Policy confusion continues to rock the Bank of Zambia (BOZ) as the Kwacha slides further. BOZ is struggling to halt the depreciation of the currency which is now at its weakest level in five years. And they do not know what to do.
Media interviews with leading figures at the BOZ suggests that the Bank is lost for options. BOZ's Financial Director Emmanuel Pamu says the Kwacha is merely on a “random walk" and that BOZ is not "concerned too much" because it expects "some correction.” He believes that the kwacha will be in “equilibrium” at a rate of 5.30 to 5.40 per dollar. A surprising hint that PF is now resigned to a Kwacha at that level at best. Is this the new policy?
Pamu's position contradicts the BOZ Governor Gondwe who admits the political problems associated with the sustained sharp slide. He us promising that BOZ is "looking at mopping up liquidity in the economy and a lot other measures". He assured journalists this week that BOZ will intervene to reverse the situation.
As I have recently noted, there's actually nothing that BOZ can do apart from reducing volatility. This is for two reasons. First, Zambis'a foreign reserves are dwindling. They are currently just at 2 months of import cover. This is below the Government’s 2013 target. Reserves have continued to fall over the last year as BOZ first tried to keep the Kwacha at strong level, then started directly funding Zambia's oil import bill and debt servicing. GRZ has recently moved to halt these practices in an effort to stabilise the reserves. Any return to artificially maintaining of the Kwacha will erode the reserves substantially!
Secondly, the factors eroding the Kwacha are on the fiscal and political side. The Kwacha has substantially eroded in value since PF came to power in 2011. There is little confidence in the Finance Minister Chikwabda's ability to manage national finances - or PF macroeconomic policies in general. A recent IMF statement warned that GDP growth in 2013 is weaker than expected (2013 growth is only 6% against the 7.3% in 2012).
But more worrying is that Zambia faces significant economic challenges in the fiscal area as concerns escalate over the inherent weaknesses in our macroeconomic fundamentals. It is noticeable that the Kwacha's current sharp fall has coincided with the Fitch downgrade and the worsening economic outlook by Standard and Poor.
The credit agencies have picked up on the fact that Government finances have deteriorated sharply with projected deficit (8.5%) in 2013 twice the target level, and GDP much lower than forecast. Spending is likely to significantly over-run again in 2014, reflecting the cost of the public service wage increase and higher debt service costs. The GDP outlook for 2014 is quite bleak.
Political we have significant chaos which has diminished confidence in the long term economic and political direction of the country. Recent policy initiatives have sent all the wrong signals. The deportation of important investors, confusion on export taxes, corrupt allegations among PF ministers, especially against Finance Minister Chikwanda, political infighting among ministers and reckless borrowing without sustainable plans to repay all sends wrong signals.
Put your seat belts on - 2014 is looking very bumpy indeed. Unless Chikwanda starts heeding the advice that I have been pumping out throughout the year. How worse do things have to get for him to listen?
Chola Mukanga | Economist
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