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Wednesday, 3 December 2008

Banda's Challenges : A Weak Kwacha

We continue our series, drawing from the challenges I identified in A memo to President Banda. The last piece identified falling copper prices, (evidence since then continue to reinforce this as a critical challenge - see the mining label). The Kwacha is falling primarily driven by the finacial crisis and global slowdown. The latter has led to falling copper prices and reduction in foreign exchange inflows, coupled with weak confidence in the economy which has led to additional impact of encouraging withdraws by foreign portfolios in Zambian government securities - simply put the Kwacha is now regarded as "less safer". The financial crisis also means that there's fewer cash circulating around. People are looking for good currencies to hold onto, and the Kwacha does not look like it. Its all going wrong in this area - consider that during the middle of the year were were talking about the Kwacha strengthening towards K3000 against the dollar. Mr Magande (ex-Finance Minister) was even sounding bullish. As I write, the Kwacha is hovering the other side of K4500.

This of course is an interesting challenge. The short term impact of the Kwacha is the higher cost of imports, mostly for consumption purposes, but some significant ones for production as well! The elasticity of imports become crucial here, but needless to say, oil is a critical input for mining production costs, and a weak exchange rate, means higher domestic production costs for other sectors not least general transportation. That said, a weaker Kwacha opens a window of competitiveness for non-mining sectors especially agriculture produce. The real question is whether the Zambian economy has diversified enough in recent years to take advantage of this window. We have seen
some signs of diversification, but in general this remains aspirational. Banda cannot change the fate of the Kwacha, but he can use this "window" to encourage more diversification, assuming he has any money. That of course is another challenge, yet to discussed!

3 comments:

  1. On the plus side, a weaker Kwacha could help attract investment to Zambia as foreign investors money would have more purchasing power. Especially if this is coupled with the reversal of the higher minimum investment amounts law instituted by the government a couple of years ago.

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  2. It is also a boon to farmers especially those in the floriculture an horticulture sector who had seen their earnings dwindle with the then all strengthening kwacha. This will be one problem sorted but then they still have issues with Jet fuel reputed to be the highest in the world. Already tourists are up in arms with Zambian Airlines who have resorted to leaving passenger luggage behind so that they have room for fuel from South Africa which is half cheaper than in Zambia.

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  3. The point of course is that any change in the currency is inherently redistributive. So for those who receive remittances, they may well find that all things being equal, they get more money in their pockets (analogous to Kafue's investors). Another potentially benefically might be Foreign Charities operating in Zambia, all things being equal again.

    As I will address in the next two challenges in this series : ODA and Remittances, these things are never equal. In particular both are highly dependent on the economic conditions in the global economy...and those are not helpful at this juncture.

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