Kwacha gains boost to economy
Published On July 28, 2021 » 2562 Views» By Times Reporter » Business, Columns
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By Kennedy Mupeseni –

THE appreciation of the Zambian Kwacha experienced currently if sustained will help retain confidence in the local economy leading to an economic boost.
Last week, we saw the local currency gain from around K22.50 against the United States (US) Dollar to K19.30.
On July 26, this year, Bureau De Change quoted the Kwacha at K19.00/19.30 for buying and selling respectively.
Thus, the financial experts are bullish about the continued appreciation of the local currency citing shifting economic fundamentals.
Government through the Ministry of Finance stated the continued stability, and recent gain of the Kwacha to the greenback, largely reflects changes in the supply of foreign exchange and broad improvements in market expectations.
The developments are consistent with broad goals set out in the Economic Recovery Programme (ERP), which was launched by President Edgar Lungu in December 2020.
Ministry of Finance public relations officer, Chileshe Kandeta indicated that the recent developments on the market showed improved foreign exchange flows from the mining sector in view of the strong recovery in copper prices and production.
Mr Kandeta pointed out that this led to a significant expansion in the trade balance estimated at US$1.9 billion during the period January to May 2021 compared to US$576.8 million over the same period last year.
These factors are significant flows from non-resident investors seeking to purchase government securities, evidenced by the oversubscription at 116 per cent in the bond issuance held today.
“This has bolstered liquidity in the foreign exchange market and has subsequently led to the substantial reduction in the hitherto excess demand,” he said.
It attributes the changes to scale up market support by the Bank of Zambia (BoZ) in view of improved flows from the mining sector which is another factor that has contributed to major shifts in the foreign exchange market.
Further, the Ministry notes a confidence boost in the market following the announcement by the International Monetary Fund (IMF) to allocate
Special Drawing Rights (SDRs) to its members in August.
It is upbeat that the SDR allocation is expected to increase international reserves by approximately US$1.3 billion in August.
In addition, the Central Bank continued with the gold purchase programme through which about US$22 million has been added to the international reserve position.
On the other hand, Centre for Trade Policy and Development (CTPD) senior researcher- public finance Gabriel Pollen is satisfied both the Ministry of Finance and the central bank has provided some measure of guidance in terms of explanatory factors associated with the Kwacha appreciation.
Dr Pollen adds that Zambia’s chronic dependence on copper exports for foreign exchange earnings is as worrying today as it was more than half a century ago.
“The structural dynamics of Zambia’s economy reflecting in the undue reliance upon copper exports leave the Zambian economy largely susceptible to the vagaries of the external sector.
“While, fortuitously, copper has been trading around decadal peaks well over US$9,000 per tonne, history teaches us that copper prices fluctuate, booms and busts are part and parcel of the dynamics of the commodity market,” he said.
Nevertheless, he observes that it appears that it is tinkering the supply side of the foreign exchange market by BoZ’s injection of greenback into the market may explain the bulk of the gains enjoyed by the Kwacha over the past few days.
Indeed, Dr Pollen said the measure put in place by BoZ to receive tax receipts in dollars from the mining companies is work of fiction, but that this means that the Central Bank will now shift its portfolio around, by offloading dollars into the foreign exchange market and crediting the Zambia Revenue Authority (ZRA) account at BoZ with Kwacha.
“Because arrangements in place between BoZ and ZRA in this regard are not in the public domain, one can only speculate as to how BoZ will settle this transaction without undue liabilities and transactional costs,” he said.
Dr Pollen further observed that further, bond issuance to non-residents, although he has noted a boost in foreign exchange inflows and that for the time being, that cannot be relied upon for long-term stability of the exchange rate.
“Bond sold today to non-residents mean that there will be outflows of foreign exchange at some point in the future, adding to demand pressures in the foreign exchange market,” he said.
Dr Pollen noted the other factor being debt suspension initiatives being rolled out as well as goodwill from international lenders resulting in Zambia’s public debt repayments not being remitted as scheduled.
In 2019, debt repayment costs were about $944.4 million, dropping to US$639.68 million in 2020 on account of Covid-19 debt repayment relief support.
He says the Central government’s external debt stands at US$12.74 billion; hence, resumption of normal debt repayment is likely to ramp up demand for the dollar.
“As we have argued elsewhere, structural transformation of the Zambian economy is the answer the country seeks for its developmental pursuits more broadly and stability of its currency and rate of inflation in particular,” Dr Pollen stated.
Financial analysts have also described as significant the recent gains made by the Kwacha against other major convertible foreign currencies.
Mambo Hamaundu says Zambia should move away from becoming a country that focuses heavily on imports.
He notes that while the appreciation of the kwacha is significant, the country needs to export more to have a stable exchange rate.
Mr Hamaundu says it is fundamental to have an exchange rate that is predictable and not volatile.
Zambia’s economy needs to improve on its productivity which will in turn change the country into not being highly dependent on imports.
“The appreciation is sitting on events, we have bond auctions, we have people who are uncertain about what will happen post-election period, they are converting their currency into kwacha, it is not sustainable,” he says.
The appreciation of the Kwacha against international currencies is a positive development which cannot be downplayed.
And Blessings Kafwanka says the appreciation of the Kwacha could improve the standard of living for Zambians.
Mr Kafwanka thinks the diversification of the economy has a long term solution to the depreciation of the local currency.
He also calls on Zambia to focus its efforts on becoming a mass export based country.
“We should diversify our economy from being over dependent on copper.
We also need to ensure that we improve on our export base especially when it comes to non-traditional items,” Mr Kafwanka says.
Southern Africa Cross Borders Traders Association (SACBTA) also says the appreciation of the local currency will reduce foreign exchange related losses if sustained.
SACBTA general secretary, Jacob Makambwe says the high cost of foreign exchange rate has been contributing significantly to the cost of doing business for cross border traders in the region.
“Our hope is that the current Kwacha gain will be sustained for cross border traders in the region to stabilise their business,” Mr Makambwe says.
He observes that Kwacha gain is always good for business hence for measures to sustain the gain by producing export oriented goods services, hence insulating the local currency against dipping back into precariousness.
“It is always an advantage in terms of doing business because the depreciation of a currency triggers inflation and other economic fundamentals among them banking lending rates, so a sustained local currency appreciation is very desirable,” Mr Makambwe says.
Similarly, energy expert Johnston Chikwanda said the appreciation of the Kwacha against major convertible currencies is a boost for the energy sector.
Mr Chikwanda says this is because most of the goods and services used in the industry were imported in foreign currency.
“You have commodities like fuel which is imported in United States dollars and other equipment used by institutions such as the rural electrification authority. So the appreciation of the Kwacha comes with a lot of benefits for the country,” he says.
Mr Chikwanda commends the Government for remaining resilient in sustaining a favourable retail petroleum pump price despite the depreciation of the Kwacha and increase in oil prices on the international market in the last one year.
He is positive the appreciation of the Kwacha will in addition create liquidity for the foreign currency in the local economy.
As observed by many economic commentators, going forward there is a need to effectively implement import substitution measures by upping the country’s production and manufacturing thereby augmenting superfluous gains from copper.
With COVID-19 pandemic, lockdowns in countries where Zambia buys most of its consumables will continue, further causing economic distortions that will pursue the currency to slide back to a more serious volatility.

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