For the past two months the Zambian Kwacha has received serious blows pushing it down in depreciation against the major currencies. The situation has caused panic among the citizens and the Government.
H.E. MC Sata assured Zambian people that the Government was closely monitoring the developments in the foreign exchange market. The President said the recent depreciation of the Kwacha is due to a combination of domestic and international market developments.
The Finance minister blamed it on the curtail which is manipulating financial markets to the benefit of some scrupulous people.
The opposition on the other hand, has attributed the situation to lack of investor confidence.
However, given the obvious confusion it is appropriate to assess the facts from an independent point of view. It is therefore important to ask the right questions for the right answers. The question would be, what causes any currency to depreciate?
Inflation is one of the biggest factors in currency depreciation. When inflation occurs, the general prices of goods and services are on an upward trend. When inflation rises too rapidly, currency then depreciates. This occurs because consumers have to spend increased amounts of money on goods and services during inflationary periods than they do during non-inflationary periods.
Bank of Zambia observed, through their policy rate report, that inflationary pressures continued to increase. In January 2014 inflation was at 7.3% but now it stands at 7.7% . Could this be a reason for our Kwacha tumbling?
On this issue the President said that his administration had tightened monetary policy consistent with the attainment of the inflation target of 6.5 per cent for 2014.
It must however be noted that, generally, a steady rate of inflation is a positive event because it indicates economic growth. Could this be our position that our economy is growing?
National Trade Balance
The other thing that causes the currency to depreciate is balance of trade. When the total dollar value of a country’s imports exceeds the total dollar value of its exports, the county has a trade deficit. This means the country is exporting fewer goods than it is importing. However, if the export value is more than the import value, it means we have a trade surplus.
Zambian’s current account trade balance, at the beginning of the year, was at US$433.5 million, which is a 17% Which is up 17% from US$368.5million in 2012. Meaning we have a trade surplus that has improved and cannot attribute to the Kwacha depreciation.
However, the central bank moved in to explain this issue further. The Bank of Zambia (BoZ) said that there is an increase in demand for imports of capital goods which has contributed to the loss of value of the Kwacha against major currencies.
Simple economics states that, when demand is high for any product, the price also goes up. The more foreign currency is demanded the more Kwacha is needed to exchange (or buy) with foreign currency. In other words the Kwacha depreciates.
This is as a result of consistent economic growth the country has recorded over the years which has led to a steady increase of imports particularly capital goods critical for sustaining such growth.
“Although exports have continued to show impressive growth, demand for imports has been relatively stronger, thereby contributing to the exchange rate depreciation,” said the central bank in a statement.
Economic Money Supply
This is where the Government through the Bank of Zambia intervenes on the financial market in an attempt to find equilibrium between the supply and demand for Kwacha and foreign currencies. Two common ways of intervention is by increasing the economic money supply by printing new money or selling government-owned securities. When either of these two events occurs, the currency depreciates because the supply of money is higher than its demand.
On this aspect, BoZ came in to explain that apart from the demand for imports, the central bank noted that Zambia’s increased integration with the world economy has had an impact on the performance of the local currency.
“It is important to note that the US Federal Reserve Board’s decision to reduce the amount of US dollar liquidity supplied through its quantitative easing programme has broadly affected several emerging markets including Zambia,” the statement added.
The Federal Reserve’s course of action has led to fears of slower growth of major economies particularly China.
This has resulted into the price of copper, Zambia’s major export earner, to be subdued thereby undermining investor optimism. The Bank stated that the impact had also resulted into a slowdown in portfolio investment inflows, which have hitherto played an important role in financing the country’s current account deficits.
Degree of political stability
A country’s political unrest is characterised by loss of control of a country’s territory, inability to provide public service and erosion of legitimate authority. The gap between the rich and the poor can also bring political instability.
All these are in one way or the other related to the economic status of the country.
Zambia has a majority of her people falling below the monthly food basket. A larger percentage of the citizens are unemployed and those that are employed are mostly facing very bad conditions of service. Anger and frustrations of the people towards the government is slowly increasing, after a high expectation after the change of Government. People don’t seem to have the patience and opposition parties are taking advantage of the situation.
This has been going on for decades although the effects are more pronounced now due to global economic advancements. This has put unforeseen pressure on the government of the day and unfortunately all the anger which has been building up in the people for decades is suddenly being directed towards the PF government.
However, the situation is not as bad as the opposition political parties are trying to portray for their political expediency.
Investor confidence is still solid judging from a number of bilateral and multilateral financial agreements the Zambian Government is signing.
Read more: http://www.ehow.com/list_7436779_causes-currency-depreciation_.html#ixzz2zTTQBdcn
In the early morning of today 22.04.2014, unknown people broke into our offices and got away with some office equipment.
The incidence has been reported to the police and a guard has been detained to help with investigation.
It is interesting to note that this is the first burglary on our premises which houses a number of organisations mostly law firms. It is the same place where our current speaker had his offices.
Yesterday we gave a comment against the crime alert message issued by the American Embassy. Zambian Voice did not agree with this statement by the US Embassy. In spite of this incidence we still believe crime and violence is being exaggerated.
However, we would not want to speculate on this matter because we have confidence in the police investigations.
We will be updating you on how things unfold.