Editor's note : Dr Mbita Chitala provides some reflections on the challenges facing the Kwacha and how it can be rescued. In particular, he argues that Zambia should impose capital controls, move away from a floating exchange rate system, and get rid of the current economic managers in order to restore confidence :
Many Zambians are disturbed that the Kwacha has continued to depreciate raising the spectre of compromising our economic performance and further increasing the poverty and inequality of our people. The free fall of our Kwacha has been on account of three reasons.
First, the PF government exchange rate policy inherited from the MMD government of using market-determined (termed floating) exchange rates where the value of the Kwacha is determined by market forces; Secondly, the unfettered international private capital flows such as the Euro Bond and other foreign bank borrowing, Portfolio Investment, Foreign Direct Investment and other Transnational Corporations activities, and ; thirdly, the lack of confidence in our economy managers occasioned by the costly introduction of SI 33 and the suspension of SI 33 and SI 55 without altering the content of our economic management.
The introduction and later suspension of SI 33 and SI 55, has resulted in large capital outflows (termed capital flight) which has been putting pressure on the Kwacha and resulting in its depreciation. As all students of economic theory know, the decrease in the demand of our Kwacha is central to why it is depreciating. This has been occurring because the Mining Companies together with all other investors including our own nationals have been selling their assets or relocating them offshore to secure jurisdictions.
This capital flight has further induced a vicious circle of additional flight and Kwacha depreciation, debt service difficultied and the reduction in stock or other asset values. This is because the panicked investors have been selling their assets en masse to avoid new capital losses brought about by anticipated future depreciation of the Kwacha or asset values.
This capital flight has aggravated Zambia’s macroeconomic vulnerability and financial instability which has culminated in the present exchange rate crisis.
It is important that the government takes up urgent measures and considers changing the current regime of floating exchange rate policies and introduce the pegged exchange rate system in which the value of the Kwacha will be allowed to fluctuate only within a narrow band (pegged exchange rate).
However, introducing a new policy exchange rate regime of pegging the exchange rate will not be sufficient unless our government considers introducing capital controls. Capital controls or the measures to manage the volume, composition or allocation of capital flows and or maintenance of restrictions on investor entrance or exit opportunities.
There is historical evidence all industrialized countries utilised capital controls successfully over long periods. This is true today for China, India, South Africa, Botswana , Brazil as it was for all European countries after WW II, the USA in 1963, Japan and South Korea in 1960s, Malaysia in 1994 and 1998.
In our country, it would be advised that these capital controls could presently target our specific vulnerability, namely, the capital flight and use and identify the specific ‘trip wires’ and ‘speed bumps’ in various domains such as the Kwacha collapse, flight of capital and then take steps to curtail these risks by activating a target capital control- the speed bump. It is in this vain that windfall taxation of our natural resources such as our base metals and emeralds should be seen.
Capital controls are beneficial to Zambia because in our small and underdeveloped economy, First, the controls will promote our financial stability and prevent our social and economic devastation; secondly, capital controls will promote desirable types of investment and financing arrangements; and thirdly. capital controls will enhance our democracy and national independence.
Lastly, It is important that that the bad image that our economic managers at the Ministry of Finance and the Bank of Zambia are responsible for, namely, of having introduced SI 33 in particular which prevented investors and owners of assets from using them freely in Zambia, is urgently addressed.
It is apparent to all and sundry that it will only be a foolish investor who will bring his assets to Zambia if the management is still in the hands of those who caused so much damage to investors and the country in the first instance.
(Author : MBITA CHITALA PhD)
Do you agree that Zambia should impose capital controls and abandon the current floating exchange rate system?
Do you agree with Dr Chitala that investor confidence will not return as long as the current economic managers are not fired?
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