Maravi

Kwacha depreciation is ‘overdone’, observe experts

COMMENT - I think the depreciation of the Kwacha to the US dollar, when all currencies are gaining against the dollar, comes from the closing of the mines and reducing of operations which is resulting in massive joblosses, and which means that what little they were contributing to the economy stops 'trickling down'. They should have never been privatised and remained in the hands of the government. Time to renationalize. Remember at the time of independenc and in the 1970s, the Kwatcha was 1 to the US dollar. When the MMD took power in 1991 it was 113 to the dollar (that is, it included all the effects of 'socialist' development, infrastructure building and universal education and healthcare). After doing away with all those productive government expenditures and privatising the mines, the Kwacha is 5,200 to the US dollar? I would say neoliberalism and privatisation have been disastrous. We need to return to demand side economics, infrastructure building and developing agriculture and stimulate national manufacturing.

Kwacha depreciation is ‘overdone’, observe experts
Written by Joan Chirwa and Florence Bupe
Tuesday, December 16, 2008 9:49:57 PM

FINANCIAL market experts have observed that the current depreciation of the kwacha is a bit “overdone”, but noted that a reversal was imminent. The local currency last week broke three psychological levels and traded at an average interbank rate of K5,200 against the US dollar last Friday.

Experts earlier indicated that the local currency was likely to trade in the band of K5,500 against the US dollar at the end of the year, and considering the current trend, it was more than likely that the kwacha will reach this level.

The depreciation of the local currency has been driven by increasing demand of the US dollar from corporates and the plummeting copper prices on the international market, which has seen a tonne of the red metal trading at around US $3,200.

“Going beyond K5,300 per US dollar will be too much. We however do expect that the kwacha will remain under pressure in the short term and this will put a lot of strain on the economy. A bit of confidence was injected in the market after the October 30 elections and the kwacha strengthened. But now, the depreciation is mainly because of external factors such as declining copper prices,” said Munalula Mate, a local financial market expert.

“The country will be in a tight situation. The current level of K5,200 is a bit overdone compared to where we were. The problem is that people have begun to panic buy the dollar because they anticipate the local currency to depreciate further around January/February next year to levels of K6,000 and K6,500. This has caused the high demand for the foreign currency.”

Mate said it was a matter time before Zambia could see a correction in its foreign exchange market to normal trading levels.

“Importers are panicking because they are spending more kwacha to buy the dollar in order to import,” said Mate. “It is also difficult to say where copper will be, but we believe that we will not be in this situation forever.”

And another financial market expert Miles Sampa, who is also former president of the Financial Markets Association of Zambia, said the local currency is expected to come under further pressure this festive season as retailers buy more dollars to import goods.

“The kwacha broke three psychological levels. It broke the K5,000 level, the K5,100 level and by Friday, it broke the K5,200 level. The next psychological level is K5,300,” Sampa said. “During the festive season, there is usually increased demand for the dollar on the retail side, and this puts more pressure on the kwacha, unless there is augmented supply of the dollar on to the market.”

And Sampa dismissed assertions that the current depreciation of the kwacha was a deliberate move by some government officials and fund managers to sale the dollar at a higher rate.

“There is nobody deliberately depreciating the kwacha,” said Sampa. “However, if there is somebody holding significant levels of foreign exchange enough to bring the kwacha back to its normal trading levels, it will be good if they can offload this onto the market to stabilise the local currency.”

Meanwhile, the Energy Regulation Board (ERB) has said the high exchange rate will dampen benefits of the declining petroleum prices for the country’s consumers.

ERB executive director Silvester Hibajene said last Friday that the exchange rate was a critical determinant of the country’s fuel prices and that the prevailing foreign exchange trends were expected to adversely affect the sector.

“The exchange rate is critical in determining the price of fuel, and the depreciation of the kwacha may result in consumers not having so much benefit from the reduced prices of oil on the international market,” he said.

Hibajene said as a result of the high exchange rate, the country’s benefit from declining international oil prices was expected to be moderate.

He expressed hope that the kwacha would appreciate in order for fuel prices to be reduced further.

Hibajene observed that with the current trend on the foreign exchange market, the country faced a huge challenge of raising enough kwacha to realise the dollar needed to import crude oil.

And Hibajene admitted that currently, the Strategic Reserve Fund (SRF) was insufficient to significantly cushion high fuel prices.

He explained that the recent reductions in the price of fuel were driven by the reduction in excise duty and crude oil prices on the international market from US $132 in July to US $68 in October.

“The strategic reserve fund is insufficient to cushion fuel prices substantially. The recent reduction in the fuel prices just before the [presidential] election was mainly driven by two fundamentals: the reduction in duty by the finance minister, and the reduction in international crude oil prices,” said Hibajene.

And on the stock market, the Lusaka Stock Exchange (LuSE) recorded a 3.63 per cent drop in its all share index when it closed trading at 2,565.11 points last Friday compared to 2,661.62 on Thursday.

Several stocks saw declines in their share prices during the week with Zambeef Plc recording the biggest reduction in its share price when it lost K1,000 and closed at K3,000. Copperbelt Energy Corporation (CEC) closed Friday’s trading at K402 when it by K48. Celtel recorded a K29.00 loss and ended the day [Friday] at K320. On the other hand Bata recorded a K1 gain and ended the day at K100.Trading also occurred in Lafarge, Standard Chartered Bank, Shoprite, Zambrew and Zambia Sugar.

Labels: INFLATION, KWACHA

posted by MrK @ 9:50 PM