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Kwacha depreciation to continue, warns Expert

Kwacha depreciation to continue, warns Expert
Written by Joan Chirwa and Kabanda Chulu
Thursday, December 04, 2008 5:14:55 AM

ZAMBIA will continue to witness huge swings in the exchange rate as long as it remains porous in terms of foreign currency regulation, a local economist has warned.

But Central Bank governor Caleb Fundanga has said the government will not introduce exchange controls to prevent the outflow of funds since that was not the solution to the current global economic crisis.

Meanwhile, the Databank Group, a Ghanaian institution that monitors and assesses the performance of selected African stocks, has observed that the drying up of foreign investments on some African stock markets may persist until next year.

The local currency has significantly depreciated against major foreign currencies within a short period, following an increased demand for foreign currency by some market players. Foreign exchange experts had earlier predicted that the kwacha would gain its ground against the US dollar around this time. The local currency has however, depreciated to trading levels of around K4,500 against the US dollar last week from around K3,700 a few weeks ago, with some experts blaming the situation on falling copper prices on the international market.

Foreign exchange experts last week indicated that declining commodity prices globally remain a concern among economies in general and Zambia was no exception to his. They explained that volatility in the local currency would thus be a consequence of movements in copper prices 'by and large'.

Copper fell nearly three per cent last Thursday, shrugging off a softer dollar, as the persistent weak demand outlook dragged down prices. Copper for March 2009 delivery edged down to US $1.52 per pound while copper for three month delivery on the London Metal Exchange dipped to US $3,685 per tonne on Thursday.

Metals analysts say until there is a turnaround in the physical demand picture, it seems unlikely that these rallies will be sustained for any significant period of time. Others say by looking at historical data, the copper price could fall as far as US $2,000 per tonne in the near future.

“The kwacha’s depreciation is attributed to short term portfolio investors’ decision to withdraw their money’ should never take away our responsibility to regulate the economy against speculative behaviour. As long as we remain porous in terms of foreign currency regulation and liberal in the treasury bill transactions, we will witness huge swings in the exchange rate,” said local economist Chibamba Kanyama, who is also the immediate past national secretary of the Economics Association of Zambia (EAZ).

“For the past four years, the Zambian economy has been the target for international financial speculators who took advantage of the under-priced stocks on the stock market; high interest rates for the government securities and no regulation governing the foreign exchange remittances. The same speculators are watching the market for the kwacha to depreciate to higher margins and then dump the dollar to cause another artificial appreciation of the local currency.”

Kanyama disagreed with earlier explanations that swings in the exchange rate have sorely been caused by falling investments in government securities.

“Investors are largely targeting the kwacha itself for speculative gain. They buy off the dollar, squeeze it from the market to create an artificial depreciation and then offload it as happened during the election time. Once they have made huge margins, they start the process again,” Kanyama observed. “This current trend is highly artificial, not backed by fundamental economic movements but by local and international speculators taking advantage of weak regulation on the foreign exchange regime. This is inadvertently hurting the real sector that requires a stable predictable currency for long-term investments.”

Kanyama indicated that the investment and economic climate of a country was threatened by a foreign exchange regime which was dictated by portfolio investors penetrating the economy through the stock market and banking systems.

“Latin America ten years ago was initially excited by huge inflows of foreign capital but did not realise that initial appreciation of the currency was not backed by economic growth but by short-term portfolio investment of which 90 per cent was merely speculative,” Kanyama said. “The banking system collapsed and the governments experienced deteriorating foreign currency reserves. Zambia has suddenly become an attractive haven for these local and international speculators.

“We should not look at the depreciation of the kwacha as an issue associated with the global financial crisis. While this remains true, countries with a weak and porous foreign exchange regulation mechanism and poor monitoring systems of hard currency inflows will experience a financial crisis.

“It is high time we monitored the true sources of these inflows; who are the speculators and which local institutions are accommodating these transactions.”

It has been observed that much of the capital fleeing some developing countries, including Zambia, was heading towards the banking systems of the rich countries since their governments have created a subsidy by guaranteeing large parts of their financial system.

But Dr Fundanga said the outflow of foreign currency from Zambia was not as widespread as portrayed by some people.

“It is true there is an outflow of funds going out of the country because various investors are hedging their investments and this is a normal business phenomenon but the outflow is not massive and widespread and this situation does not call for exchange controls whatsoever and we are also in a position to monitor all outflows,” Dr Fundanga said. “And I can’t see any reason why we should put stringent measures like exchange controls because there are no solutions at all and this is a free market economy and soon the market will stabilise itself.”

And an official at the Ministry of Finance who preferred anonymity said there was no control over what private companies, including those in the mining sector, did with their profits.

The official said the government's responsibility was to ensure a stable economy that would result in establishing Zambia as the most preferred investment destination in Africa.

“The government through the revenue authority collects taxes and what remains is net profit which is basically salaries for shareholders and we have no control over what a company can do with its profits and normally externalisation becomes prominent when the economic outlook is bleak but in Zambia things are looking positive and if investors are making profits, they will be inclined to stay and reinvest because of the prevailing favourable policies,” said the official. “Also government through the Bank of Zambia is able to monitor funds taken out or brought into the country since all financial flows are documented but any system is prone to loopholes hence the need to tighten monitoring controls and points of entry.”

And the Databank Group stated that Zambia’s stock market was among the worst decliners during the previous week, with index levels down between 10 and 20 per cent.

Other worst decliners were markets in Mauritius, South Africa and Egypt.

“Bearish investor sentiments seem to be arriving late on African markets as investors have decided to cut their losses, thereby deepening the already sour performances on the various markets,” stated Databank. “This is attributable to both local and foreign investors, with foreign investments also drying up on some markets. Every indication points to the fact that this trend will persist for the rest of the year.”

Labels: CALEB FUNDANGA, CHIBAMBA KANYAMA, EAZ, GLOBALISATION, KWACHA, RECESSION

posted by MrK @ 5:14 AM