THE only way you sustain a very stable kwacha in a less artificial way is to expand productivity where you are earning dollars, says Professor Oliver Saasa.
The kwacha, which strengthened last week, started depreciating on Monday to close trading at an average rate of K9.89, after touching the K9.60 mark last Friday. The World Bank has since indicated that the kwacha’s appreciation seen last week was a sign of a weakening economy resulting from continuous trade deficits.
“On the currency side, I never thought it (the dollar) will be less than K10 this month and I was shocked last week! I talked to a number of different people – traders in the banks, business people, economists and I think most people were shocked [with the appreciation of the kwacha against the US dollar]. So it is very interesting to see the kwacha appreciate in such a strong manner over the last few months. But I think my main point for now is that we are in volatile times and things can shift swiftly upwards and swiftly shift downwards. So we have to really be careful about jumping [up and down]. For most people, it’s not all good news [but] probably a mixture of a bit of good news,” said World Bank country senior economist Gregory Smith during a briefing in Lusaka on Monday.
“People want the dollar normally because they are buying something from overseas and if you look at the CSO data, the most recent data, we see a widening trade deficit; there are less exports than imports and so that means there is less demand for dollar. To me, it’s a bad sign and sort of a signal of a weakening economy as well. Lower trade [means] lower demand for dollars and so we just continue to monitor. So basically, it’s been quite a stable first quarter and a volatile April.”
And Prof Saasa has also said tightened liquidity of the kwacha and slight loss in value of the dollar globally, are among the reasons behind the local currency’s appreciation.
By close of business on Monday, the kwacha had lost some value, with the Bank of Zambia quoting the currency trading averaging K9.80 and K9.82 against the dollar, K13.83 and K13.86 against the British pound, K11.15 and K11.17 and the rand at 65 ngwee.
Explaining the trends of the kwacha, Prof Saasa noted that there were currently fewer buyers of the dollar, on account of an erratic flow of the kwacha after the Central Bank constrained kwacha availability.
“We have to look at what motivates the currency to strengthen; it can either be results of increases in productivity which leads to increases in foreign exchange earnings of a country or you flood the market with the dollar and when something is in abundance, the price of that thing comes down because there will be less demand than what is available. That’s one way of looking at it; but that’s not what’s happening,” Prof Saasa said in an interview yesterday. “What is happening, firstly, is that you have to look at the kwacha and [establish] how much kwacha, in terms of liquidity, is available on the market. If you have over-mopped what was seen as excess kwacha and find that the banks do not have enough liquidity, then it means that in spite of a fairly stable availability of dollar on the market, there are fewer buyers because the kwacha is relatively scarce. Therefore, you see that because there is less demand on the dollar – although you want it but you can’t afford it – the value of that dollar comes down.”
He further said the kwacha was strengthening on relative loss of the value of the dollar on the global market.
“About two weeks ago, we were expecting the Federal Reserve in America to increase the interest rates by about half a per cent [but] they decided not to do that. What that means is that the global interest or appetite for dollar has slackened a bit and therefore, the dollar has lost slight value and when the dollar loses value, it means the kwacha also increases in value,” Prof Saasa explained.
“The other thing about the kwacha gaining strength in the last week or so is that it was the end of the calendar month and a number of companies, including mining companies, needed kwacha. But because they don’t have enough kwacha in their bank accounts because of [tightened] liquidity, they have to offload the dollars that they have and sell to the market. And what happens to the price of the dollar when it’s readily available on the market? Its price comes down! So, these factors essentially explain what you are seeing now.”
And on the sustainability of the kwacha, Prof Saasa advised citizens against equating a strong currency to a good economy, unless productivity was lifted.
“If you are talking about a strengthened kwacha, in the real sense, the only way you sustain a very stable kwacha, in a less artificial way, is to expand productivity where you are earning dollars. One thing is to make investments into this country attractive, which the government has failed to do,” said Prof Saasa.