ZAMBIA DOES NOT NEED A VERY STRONG CURRENCY. By Choolwe Joyce Lungu.
The implications of words such as “strong” and “Weak” can mislead people to believe that an
appreciating currency is always better for the economy than a depreciating currency, but this is not the case. In fact, there is no simple connection between the strength of a country’s currency and the strength of its economy –Romer.
Import oriented countries like Zambia do not need a VERY strong currency. This can also be applicable to large economies like the USA. As we rejoice over the appreciation of the Zambian Kwacha it is very important to ask questions like; What causes the Zambian Kwacha to appreciate amidst low levels of
production and the absence of value addition on the few exports made? If the appreciation is as a result of a certain degree of government intervention, how long will it last?(is it sustainable)?
WHY WE DON’T NEED A VERY STRONG CURRENCY.
Firstly, here’s a simple description of exchange rates. Think of dollar(USD) as a good say bread and quote the price of the good in kwacha (ZMW). If the price of bread (USD) falls, then we say Kwacha has Appreciated (Less kwachas are needed to by the dollar). If the price of bread rises, we say kwacha has
depreciated because this time we will need more Kwachas to buy the bread (USD).
If the Zambian Kwacha keeps appreciating (getting Stronger), goods and services produced in Zambia will become relatively more expensive for foreign buyers, which will hurt Zambian domestic producers that export goods. In short, a stronger Zambian kwacha means that Zambians can buy foreign goods
more cheaply than before, but foreigners will find Zambian goods more expensive than before. This scenario will tend to increase imports, reduce exports, and make it more difficult for Zambian Firms (Businesses) to compete on price. A further Appreciation of the Zambian Kwacha risks making much of
Zambia’s export agriculture less competitive on the world markets. Since most Zambians consume more than they invest or save, the imports will grow more and more. This will widen the gap between imports and exports even further (Negative Net Exports).
The recent appreciation of Kwacha is not the main issue here as it has helped in cushioning the high cost of living for Zambians. The Continued Appreciation that would cause the kwacha to be very strong is the
issue. A stronger kwacha will reduce the flow of dollars and other foreign currencies in the country and the Bank of Zambia may be forced to draw down on its reserves whenever there is an increase in demand for foreign currency (USD) on the market (by commercial banks or individuals). This may cause a balance of payments deficit.
WHAT LIKELY CAUSED THE KWACHA APPRECIATION? IS IT SUSTAINABLE?
Some of the factors causing the Zambian Kwacha appreciation are; The announcement of the IMF package, Bank of Zambia gains on reserves, and the recent flows of investments in the country – John Musantu, PhD (Zed Econ Observer).
Questions of sustainability and stability depend on what causes the kwacha appreciation. If it is largely caused by the announcement of the IMF package and BoZ gains, it is likely not to be sustainable and
stable. If it is caused by CONTINUED increased flows of investment, it is likely to be sustainable.
WHAT CAN WE DO AS A COUNTRY? SOME RECOMMENDATIONS.
The current government’s effort towards the increment of value (Value Addition) on Agricultural exports are very necessary and worth applauding. More efforts should be placed on creating a favorable environment for foreign investors. More efforts should also be placed on boosting the tourism sector in
order to induce the genuine flows of foreign currencies in the country.
Picture Credit : Money FM Zambia.