The Bank of Zambia has momentarily abandoned its “random walk” mantra by offloading foreign reserves to desperately keep the Kwacha under K6 per $1. Only last week Finance Minister Chikwanda was still saying government will allow forces of demand and supply to determine the currencys performance. The decision to keep the Kwacha temporarily below K6 appears to be political as the Patriotic Front base is struggling to come to terms with the new realities. The Kwacha is now at its lowest level against the US dollar. This morning it was trading at 6.005, more than 1 percent weaker on the day and softer than the psychologically key 6.0 level against the dollar. The Kwacha would certainly be in a much worse position without BoZ’s latest intervention. The decision to continue offloading foreign reserves will lead to further reduction in that area. The reserves currently stand at $2.67bn having declined since the start of January. I had previously said that BoZ would find it politically difficult to let the Kwacha go beyond K6. What is worrying is that it now appears to be returning to the disastrous policy of last year when it drained the reserves in an effort to shore up the Kwacha, import fuel and pay off debts. A practice heavily criticised by the IMF and other players. The key point of course is that if BoZ decides to go beyond managing volatility and use reserves to keep the Kwacha artificially at K6, the depletion of foreign reserves will further reduce confidence in Zambias ability to service foreign loans. Dwindling foreign currency reserves are always associated with a deterioration in a country’s creditworthiness. By sustaining the Kwacha at that level BoZ will make Zambia’s credit rating worse. It seems to me it is only a matter of time before Zambia is downgraded again. What is interesting is that Gondwe is attributing the fall in the Kwacha to decline copper prices and foreign investors [in money markets] pulling out because of concerns about the impact of eventual monetary tightening by the U.S. Federal Reserve. It is a relief that he has finally recognised the Chinese and copper factors. Something I have been warning about for some time. But that is not the larger picture. The factors eroding the Kwacha are largely on the fiscal and political side. The Kwacha has substantially eroded in value since PF came to power in 2011. Regular readers have seen the charts here and on the website. There is little investor confidence in the Finance Minister Alexander Chikwanda ability to manage national finances - or PF macroeconomic policies in general. In particular, Zambia is facing significant economic challenges in the fiscal area as concerns escalate over the inherent weaknesses in our macroeconomic fundamentals. It is noticeable that the Kwachas current sharp fall started with the Fitch and Standard & Poor downgrades in November 2013 The credit agencies have rightly picked up the fact that GRZ finances are deterioting. Spending overrun in 2013 and will overrun again in 2014, reflecting the cost of the public service wage increase, rising infrastructure commitments and higher debt service costs. The Kwacha’s depreciation and reduced copper revenues all means that key figures are all headed in the wrong direction. Even if we took the rebasing of GDP into account. To make matters worses it appears politically Zambia is becoming unstable. We have significant political disharmony which has diminished confidence in the long term economic and political direction of the country. Recent political postures have sent all the wrong signals. The deportation of important investors, confusion on export taxes, constitutional impasse, restriction of political freedoms, lack of consultation, fights with traditional leadership and reckless borrowing without sustainable plans to repay, are but a few of the problems. Then we has poor coordination of political and economic decision, and it all sends wrong signals. People always ask what is the solution? The solution is NOT to let the Kwachabottom out as some have wrongly suggested. That would accelerate the serious danger of a spiral with rising debt, high inflation, rising fiscal deficit and political chaos. The falling copper prices and Chinas slow down all point to difficult times ahead. Doing nothing is not an option. Neither is the appeal to the real exchange rate as a long term home. The answer lies in restoring confidence. The country needs a totally radically new direction that would signal to everyone, domestic and international, that fiscal and monetary responsibility is now the new norm. This means new policies coupled with competent people leading these institutions. I would urgently recommend a clean state at BoZ and Ministry of Finance. And a new and improved way of coordinating and communication economic and political decisions.
Posted on: Thu, 13 Mar 2014 17:14:55 +0000
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