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Wednesday, 25 February 2009

Talking up the battered Kwacha...

The Finance Minister Hon Musokotwane tried this afternoon to inspire some confidence in the Kwacha, after his Budget address failed to readdress the continuous slide. The full statement can be found here. He again reminded us the Government belief "that the economy going forward still remains fundamentally strong. This is because the fundamental strength of any economy is derived from the investments that it makes in building its own productive and intellectual capacities..."

And what are those "investments" for Zambia that the Government has made? Musokotwane should know that we not as foolish as he assumes. We choose not to share his John McCain moment. The fundamentals of the Zambian economy are weak. They have been weak for a long time. As my good friend says "Zambia has been in perpetual recession since time immemorial". Our economy is fundamentally dependent on copper, which in turn is dependent on world demand. We can hardly indpendently finance our national budget and rely on the good will of the world to deliver health care and education. Productive and intellectual capacities? Just who advises this guy? All the analysis I have see show that Zambia has low labour productivity and suffers especially in non-mining sectors. To be sure Zambia is an attractive place to invest but we are much more susceptible to political risk than Musokotwane would care to admit.

The real coded message I deduced from the statement is that Zambians should learn to live with a weak Kwacha, BOZ will do what it can to stabilise rate, but its difficult because we are at the mercy of foreign powers and dollarisation is a real danger. I do agree with him on one thing though :

...the current level of the Kwacha presents a number of opportunities for our economy. Firms that receive incomes in foreign currencies and face costs in local currency stand to gain significantly from a depreciated currency. This is particularly seen in the mining sectors and tourism sectors, where firms have tried to retain workers as much as possible as a result of improved cash flow rising from the depreciated Kwacha. Exporters also stand to gain, as their goods will now effectively cost less to buy. Local manufacturers are also urged to take advantage of this situation, as their goods will be more competitive on local and foreign markets...

I was one of the few, alongside the agriculture and tourism sector players, who bemoaned the strength of the Kwacha last year (see An even stronger Kwacha? 2nd Edition ; and the very graphical blog More stable...but in the wrong direction? ). If this helps with diversification of the economy that should be a good thing. I have my doubts even there though - see A mid-week rant.....on the state we are in... But here is my question to Mr Musokotwane : if a weak Kwacha is a "good idea" now, why was it not regarded as so, when the Kwacha was strengthening last year possibly even damaging the diversification, that we are now chanting?


  1. Let me suggest an answer to the question you put to Mr. Musokotwane, 'if a weak Kwacha is now a "good idea", why was it not regarded as so when the Kwacha was strengthening last year?'

    A 'strong' Kwacha sounds good and is popular with the public (especially with those whom it enables to buy cars and computers) because it greatly reduces the cost of imports. So no politician is going to oppose it. Most economists too enjoy these benefits and are not averse to popularity.However, now that the unwelcome collapse of the kwacha has happened, these people might as well make the best of it by pointing out its benefits to the economy. To be fair to Musokotwane, he is not on record as having favoured Kwacha appreciation.

  2. It's particularly disheartening to hear the very naive statement by the Finance Minister that a weaker kwacha favors industries whose product is denominated in foreign currency and whose input costs are in kwachas. This completely ignores the cost of capex almost all of which is not only denominated in foreign currency, but is also subject to high domestic variable costs in the form of taxes, duties and maintenance.

    The currency is not a lever that promotes exports when its weak, if the infrastructure to support exports doesn't exist. I suppose there is some logic that a weaker currency makes existing export products more attractive on the global market, but any exporter that wants to take advantage of that scenario would need to invest in additional capacity which is inordinately expensive because it is based on foreign currency. Add to that the fear of exchange controls and we revert to the 80's where businessmen hedged currency risk by stashing foreign currency wherever suitable.

    The Dutch effect created by the strengthening kwacha was potentially a problem with regards to export growth, but it presented an opportunity to build capacity, particularly for non-mining related goods and services. Very little of that happened during that period, primarily because the policy environment did not support it. We witnessed two bubbles - property (yet to burst) and equities - not dissimilar to the rest of the world. Government continued to grow, introduced new taxes and raised existing ones, and ignored the real need to preserve wealth in times of fortune to provide a shield in times of misfortune. Chile is thankfully able to engage in fiscal spending to shore up their economy because they agreed to preserve a fund with the excess profits derived from the increase in copper prices. Not us. That would be far too pragmatic and socially conscious based on our history of fiscal mismanagement and disregard for the rights of individuals.

    Labor productivity has very little do with it.

    What ironically could happen is that the next 2.5 years sees yet another rash of donor driven funding to prop up the economy, because let's face it, we are the relative darling of the Sub-Saharan African donor world. Of this a good portion will leak, continuing to fund higher-end property prices, luxury vehicle sales, and keeping Manda Hill and Arcades in business. This could be followed by a new administration whose entry will coincide with a resurgence in commodity prices - after all demand has not evaporated and 6% growth in China and India still means a fair degree of base metals demand particularly when stockpiles have depleted - which will invariably result in the same scenario we're in.

    So hang on for the next 2-3 years, watch the threat of exchange controls, the testing of ZMK7,000 to the US$, poor equity performance, and the requisite accompanying political fighting and xenophobia and focus on the next up cycle.

  3. Oh I forgot to mention...that scenario assumes government doesn't default on its domestic debt given the scarcity of global capital particularly for our very meagre foreign banks, could put a dramatic squeeze on things.


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