Kwacha Slide Causes Panic

Written By: The Lowdown - Feb• 01•01

smallcover2001-02Suddenly, during January, the poor health of the Zambian Kwacha created what was almost a panic in Government. President Chiluba warned the business community that it must take steps to reverse the decline of the currency, and at a meeting at State House he put forward measures which he expected them to follow.

The measures included limiting the right to quote prices in dollars to authorised foreign exchange dealers such as bureaux d’change (before this announcement, Multichoice, hotels, internet service providers and other types of business were routinely quoting in dollars). A maximum spread of 2 per cent between buying and selling prices was to be maintained. Applicants for a bureaux licence would have to demonstrate possession of US$10,000, while new bureaux would have to pay a non-refundable fee of US$1,000 and an annual renewal fee of US$2,000.  Payments for exports were to be receipted locally, and 75 per cent of the amount received was to be deposited with local banks within 180 days. Foreign exchange demand deposits were to be limited to 25 per cent of total foreign exchange deposits, and offshore forex holdings to 5 per cent of total forex holdings. The effect of these measures was not immediately known, as the business community was awaiting the formalisation of the measures before commenting in detail.

Meanwhile the Bank of Zambia took precipitate action to protect the Kwacha, by injecting US$12.5 million into the system during a single week in mid-January. The effect of this move was more obvious – the exchange rate of the kwacha to the Dollar improved from over K4500 to under K4000 overnight.

Problem solved – or was it? The one thing the business community, and particularly the foreign investor, find hard to stomach is a wildly fluctuating exchange rate. It makes planning impossible, since you cannot tell in advance what price you may have to pay for your imports when they arrive (the landed cost includes customs duties and other taxes payable to ZRA in kwacha). Moreover the sudden appearance on the market of such huge amounts of dollars must raise questions as to why the Bank of Zambia had been hoarding forex while pressure on the dollar continued to rise.

At the same time there were many aspects of the measures announced by Finance Minister, Dr Katele Kalumba, which were not understood by investors, one big one being what happens if a company wants to fold up and move out of Zambia. Can they take the whole of their capital with them, or do they have to retain 75 per cent in Zambia, and if the latter, for how long. Obviously it would have been desirable to make full consultations with the business community and address all its problems and queries before the full package was announced.

It could be argued that there was no time to do this, but that simply indicates poor planning by the government. The situation should be monitored on a daily basis, and adjustments made accordingly. A committee is said to have been in place at the Ministry of Finance for several months to look into just this problem. Why was it caught napping? The availability of forex over the counter at commercial banks has been declining for some time, with a limit of US$5,000 placed on such transactions and delays of several days in complying with customer requirements.

The question of unclear sections of the measures was brought up at the routine meeting of managing directors of commercial banks with the Bank of Zambia on 22 January, and clarifications were offered. These were to be followed by published guidelines, but at the time of going to press these guidelines had not been made public.

One local company, Zambian Skyways, announced that it was cutting fares by 20 per cent on its Lusaka Ndola route as a result of the sudden appreciation of the kwacha. This move seems to have overlooked the possibility of a further depreciation if the Bank of Zambia failed to sustain its interventions and pressure on the dollar began to rise again.

Business people who use the route regularly were again subjected to confusion. The depreciation seemed bound to return since restricted access to the dollar created increased demand. A thriving parallel market is already in operation. The only solution to the problem, say some analysts, is increased production for export. But again we are lagging behind other countries in the region – no export processing zones have yet been established despite years of talk.

Once again, the government should take more account, on a continuing basis, of the needs and suggestions of those who have expertise in running businesses, and in particular the commercial banks.

by David Simpson

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.