Zambia records K700bn outflow
Zambia records K700bn outflowWritten by Chiwoyu Sinyangwe
Wednesday, November 12, 2008 9:00:34 AM
THE Central Bank has revealed that Zambia recorded a net outflow of US $177.0 million (about K700 billion) in September and October this year, mainly on account of a recent slump in international copper prices, among other factors.
And the World Bank has asked the government to set up mechanisms to ensure windfalls from commodity booms are kept in instruments abroad as opposed to bringing everything back into the domestic economy.
Meanwhile, the Bank of Zambia (BoZ) has asserted that the continuation of the ruling MMD in government has to a large extent settled investor concerns since it is expected that the prudent economic policies pursued by the late president Levy Mwanawasa would continue to be implemented.
In response to a press query, BoZ governor Dr Caleb Fundanga stated that general aversion towards emerging and pre-emerging market currencies and high global demand for the United States dollar following the international financial crisis have also contributed to the recent weakness in the kwacha.
“Reflective of this aversion, the off-shore portfolio investors purchased about US $386.0 million (K1.516 trillion) from the market compared with sales to the market of US$208.9 million (about K820 billion) resulting in net outflow of US$177.0 million (about K700 billion) in September and October 2008,” Dr Fundanga stated. “The recent depreciation in the kwacha was also exacerbated by political uncertainty after the death of president Levy Mwanawasa in August and concerns over the outcome of the recently held presidential by-election. These events created nervousness amongst investors who in many instances were not clear about the economic policies of a new government.”
Dr Fundanga also observed that high demand for cash, such as the United States dollar, resulted in a massive sell-off of other assets such as equities, securities and commodities in global markets, including emerging and pre-emerging markets like Zambia as investors tried to meet their liquidity needs.
“Consequently, the prices for these assets declined sharply and that of copper was no exception. By November 5, copper prices for three months delivery on the London Metal Exchange (LME) had declined by 57.8 per cent to US $3,765.00 per tonne from the peak of US $8,930.00 per tonne reached on July 2, 2008,” he explained.
“Also contributing to the sharp slump in copper prices were expectations that demand for the metal may decline significantly given the possibility that the crisis may lead into a worldwide recession owing to globalisation. These concerns resulted in high investor aversion to assets considered risky, such as, emerging market currencies, resulting in a sharp sell-off of these currencies in preference for currencies considered safe haven, such as, the US Dollar. The immediate impact of these unfavourable developments on the Zambian economy has been on the foreign exchange market, which recorded a sharp depreciation of the Kwacha against the major foreign currencies.”
Dr Fundanga stated that the local currency which appreciated by 17.3 per cent in the first half of the year, depreciated by 45.8 per cent against the US dollar to K4, 646.1 between July and October, 2008.
And Dr Fundanga said the portfolio investors’ positive outlook on the domestic economy has remained despite the crisis in the international financial markets largely on the recent election of Rupiah Banda as the country’s fourth President.
“The retention of the MMD is widely perceived by investors as critical to the continuation of the sound macroeconomic policies implemented under the late president Mwanawasa. This development has helped restore investor confidence, which has been reflected by reduced demand for foreign exchange by off-shore investors,” said Dr Fundanga. “Portfolio investors’ interest in the Zambian financial market is likely to continue. Overall, portfolio investors’ confidence in the Zambian economy is underpinned by the strong long-term fundamentals reflected by government’s projection of a 6.0 per cent growth of the economy in 2008, which is consistent with the International Monetary Fund’s projected growth for sub-Saharan Africa of 5.9 per cent.”
And World Bank senior economic advisor Robert Zagha said Zambia should emulate commodity-driven economies like Nigeria that ensured that windfall gains triggered when prices of commodities like oil and metals skyrocketed were kept in instruments outside the country.
Analysts contend that Nigeria, an oil export dependent country has a policy that dictates that each time the price of oil surges over US $60 per barrel, the extra proceeds are kept in off shore accounts.
Zagha, who is also World Bank's director for Growth and Development, said the policy decision would allow for the country to safely keep its windfall as well as help to avoid unnecessary volatility in the domestic foreign exchange market.
“One of the most important things is to move some of the proceeds of the boom abroad. You don’t have all the money coming back and disturbing the foreign exchange rates thereby threatening the competitiveness of the agriculture and manufacturing sector,“ Zagha said. “You should create a fund: It is like a football player, one day you make a million dollars, the other day you have nothing. And you need an optimum strategy to say 30 to 40 per cent of the funds are invested in instruments abroad. You don’t bring everything back.”
Zagha also emphasised the significance of maintaining competitive foreign exchange regime in the economic development of the country.
“You can be very open in your imports, exports, foreign direct investments, your financial flows and at every phase of development process,” he said. “But the word open had often been abused and misused because when we say open, we don’t often clarify what we have in mind and we don’t think in strategic terms, you want openness because you want the market or import technology, more capital and savings from abroad.”
Zambia in the last six years experienced an unprecedented rise in the amount of foreign exchange earnings coming into the country mainly on account of a boom in commodity prices and augmented inflow of foreign direct investments mainly into the mining sector.
The country has in the last few years seen a surge in the amount of foreign direct investment from the average of US$250 million to around US$3 billion currently.
At the height of the commodity boom, some cooperating partners like International Monetary Fund warned that Zambia did not have a strong mechanism of keeping excess earning from metal prices to prepare the country for possible slump in metal prices.
The IMF observed that although the Bank of Zambia had kept reserves in excess of US$1.4 billion, the government was still exhibiting some levels of excitement in managing increased foreign exchange inflows as they were overspent instead of enhancing the country’s reserves.
Labels: CALEB FUNDANGA, CURRENCY, KWACHA, WINDFALL TAX, World Bank
posted by MrK @ 9:02 AM
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