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Wednesday, 11 July 2012

A restriction of export earnings?

GRZ is planning to introduce policy measures to stop companies from externalising all their export earnings, according to Finance Minister Alexander Chikwanda :
“We are in the process of enforcing policy to ensure that export companies including the mines do not externalise all their export earnings. This has been disadvantaging the country. This enabling environment was introduced by our colleagues in the opposition who we replaced, but we want to correct this and introduce an enabling environment for both the investors and the people"
Mr Chikwanda has been talking to Mr Sichinga who sounded out this policy in 2010. Others like David Panabantu have also championed it. The problem is that proponent of this idea have not adequately explained the trade-offs. Its strikes me that there are essentially two strong short / medium term impacts.

The immediate impact would be a stronger Kwacha. Whilst this may have its benefits (reduces import costs for machinery, etc), it could have potentially significant negative effects on our export competitiveness. We might possibly have to kiss diversification good bye. Incidentally the MFEZs may also suffer if a stronger Kwacha led to higher labour costs. Then we have reduced purchasing power of aid inflows (conversely making it easier to pay back debt) and remittances.

The other effect would be to increase bank deposits potentially increasing domestic savings. This would have the likely effect of reducing the need for foreign borrowing at higher rates relaxing the "external constraint". Real interest rates may decline and growth would increase if interest rates are a significant binding constraint on the economy. It strikes me that the real issue regarding interest rates is the absence of financial intermediation in rural areas. The challenge is widening banking services to rural areas to allow people to save and invest. This is beginning to happen with increased banking expansions and some element of subsidised credit.

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