By Chola Mukanga
These are busy times for Bank of Zambia (BOZ) Governor Michael Gondwe. The Kwacha continues to face a battering, it is now at its weakest position in 12 months and the second worst performing currency in the region. The Governor is struggling to bring it back to what he regards as a “more realistic” level. Despite throwing millions of foreign reserves it continues to slide with declining foreign investment. High food and import costs recently prompted BOZ to raise interest rates and increase the reserve ratios for commercial banks.
Gondwe seems to be a man lost at sea and fearing for his job. Last month he said, "the exchange rate needs to be right, because if it gets out of hand it has an impact on inflation....President Michael Sata has legitimate concerns because of the weaker currency and rising costs in the economy". Finance Minister Alexander Chikwanda added the pressure suggesting that a weaker Kwacha may lead to an inflation spiral and boost the government’s debt costs. He wants the kwacha to trade between KR5 to KR5.10 a dollar to hold back inflation. That seems like a tall order, with analysts predicting that that the Kwacha may fall as much as KR6.5 a dollar going forward.
What has worried economists is not only Gondwe’s failure to reduce currency volatility, but he also appears not to have a clue what the problem is. He recently blamed the mines for deliberately withholding foreign currency but failed to explain why and how they are doing that! Government also generally appears not to understand that part of the erosion in the Kwacha is essentially policy uncertainty and general lack of confidence in Government policy direction. There appears a lack of cohesion at the heart of the PF government, with politics and economics not singing from same hymn sheet.
The importances of these issues are now magnified by new proposals to give BOZ additional responsibility. The Bank of Zambia (Amendment) Bill, 2013 currently before Parliament would mandate BOZ to “promote the efficient operation of the foreign exchange system, regulate and monitor: (a) foreign exchange inflows and outflows and amounts remitted; (b) imports and exports of goods and other inflows and outflows; (c) international transactions in services; (d) international transfers to or from non-residents; (e) profits or dividends received in respect of investments abroad; (f) borrowings and trade credits from non-residents; (h) receipts of both principal & interest on loans to non-residents; and, (i) international money transfers into and out of Zambia..” It also enables BOZ to set maximum interest rates for banks, with corresponding financial and custodial penalties.
It is the most sweeping legislative change that has taken place in our financial system since market liberalisation in the 1990s. BOZ will now effectively be able to restrict flow of foreign exchange. It will also become a regulator of exports and imports. In particular (e) is clearly targeted at mining companies to ensure the money is banked domestically. A solution which does not appear to have any real economic benefits and would most likely lead to significant appreciation of the Kwacha with negative consequences for export led diversification, if poorly handled.
There has been much discussion of the pros and cons of these proposals. But a key issue that has been ignored is that these are enabling powers with significant discretion on the part of BOZ. The real issue is how BOZ eventually uses these powers. That comes down to the level of accountability and independence that can be assumed by BOZ as it seeks to execute its powers in the best economic interests of the country.
That is the huge elephant in the room because as things stand BOZ seems politically captured. It is certainly less independent than it was under Mwanawasa. Many of the recent decisions have all been political: rebasing the Kwacha, fixing lending cap rates, increasing reserve ratios and increase banking capital requirements. Currently, BOZ is trying to make the Kwacha stronger when economics suggests that they must simply manage volatility and allow the Kwacha to find its "natural equilibrium". But this is politically unacceptable so BOZ is trying to strengthen the Kwacha to no avail. Its misguided political decisions are also leading to inflation because significant weakening of the Kwacha for a country that lives on imports means inflation and high production costs. The more volatile the Kwacha the less you want to hold it.
Of course this politicisation started with Rupiah Banda's MMD. When BOZ forcibly took over Finance Bank, the largest privately owned lender at the time, and then attempted to sell it off without proper process. Though Finance Bank had problems the common interpretation is that the move was aimed at fixing Rajan Mahtani who at the time had withdrawn political funding from MMD. Caleb Fundanga pandered to Mr Banda in the process doing irreparable damage to the informal "operational independence" of the BoZ that had been established during the Mwanawasa years.
The central point is that regardless of the past, it is now imperative to ensure that BOZ is operationally independent. The PF Government needs to urgently put in place legislation that guarantees BOZ "operational independence". The Executive Branch (run by PF) would still set the policy goals for monetary policy (e.g. low inflation). Once these goals are set BOZ must have operational freedom in how it achieves them. These arrangements need to be set out in a new BOZ act, including provisions for appointments of a new Governor through open competition. It is folly to say let us wait for the draft constitution. These are policy matters which we should act on now, especially in light of the new powers now being handed to BOZ. At present BOZ is a toy of political leaders whose overriding desire is to remain in office. That is a dangerous position to be in.
Question : Do you approve with the way Bank of Zambia is handling monetary policy currently? What further reforms, if any, are needed going forward?
Copyright © Zambian Economist 2013