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Sunday, 22 March 2015

Kwacha Contradictions

The Kwacha's crisis shows no signs of ending soon. It is closed on Friday at  K7.7 per $1 (K8.2 per €1 and K11.4 against £1). The current historic collapse is against all major currencies. The two men tasked with stabilising it have been talking. So far we are only getting a tale of contradictions between Alexander Chikwanda [Finance Minister] and Denny Kalyalya [BOZ Governor] over the domestic causes of the current Kwacha crisis.

Alexander Chikwanda's statement to Parliament:
On the domestic front, the major reason for the weakening of the Kwacha is the palpable demand/supply disequilibrium. In other words, the demand for dollars principally and other currencies exceeds supply. At the beginning of the year, the foreign exchange earnings inflows are slow because of the time lag effects in the realization of export earnings, while lower copper prices have further constrained supply conditions. In general, net monthly supply of foreign exchange in 2014 exceeded US$100 million. However, at the beginning of 2015 this fell to around US$85 million.  (Source: Ministry of Finance, 3rd March 2015)
Denny Kalyalya's statement to the media:
There have also been important domestic factors impacting on the exchange rate. The supply of foreign exchange by the mining sector has fallen relative to demand, and this cannot be purely explained by the reduction in domestic production because we have seen higher mining sector exports in 2014....The exchange rate of the Kwacha against other currencies is determined in the interbank market. This market responds to both fundamental factors such as some of the demand and supply factors related to external trade, but it also responds to sentiment which tend to drive demand and supply away from fundamentals. 
Clearly, other issues have been raised with respect to mining tax policy and value added tax which also impact on sentiment in our market. In this regard, I return to my earlier comments that if we are speculative and talk down our own currency then we cannot blame others for reacting negatively. We therefore have a role to support stability in our market by providing sound analysis.
Chikwanda and Kalyalya both agree that the Kwacha's poor performance is partly driven by local factors. The depreciation is being driven by a reduction in supply of foreign exchange (rather than an increase in demand for foreign currency). But the two gentlemen have different explanations on why the supply of foreign exchange is low.

Chikwanda says it is because there is a "lag" or "delay" in mining companies in realisation of foreign exchange earnings, but he does not say why this delay is happening or what has created it. He also blames lower copper prices leading to lower copper volumes.

Kalyalya partly agrees that mining companies are responsible for the reduction in foreign exchange, but he disagrees that this is due to lower copper volumes. He says, "this cannot be purely explained by the reduction in domestic production because we have seen higher mining sector exports in 2014". Instead he appears to blame "sentiment" or poor investor confidence. He particularly notes that the tax regime and the VAT impasse are affecting "sentiment".

But shockingly Kalyalya seems to think the answer is to talk positively about the Kwacha and the economy as a whole. His solution to the "sentiment" challenge is that the Bank needs to "support stability in our market by providing sound analysis". Surely if the issue is poor investor confidence (mining companies' in particular, and in money markets) the answer lies in policy coordination? It means that we must review not only the policies but how they are implemented and communicated. It is political problem not a media or analysis problem.

Most importantly, whilst we welcome sound analysis, shouldn't Kalyalya start by making sure his boss has correct analsis? They are contradicting each other publicly over fundamental issues. It is no surprise that the Kwacha has not moved since Kalyalya made his statement. Since BOZ is not an independent central bank (unlike in other countries) it is vital that Chikwanda and Kalyalya speak the same language and get their story right. It is total confusion at present.

Chola Mukanga 
Copyright © Zambian Economist 2015

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