FALLING KWACHA: THE ELEPHANT IN MVUNGA’S NEW ROOM
AS I was reading the report on the swearing in of new Bank of Zambia (BoZ) governor, Christopher Mvunga, by President Edgar Lungu yesterday my mind wandered off.
I found myself reflecting back on the swearing-in of Mr Mvunga’s
immediate predecessor, Denny Kalyalya on March 18, 2015.
At that time the dismissal performance of the Kwacha against major convertible currencies like the United States (US) dollar was a major subject.
It is little wonder that one of the immediate major challenges to Dr
Kalyalya by President Lungu then was to address the foreign exchange (FOREX) rate volatility, with one dollar then fetching above K14.
“’Resuscitate Kwacha’…President Lungu directs new BoZ chief,” was this paper’s main headline the following morning.
That underscores the importance of a stable rate of the Kwacha which in my view still needs to be addressed by Mr Mvunga.
The Kwacha – in connection with international convertible currencies – falling to K20-per-dollar level.
As I have said before, the forex rate 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.
Therefore, one of Mr Mvunga’s tasks in connection with the subject isto 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.
The fall in the value of the Kwacha to the current level of about
K20-per-dollar is not in the interest of the national economy.
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 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 become a universal currency.
It reminds me of my experience in 2013 while traveling to Japan, I
stayed without food and water for seven hours because all I had was a stack of Kwacha notes, which all bureaux de change at Jomo Kenyatta International Airport could not accept.
According to experts, 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 theinflation is low.
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 depreciation of the kwacha therefore is contrary to the current
high interest rate unless there are factor scarring 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.
On average, 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 which has about $1.4 billion.
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.
Therefore, the risk has been more from the economic sector rather than on 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.
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.
On December 2, 2015 we looked at how adverse sentiments can affect the national economy, including the value of the local currency.
I stated then that from a layperson’s point of view I can liken the
economy, especially a poorly performing one, to a patient, on what
some people may term deathbed.
At that point, whatever other people say about that person, obviously, becomes very important as words can either revive the patient or send him/her to his/her early grave.
Some Christians describe that as the power of the tongue and it
seemingly works in both spiritual and physical realms.
The economy “hears” what, especially, national leaders and the media say!
So as Mr Mvunga takes office, there is need for people to remain
optimistic and express positive sentiments towards the BoZ and the economy, including the value of the Kwacha.
For comments call: 0955 431442, 0977 246099, 0964 742506 or e-mail: jmuyanwa@gmail.c