By.
Dr. Mbita Chitala – Public Policy Analyst
I have been
challenged by many of my colleagues and students to state my opinion and offer advice
on what could be done to resolve some of our economic challenges. These are my
views.
KWACHA
DEPRECIATION
Why is the
Kwacha falling like a domino? The answer is not because of the eight months
rule of President Lungu as some would like us believe or a creation of any
Zambian. These economic problems have their genesis in the global economy.
Kazakhstan’s Tenge tumbled more than 20% on Thursday against the dollar when
the country said it would adopt a free-floating currency (pretty the same as
Zambia). Vietnam devalued its currency for the third time this year. And this
phenonomena is evident in all so called free markets.
For the past
decade or so years, Zambia has enjoyed positive growth in excess of 8% of GDP
spurred by global growth, high copper prices, low interest rates and a weak
U.S. dollar. But now, Zambia’s main stay copper and other commodity prices are
dropping. There has been an economic slowdown in China and the prospect of the
Americans hiking interest rates soon mean our economy will be in deep trouble.
Early in
September, 2015, China allowed its currency to devalue, sending the year down
about 2^ against the dollar. Currencies in other countries such as South
Africa, Brazil, Russia, Turkey and so on have also plunged down this year.
Furthermore,
uncertainty surrounding China’s economic growth and the impeding interest rate
hike in the US could send our currencies even lower, especially so in the case
of Zambia, as our growth estimates of our copper export prices continue to
fall.
This global economic
debacle has in some cases led to currency wars in which countries compete to
devalue their currencies against other countries to boost their exports.
In our country
Zambia, we are experiencing a currency crisis – a situation where the value of
the Kwacha has depreciated in a very short time and has continued to adversely
affect the wider economic woes with long lasting repercussions.
This Kwacha
crisis has emerged because many citizens now doubt that the Bank of Zambia has
sufficient foreign reserves to maintain our exchange rate. The Bank of Zambia
has tried to fend off this Kwacha crisis by satisfying the excess demand using
our country’s reserves by releasing foreign currency on the market. But, this
is temporary and it has not worked.
There is no widely
accepted definition of a currency crisis but it is generally agreed that a
currency crisis emerges when a nominal depreciation of a currency of at least
25% but it is also defined at least 10% increase in the rate of depreciation.
Our Kwacha has suffered both.
WHY THE KWACHA IS DEPRECIATING
There are at
least three things that can bring about a currency collapse:
First, is the
speculative attacks in which people perceive that there will be a drop in the
value of the Kwacha in the future and they tend to opt to sell their Kwacha to
avoid a loss. As they sell their Kwacha, the value of the Kwacha begins to
decline and the Bank of Zambia is forced to buy up excess Kwacha to keep the
exchange rate stable. As the value of the Kwacha declines, people may begin to
panic, selling off more of their reserves and causing the Kwacha to fall even
further.
This speculative
attack as we are witnessing it now, may be because of the huge public debt that
is growing and people may suspect that it is not sustainable. The result of
this speculative attacks can be fatal to our economy and if not addressed can
cripple our government because, in due course, the government may fail to
service its debt, since the Kwacha will have devalued so much that it is
impossible to pay the debts when they fall due. It is important that our
Minister of Finance must work smart and hard to address this potential
challenge.
Secondly,
runaway inflation can also lead to a currency collapse. The case of our sister
neighbour Zimbabwe is most telling of a country that suffered political
turmoil, hyperinflation and the collapse of the ZIMDollar. The Zimdollar was
the official currency of Zimbabwe until January 2009 when the government
legalized the use of other foreign currencies. This currency substitution is
currently happening in Zambia. This measure for Zimbabwe led to the sharp drop
in the usage of the Zimdollar and by April 12, 2009, te Zimdollar was abandoned
as an official currency.
The Zimbabwean
government has undertaken that they will only re-introduce the Zimdollar or
some such national currency if industrial output would average 60% more of its
current output capacity. In April, 2009, the output was 20%. It is important
that Zambia ensures that we do not return to the runaway inflation before 1992
and that we increase our nations output by seriously diversifying our economy.
Thirdly, the
government policy moves such as altering interest rates can also lead to Kwacha
collapse.
Once a currency
collapses, it is difficult for a nation to recover. Citizens will find that
their savings are devalued. The cost of goods and services will rise as the
nation is forced to pay much more for imported products. This is so for Zambia
since our privatization destroyed our then buoyant manufacturing sector and our
country has become a profitable market for imports.
On account of
the Kwacha devaluation, foreign direct investment will be reluctant to come to
Zambia or to invest in our Kwacha. From Germany in the 1920s to Argentina in
early 2000 and Zimbabwe in 2009, the scene is the same: prices will sky rocket
as personal savings are destroyed. Our government together with all well
meaning citizens must combine their efforts to forestall this potential
tragedy.
CAPITAL CONTROLS THE ONLY SOLUTION
As for me and
many progressives, it appears our country has no option but to introduce some
capital controls. It is not helpful for those charged with this responsibility
at the Ministry of Finance and the Bank of Zambia to remain mum and think that
the challenges will resolve themselves.
Capital controls
are measures such as transaction taxes, other limits or outright prohibitions
that a government can use to regulate flows from capital markets into and out
of a country’s capital account. These measures may be for the whole economy or
sector specific (e.g the Banking Sector) or industry specific (e.g. the Mining
Industry)
Until the early
1970s, almost all countries had capital controls until the IMF and the World
Bank persuaded all of us wrongly that capital controls were harmful.
Presently,
particulary after the global financial crisis of 2008, many countries have
adopted capital controls alongside macro economic and prudential capital
controls to damp the effects of volatile flows in their economies. This has also
been accepted by both the IMF and the World Bank as necessary policies
directions.
If our Minister
of Finance A.B.Chikwanda and his team were now to seek advice from the IMF, they
would be advised to consider introducing prudential capital controls to deal
with our current economic crisis. Failure to recognize this necessity, is not
helpful to Zambia.
During the
2008-2012 Icelandic financial crisis,
the IMF proposed that capital controls on outflows should be imposed by
Iceland. In 2009, Brazil imposed a tax on the purchase of financial assets by
foreigners and Taiwan restricted overseas investors from buying Time Deposits.
The Financial Times has reported tightening of controls in Indonesia, South
Korea, Russia, Peru and so on. Indonesia implemented a one-month minimum
holding period for certain securities. In South Korea, limits have been placed
on currency forward positions. Taiwan has restricted foreign investors to
certain bank deposits.
PRUDENTIAL CAPITAL CONTROLS
As everyone
knows, Zambia has in recent years, experienced huge capital inflows resulting
from the expansionary monetary policies of our governments. These capital
inflows are both good and potentially bad. Many countries that experienced
similar inflows, adopted prudential capital controls to reduce the risk of
financial crisis and prevent the associated externalities such as currency
collapse. Prudential capital controls is a process where a country regulates
its capital account inflows to mitigate systemic risk, reduce business cycle
volatility, increase macro stability and enhance social welfare of the people.
Prudential
capital controls are necessary for Zambia. The doctrine of free capital
movement as demanded by right wing ideologists does not correlate positively
with economic growth. That is why Joseph Stigliz and his colleagues have
written to President Obama to repeal he law in America the punishes those
nations that adopt capital controls.
Capital controls
as India and China have shown, are a progressive policy paradigm as for
instance, by limiting Zambians to own foreign assets, this would ensure that
domestic credit is available more cheaply and Zambian businessmen would have an
inexpensive source of loans.
Large
uncontrolled capital inflows and unabated outflows mostly as illicit outflows
as Zambia has experienced in recent years have damaged our country’s economic
development. The inflows have become loans dominated in forex and the
repayments will be very expensive as our Kwacha continues to depreciate. This
is what is called the “original sin”-
a situation where our country will not be able to borrow abroad in our Kwacha
or to borrow long-term even domestically. The illicit outflows is known as
capital flight where companies instead of exporting only dividends earned also
are allowed uncleverly, to export all their gross earnings everyday.
End
