 2023 to curb Kwacha depreciation and inflation by 2.5 per cent. In addition, Bank of Zambia has consistently raised the Monetary Policy Rate at its quarterly meetings to curb inflation and Kwacha depreciation, coupled with direct market intervention by pumping colossal sums of Dollars from International Reserves into the market.
Despite these bullish measures, the Kwacha continues heading South, now trading around K22.8 and inflation jumping to 12.6 per cent. Most recently, Bank of Zambia has again increased the statutory reserve ratio by 3 per cent hoping to curb inflation and Kwacha depreciation. Prior to this decision Kwacha was trading at K22. Post the announcement Kwacha is heading to K23. We also anticipate a further 100 basis points increase on the Monetary Policy Rate at the Bank of Zambia’s November 22 Monetary Policy Committee given the hawkish contractionary economic policy pronouncements.
Economic commentators have consistently commented against such Monetary Policy measures which they say will hurt the economy and create a serious liquidity crunch and reduce access to credit, consequently inhibiting economic growth.
The question is why is the Bank of Zambia using the same tools which do not seem to work? Is it because we are reading text book theories and failing to see reality on the ground? Why not for instance just reverse the mining tax waivers where we were collecting $400 million annually compared to $80 million we are now collecting?
The Monetary Policy tools consistently being applied have failed. Why use same failed tools to resolve a new problem?
As lawyers say,
I rest my case!
Fred M’membe
President of the Socialist Party