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Tuesday, 25 March 2014

Saving the Kwacha : Abolition of SI 55

Zambia is a very funny country. One would have expected the removal of Statutory Instrument 55 ("SI 55") to be properly analysed by people with pros and cons. Instead what I have heard and read so far is pretty superficial and disappointing comments.  What is even more puzzling is that it seems all of a sudden no one wanted SI 55. Where are its supporters?

We may even go further and ask, why do these same people now believe SI 55 is the cause for the free falling Kwacha? Where is the cost benefit analysis of the latest decision? What is being gained and lost? And is a fire sale abolition of instruments without wider public consultation (not just with multinational businesses) good way to make policy? We must not forget that a lot of money has been spent by GRZ to get here! 

You see I have learnt that whether we are agree with policy decisions or not  our analytical armor must always remain intact. We must ask the same searching questions to foster deeper dialogue on the future of this country. It is vital that as a people we learn to think through issues and not merely follow the crowd. 

Government introduced SI55 in July 2013. It empowered the Bank of Zambia (BOZ) to monitor currency inflows, outflows and international transactions and regulate charges in the financial sector. BoZ worked with financial service providers, ZDA and ZRA to collect specified documents from importers and exporters above a specified threshold. Persons making certain remittances and those contracting external loans were compelled to submit these to ZRA. Periodic monthly returns have had to be submitted by financial service providers to BOZ.

The main problems I had with SI 55 were two-fold. First, it was created in the same way it has been abolished : without meaningful consultation. Secondly, it was always a lie. Politicians publicly said it was designed to "repatriate profits from abroad".  PF championed the so called "Panabantu solution" to low tax revenues in mining which PF had championed during its election campaign, following misguided advice from an analyst going by the same name. In the end of course it turned out to be merely a bureaucratic monitoring mechanism.

But SI 55 has not been without benefits. Yes, it has imposed costs but certainly people also saw benefits. One benefit frequently mentioned is that it has been a deterrence against illicit financial flows. Many people have increasingly found it difficult to transfer money abroad, especially cash obtained through corrupt means. The removal of SI 55 may now make it easier for politicians and large businesses to externalise money abroad undetected. Chikwanda so far has not said how this will be mitigated. To be fair no one has actually asked him! Three cheers to our journalists! 

Another possible impact of course is that the lack of monitoring framework may now mean that foreign mining companies and other business will continue with their activities of under-declaring profits. It may also mean that if you have large cash this may now be the time to take it out of the country or leave it abroad rather than incur the political risk under the PF government, given PF's tendency to make up policy at a whim! That may actually not only lead to more money going abroad but it may even weaken the Kwacha further in the medium term.

We can go and analyse many dimensions to this. The main point here is that there costs and benefits to this policy decision. What Chikwanda should have done is to release a report to the public that explains how SI 55 has been working; what government has learnt; and, why it believes that the benefits of removing SI 55 are greater than the costs.

Government needs to explain whether it is has been deliberately FORCED by multinational companies to change government policy. Has it been bullied as Chikwanda hinted by a 'cartel'? Or is this infact an outworking of careful policy thinking? Or may be PF has changed it to allow its politicians to transfer money abroad?  

Or is the removal of the SI 55 simply about sending a clear signal to investors that govt will no longer pursue a largely socialist agenda?  This appears to what have been behind Vice President Scott's statement to the UK's Financial Times: "It's very dramatic; it's back to free markets. We have learnt to back off from our mistakes and listen to people." Or does PF simply want to revert to old MMD policies?

I am asking questions because I don't know the answers. Chikwanda has not offered any! Again this is not say that Chikwanda was wrong to revoke SI 55. Rather it is simply noting that Chikwanda has not justified his decision. His decisions are abrupt and do not appear to have been thought through carefully. If he has thought through them, the has not explained them to the public.

Some will of course criticise this as merely politicking. But regardless of particular policy positions and regardless of PF, MMD, or other political party the key point here is that thoughtful debate and public discourse needs to happen on all major policies prior to implementation, expansion, or revocation. Last year I opposed the SI 55 for the same reason I have problems with its removal : a failure to engage in thoughtful, public, point-counterpoint debate.

We need proper debate not simple statements! There's also a genuine question on whether this reversal will have any effect on the Kwacha in medium term, even allowing for other changes to the Overnight Lending Facility requirements and changes in the reserve ratios. What will GRZ do if the Kwacha keeps falling? What else will be abolished without consultation? 

In the end what will impact on the Kwacha is keeping a rein on public spending and restoring investor confidence by creating a stable investment and political climate. Dropping Chikwanda and Gondwe would also help. Until that happen I believe things won't improve. And any governing by decree in the meantime will simply continue to reinforce the view held by some, right or wrong, that rule of law is absent. And until that perception is changed, investors will always be wary! 

Chola Mukanga | Economist
Copyright © Zambian Economist 2014

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