Financial analyst Mambo Hamaundu has attributed the recent volatility in kwacha to government’s abuse of donor funds and the subsequent withdrawal of aid by four European donor countries.
The kwacha lost value in the latter parts of last month of nearly 20 per cent to breach the K12 psychological barrier in the final week of September from an average of K10.99 and K11.06 per dollar by mid-September.
Although the local currency appreciated back below the K12 threshold last week, it has again breached the mark by lunchtime trading, Monday.
In an interview, Hamaundu said the withdrawal of aid by donor countries sent negative sentiments about Zambia to the international community and has affected the local currency’s performance.
“…And pronouncements by government have played a critical role to the depreciation. We can agree here that the recent adverse movement against our currency to a big extent has been driven by issues surrounding the aspect of donors withdrawing aid because of alleged corruption or money missing or stolen, we can assign whatever term it is, but the bottom line is there is a problem with how the donor money was being utilised or should have been utilised. That, too, contributed, but if we have a situation where there is commitment from the policymakers, when you receive money from donors, it is used in a manner that you have agreed with the donor, you know it will not affect your supply side as it in this instance and it will also not send a negative sentiment in the market because withdrawal of donor [funding] does send a negative sentiment in the country,” Hamaundu explained.
“And it affects the rate of exchange because if you are a donor, if you are a business player who thinks that there are a lot of things that are not going the way they should be in an economy, your options would be to ensure that you protect your assets, you will convert from kwacha to dollars so that you do not suffer from erosion of the currency as a result of movement in an exchange rate so that you maintain your asset value. And as Zambians, we are not doing enough to be productive. As you know, being productive is the only way you can ensure that your currency is very stable. Every year, we hear politicians talk about the need to construct manufacturing sectors. This tells you how far we are from being really productive as a country. But if at all we can be productive, our currency can really stabilise.”
And Hamaundu added that the kwacha’s depreciation has put traders in an awkward position because they don’t know what price to charge due to the ongoing currency volatility.
“That’s why, ideally, we are better off having a stable currency as a country as opposed to volatile; stable and predictable. Because when you have stability, and your currency is also predictable, you know when it comes to prices of goods and services, whose base is dollar or pound, it becomes a bit easier. But in our instance where the rate like we have seen as we are were going towards the end of September, the rate moved from about K10.3 [per dollar], coming into October it even reached K12.8. Then there was an appreciation from K12.8 to K11.3, and again, the movement of depreciation has started to levels around K11.8 to K11.9 against the US dollar. All this has happened within a space of less than 30 days. Now, if you are a business player, if you are a trader who imports goods, where are you expected to peg the prices of goods that you are selling? But if it was a situation where one knows that the general direction was now that of depreciation and it’s highly likely that we might reach K12, then the traders will assume the prices of K12 per dollar. But in this instance, it’s very difficult for business people to peg a price,” narrated Hamaundu.
“The psychology surrounding money matters is generally that, when the prices are going up, they very rarely come down even when the exchange rate comes down. If the price is pegged against the dollar, and the dollar loses pace against the kwacha, it is very rare that the appreciation of the kwacha is passed on to the consumer. Especially in things like groceries, you know toiletries, these things that are used every day. But if you are looking at rent where your rent is pegged in dollar, then it will be easy to determine how much you will pay in kwacha. But on these other commodities, it stays up there unless the movement in appreciation in kwacha is quite significant and noticeable by the consumers, then the price will drop. And the other aspect is, of course, as consumers, we are not that sensitive to demand for a price reduction because many a time the argument by a business persons is that we bought these stocks at a high rate and we are not even sure whether this reduction in the exchange rate will be sustained or will be held at this level for a long time. That’s why you find that the business person is put in an awkward position and the only option that they have is to get a bit more from the consumer.”