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Monday, 16 June 2014

Killing the Kwacha : BOZ Response

A recent statement from the Governor of the Bank of Zambia on the challenges facing the Zambian economy, especially the Kwacha :
June 10, 2014

The Bank of Zambia wishes to take this opportunity to update the public on recent developments in the foreign exchange market and the measures that have been taken to stabilize the recent instability in the Kwacha. As a result of additional measures implemented on May 30, 2014, the exchange rate has shown signs of stability over the past week.

Let me first of all state that Zambia's economic fundamentals remain sound. It is our view that the rate of depreciation of Kwacha witnessed over the past few months is not consistent with economic fundamentals.

Early this year, the Central Statistics Office revised the GDP numbers for the year 2010, to take into account the changes in the economy since 1994. Based on these revised GDP numbers, in 2013 the economy registered growth of 6.7%. It is anticipated that growth will remain above 6% in 2014 and even higher over the medium term.

As we have indicated before, the prospects for the mining, agriculture, construction, manufacturing and tourism sectors are all bright. We expect these sectors to continue being strong drivers of growth and this is being supported by the strong investment in the transport and energy infrastructure that the Government is currently undertaking.

Our mandate at the Bank of Zambia is to achieve price and financial system stability. For the year 2014, our inflation objective is to attain an end-year inflation target of 6.5%. From the beginning of the year, inflation has generally been on an upward trend with the annual inflation rate rising from 7.1% in December 2013 to 7.8% in May 2014.

Factors contributing to these inflationary pressures include the depreciation in the exchange rate from the third quarter of 2013, higher food prices during the lean period between October 2013 and March 2014 prior to the crop harvest and the increase in fuel prices. More recently, the announcement that electricity prices are likely to be raised, will also add to inflationary pressures.

Having said this, we are confident that the increased investment in the electricity sector supported by economic tariff rates will bring the benefit of higher exports and more stable power supply, which ultimately will support export diversification, exchange rate stability, greater productivity in industry and lower inflation.

We are all aware that inflation is a corrosive influence on any economy and mostly hurts the poorest. The depreciation of the exchange rate is a strong driver of inflationary pressures and is, therefore a threat to the achievement of our inflation objective.

Some of the factors that have contributed to the depreciation in the exchange rate include but are not restricted to: a noticeable reduction in the supply of dollars to the market, particularly from the mining sector, which accounts for the bulk of foreign exchange supply. Over the first
quarter of 2014, we also noticed deterioration in the current account balance to a deficit of US $260.7 million from a surplus of US $28.7 million in the fourth quarter of 2013. The deterioration was largely accounted for by higher service payments.

Over the fourth quarter of 2013 and into the first quarter of 2014, there has also been a significant build-up of liquidity. This liquidity has supported demand for foreign exchange - and has ultimately led to the measures taken to tighten monetary policy. Developments in the international financial markets have also impacted on the Kwacha, as the strengthening of the dollar has led to a corresponding weakness in the Kwacha through financial flows.

It is because of the importance we attach to maintaining low inflation, that the Bank of Zambia has taken strong measures to address the rising inflation trend and the instability in the foreign exchange market by significantly tightening monetary policy.

In March 2014, the Monetary Policy Committee raised the BoZ policy rate by 50 basis points to 10.25%. The statutory reserve ratio was also increased to 14.0% from 8.0%, to help address the
high liquidity levels in the market. In April, we announced a further increase in the policy rate to 12.0%.

On May 30, 2014, the Bank of Zambia took further measures to tighten monetary policy by increasing the rate on the overnight lending facility to 10 percentage points above the policy rate from 6 percentage points. Further, the Bank has widened the application of statutory reserves to include Government deposits and Vostro accounts held by foreign financial institutions. The Bank of Zambia will also now require Banks to comply with statutory reserve requirements on a daily basis and not on an average basis as was previously the case.

In addition to these measures the Bank of Zambia has also intervened in the foreign exchange market to improve supply of foreign exchange. This is in line with its policy of managing volatility in the exchange rate, rather than targeting a specific level of the exchange rate.

With the measures we have taken, we have seen some stabilisation in the exchange rate over the past few days. We will remain alert to ensure that we achieve our objective of a flexible and market-determined exchange rate that reflects market fundamentals and promotes macroeconomic stability.

In addition to measures taken to tighten monetary policy, we have also had in-depth discussions with stakeholders in the financial sector. These discussions have focused on the foreign exchange market in general and the operations of the interbank market in particular. It is clear that working with the banking sector, there is a need to improve the efficiency of the foreign exchange market by eliminating the structural rigidities that have emerged. Some of these rigidities include the concentration of sources of supply, and the lower sales of foreign exchange, particularly by the mining sector.

The Bank of Zambia will continue to address the key structural constraints in the financial sector. We are confident that efforts to develop our financial markets and make the interbank foreign exchange market more efficient, coupled with the continued strong growth in non-traditional exports, will promote a diversified supply of foreign exchange and help achieve greater resilience in the foreign exchange market.

In conclusion, we wish to assure the general public that the Bank of Zambia and the Government are committed to maintaining macroeconomic stability and ensuring that the year of our golden jubilee becomes a stepping stone towards inclusive growth.

BOZ Governor
There are too many holes, as usual, in Gondwe’s statements. We will leave readers to explore deeper. But it is striking that Gondwe appears to believe the tightening measures are responsible for the relative stability of the Kwacha we have seen over the last week. There's little acknowledgement of the policy credibility problems. 

In fact the simple reason the Kwacha has stabilised is because GRZ has asked the IMF to provide a bailout programme which will ultimately lead to austerity measures and downward management of the government budget deficit. In other words GRZ appears to have concluded that it needs policy credibility by handing over some degree of control over its fiscal plan to an external foreign body that the wider investor community is likely to have confidence in. It is an extraordinary admission of ineptitude, but one which appears to be temporarily working.

The consequence is that the market, for the moment, appears to believe that fiscal consolidation will ultimately take place e.g. wages will continue to be frozen, no significant reckless spending will occur, etc. Whether President Sata will toll the IMF line is anybody’s guess. The way the government is currently organised is quite chaotic with no central intellectual centre.

There also increasing political fractures within PF. And then there's the possibility of an early election looming coupled with inevitable pressure for pre-2016 election spending. These factors should soon combine to make it more clearer that IMF programme will hardly provide the silver bullet needed to restore confidence. Much more needs to be done on the politics that are currently obtaining.

Gondwe of course is the man in the middle. And an obvious handicap of his that he has never taken Economics 101 in his life. So he does not even realise that "market fundamentals" is actually a broad term in economics which includes not only the things like inflation and interest rates, but also the state of the government’s fiscal deficit and the level of business and investor confidence. At present the fiscal deficit is is not in a good place. As for investor confidence, it is at its lowest point. 

One suspects that once most of these facts concerning Zambia become more prominent to all the relevant players, in the next few weeks the downward trajectory of the Kwacha will resume. Unless GRZ shows serious intend in dealing with the policy making challenges. This has always been the pattern over the last three years.

By the way, it is interesting the economic growth projection now been downgraded! It was 7% in the 2014 budget. We are now talking about 6%. That is definitely the wrong direction. Zambia needs at least double digit growth to reduce poverty.

Chola Mukanga
Economist | Consultant | Researcher
Copyright © Zambian Economist 2014


  1. Hi chola double digit growth will not automatically result in reduction in poverty levels. What will reduce poverty levels are high employment levels. Zambia's economy can easily graduate to double digit growth rate with the coming on board of just 2 new large scale mines like the size of kansanshi mine adding $4 billion to the economy but employing only a total of 1,000 people and paying very little taxes as a result of tax incentives .On the other hand our economy may remain in single digit growth rates if we produced extra 3mt of maize with a value of $750 million using 1,000 small scale farmers. GROWTH SECTORS MATTER!!!

  2. Hi Cho,

    by handing over some degree of control over its fiscal plan to an external foreign body that the wider investor community is likely to have confidence in. It is an extraordinary admission of ineptitude,

    What if they are just working off a gameplan?

    1) HIPC writes off Zambia's debt however it requires a massive handover of natural resources to the same corporations that these banks own.

    2) Because in this New World Order, no country is allowed to exist unless it is in debt to the IMF/World Bank, the first thing the government does is take on a billion dollar euro bond. It is unclear what the money is spent on. Notice that the IMF/World Bank never object.

    3) After having run up the debt from $1 billion to $4 billion, and indicating that Zambia's debt would still be at 'sustainable levels' at $10 billion * , the Kwacha is being slammed after two Statutory Instruments were introduced to slow or at least monitor the outflow of money from the economy.

    4) The IMF's solution is austerity, and I am sure, an even greater sell out of natural resources, if history and the example of Greece are anything to go by. Maybe they'll privatise Victoria Falls, the roads like is proposed in the UK, state land, the rivers, whatever they can get their hands on.

    Then the process repeats - debt - sell off - debt - sell off, etc. until the banks own the entire country, and everyone in it.

    There is a reason the PF's financial team is considered corrupt, and it is not only their acquiesence in the non-declaration of profits by KCM worth billions of dollars. Their closeness to the IMF may be about a lot more than an admission of ineptitude.

    * (LUSAKATIMES) Zambia’s external debt stands at US$4.2 billion
    Time Posted: June 14, 2014 3:29 pm

    Ministry of Finance Public Relations Officer, Chileshe Kandeta, has told QFM News in a treasury brief that at this level the ratio of Debt to GDP is about 17.8 percent of GDP, which he believes is way below the internationally agreed sustainability level of 40 percent.

  3. It gets worse. Now there is another $1 billion eurobond on the offing:

    (LUSAKATIMES Another US$ 1 billion Eurobond on the cards
    Time Posted: June 23, 2014 6:07 am

    He said the past two international issuances have mainly targeted large infrastructure projects such as roads and bridges but that this new bond will be agriculture centered.

    “We want something specific to agriculture. All the two Eurobonds have mainly gone to ZESCO, Zambia Railways, DBZ and the like and the agriculture sector did not receive much and so we are hoping that this Eurobond kicks off so that we can have our own financing for agriculture development,” he said.


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