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No short-term solution to save kwacha – EAZ

No short-term solution to save kwacha – EAZ
Written by Fridah Zinyama
Monday, March 02, 2009 7:40:28 AM

THE Economics Association of Zambia (EAZ) has said there is nothing that can be done in the short-term to prevent the kwacha from depreciating further.

Commenting on the exchange rate situation where the kwacha has seen the worst depreciating levels ever, EAZ stated that until there were clear signs of a turnaround in the global economy and serious efforts being made to diversify the country’s economy, Zambia’s local currency would continue to tumble. EAZ further observed that short-term prospects for the global economy remained bleak.

“All major western economies are now contracting, some at rates that have not been seen since the 1930s. Even China is stagnating. It will be some time before the stimulus packages that are being put in place in almost all the major economies will have an effect,” the association stated.

EAZ however, stated that Zambia could start setting the platform for future improvements in its economy by fasttracking its economic diversification plans.

“Diversification in Zambia’s exports away from mining towards agriculture and tourism will be helped in the long-run by the kwacha depreciation, provided that it is sustained,” EAZ stated. “In the short-term, we can expect some reduction in import demand – and therefore in foreign exchange demand.”

EAZ stated that this would be due to several factors such as capital spending by the mining sector which had reduced due to the completion of some major investments.

“The other factors are international fuel and fertiliser prices which have reduced, and the weak kwacha which will lead to a reduction in import demand,” the association stated. “In addition, the currency depreciation is providing a much-needed cushion to the mining industry, which is better able to meet its local costs.”

EAZ pointed out that the weakening of the kwacha would to some extent help the mining industry avoid any further job losses.

And the EAZ also observed that the reintroduction of exchange controls would only risk the development of a parallel market and discourage whatever foreign investment may be available.

“The use of the foreign exchange reserves to defend the exchange rate will risk both the loss of those reserves and, in the end, an even more depreciated exchange rate,” the association noted.

“We believe that the kwacha depreciation can and should be turned to the country’s advantage. This can be done by government adhering to much greater fiscal austerity than is presently planned in the current budget.”

EAZ also added that improving the business climate through license reform and better financing would also help the country’s economy.

“Fast-tracking infrastructure improvement; targeting groups and regions that need special assistance during a difficult adjustment period, like those facing redundancy are all ways that government can best make use of the weakening currency,” the association pointed stated.

EAZ however, suggested that it would be best for government to set aside some funds in a special account that would help cushion the economy against such future fluctuations.

“This strategy and diversification of the real economy – not a return to the discredited control regime of the 1970s and 1980s – is the best way to avoid high exchange rate volatility,” stated EAZ.

Labels: EAZ, GREAT DEPRESSION II, KWACHA

posted by MrK @ 7:39 AM