Kwacha rise: Clear economic feat
Published On April 12, 2023 » 1707 Views» By Times Reporter » Business, Columns
 0 stars
Register to vote!

THE change in foreign exchange (FOREX) rate is one of the most concrete of the economic fundamentals which is experienced even by lay people.

The change in forex rate is as real as the change in the price of a given commodity and you do not need an economic expert to tell you whether it has occurred or not.
Any change in the forex rate, just like the change in the price of a commodity, is directly felt or experienced by those ‘dealing’ in forex in one way or another.
For instance, the recent rise in the value of Kwacha against major convertible currencies especially the dollar, has had direct effects on people dealing in the forex in one way or another.
From trading well above K21-per dollar, the Kwacha is now slightly above K19 per dollar in commercial banks and well below that in Bureaux De Change.
It has so far gained about K2, which is significant!
For the direct effect, imagine John, a Small and Medium Entrepreneur, engaged in the sale of imported clothes from China or any other country.
To order his monthly goods in dollar, John was spending K10,000 when the exchange rate was about K21 per dollar.
Now that the value of the Kwacha has picked to about K19 per dollar, John will only need K9,050 to order the same quantities of clothes, all things being equal.
John cannot ignore that K950 gain as the result of the mere change in the forex!
Further, imagine that John’s original orders were for as high as K100,000 per month, his gain purely resulting from change in forex rate will be as high as K10,000 before we even talk about the mark up on the original purchase price.
Since I started following the performance of the Kwacha, the most drastic movement I have ever witnessed was somewhere in May 2019 when its value fell from about K10-per-dollar, and I mean the United States (US) dollar, to about K14.
It suffices to observe that the Kwacha has never performed any better since then.
The effect of that change was real to those who were dealing or transacting in forex.
For instance, if somebody was keeping $1,000 which translated into K10,000 when the exchange rate was at K10-per-dollar, the figure in Kwacha after the depreciation rose to K1,400, a 40-per cent increase.
While it can be said that it is possible to mechanically fix the level of the international foreign reserves, the foreign exchange rate in Zambia is a product of market forces – demand and supply.
As you may already know, unlike the forex rates for some countries which are fixed, Zambia’s is a floating one meaning it can change from one day to another.
The central bank in connection with the subject should, however, ensure that there is some level of stability in the value of the Kwacha vis-à-vis other currencies, using monetary policies.
This stability is important in planning and budgeting especially in international trade because things have to be factored into decisions or measures with some semblance of predictability.
A simple definition of foreign exchange relates to trading in currencies to make profit as the result of changes in currencies’ values.
According to FOREX. com, it is the world’s most traded market, with turnover of $5.1 trillion per day.
In my view, the most appropriate definition of forex is “the rate at which one country’s currency may be converted into another.”
But why should you care how much Kwacha it takes to buy a dollar, as a Zambian, for instance?
If you plan to travel outside Zambia you need to know the forex rate particularly for the dollar which has been a universal currency.
This always reminds me of the story I have told many times of my experience in 2013.
While traveling to Japan, I stayed without food and water for seven hours because all I had was a wad of Kwacha notes, which all bureau de change at Jomo Kenyatta International Airport could not accept.
There are eight leading factors which affect the exchange rate.
These are inflation rate, interest rate, balance of payment, terms of trade, political stability, recession, speculation and most relevantly government debts.
Changes in market inflation cause changes in currency exchange rates in that a country with a lower inflation rate witnesses the appreciation in the value of its currency.
The prices of goods and services increase at a slower rate where the inflation is low.
Currently, Zambia is experiencing stability in the rate of price changes and, therefore, that could have contributed to the current rise in the Kwacha.
Comparatively, Zambia’s interest rate is still high and generally, changes in interest rate affect currency value and dollar exchange rate.
Forex rates, interest rates, and inflation all have a correlation.
Increases in interest rates cause a country’s currency to appreciate because higher interest rates provide higher rates to lenders, thereby spurring foreign capital, which causes a rise in exchange rates.
The appreciation of the Kwacha, therefore, is not contrary to the current high interest rate unless there are factor scaring away foreign investors.
Further, a country’s current account reflects balance of trade and earnings on foreign investment.
It consists of total number of transactions including its exports, imports, debt and others.
Generally, Zambia has been recording a deficit in current account due to spending more of its currency on imports, debt and others.
This is definitely a contributing factor to the current scenario.
Some countries use their foreign exchange reserves to keep the value of their currencies at a fixed rate.
A good example is China, which pegs the value of its currency, the Yuan, to the dollar.
This is given its huge international reserves of more than $3 trillion as compared to Zambia’s $3.1 billion.
Connected to current accounts and balance of payments is the terms of trade which is the ratio of export prices to import prices.
A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices.
This results in higher revenue, leading to a higher demand for the country’s currency and an increase in its currency’s value, or the appreciation of exchange rate.
A country’s political state and economic performance can affect its currency value.
For a long time now, Zambia’s major attraction has been its low risk for political turmoil and that has helped to spur foreign direct investment.
However, the poor performance in the mining sector where some investors’ future seems uncertain could just work counter to the splendid economic performance.
Therefore, the risk is more from the economic sector rather than the political front.
When a country experiences a recession, its interest rate is likely to fall, decreasing its chances to attract foreign capital.
So, its currency weakens in comparison to that of other countries, thereby lowering the exchange rate and I do not think Zambia is currently experiencing any recession.
If a country’s currency value is expected to rise, investors will demand more of that currency to make a profit in the near future.
As a result, the value of the currency will rise due to the increase in demand thereby triggering the appreciation of the currency and this could be one of the factors for the current situation.
I deliberately left government debt for last because its effects on the Zambian economy including exchange are real.
The level of Zambia’s indebtedness has obviously been weighing down on the economic performance and on the many strides the current government has made.
For comments: 260 0955 431442, 0977 246099 or email: jmuyanwa@gmail. com.

Share this post
Tags

About The Author