(COMMENT) Interesting. The absence of the former Central Bank makes the money mass of Somali Shillings a finite commodity. Which then gives it it's value.
Somalia’s mighty shilling
Hard to kill
A currency issued in the name of a central bank that no longer exists
Mar 31st 2012
USE of a paper currency is normally taken to be an expression of faith in the government that issues it. Once the solvency of the issuer is in doubt, anyone holding its notes will quickly try to trade them in for dollars, jewellery or, failing that, some commodity with enduring value (when the rouble collapsed in 1998 some factory workers in Russia were paid in pickles). The Somali shilling, now entering its second decade with no real government or monetary authority to speak of, is a splendid exception to this rule.
Somalia’s long civil war has ripped apart what institutions it once had. In 2011 the country acquired a notional central bank under the remit of the Transitional Federal Government. But the government’s authority does not extend far beyond the capital, Mogadishu. The presence of the Shabab, a murderous fundamentalist militia, in the south and centre of the country, makes it unlikely that Somalia will become whole anytime soon. Meanwhile, 2.3m people are in need of edible aid. Why, then, are Somali shillings, issued in the name of a government that ceased to exist long ago and backed by no reserves of any kind, still in use?
One reason may be that the supply of shillings has remained fairly fixed. Rival warlords issued their own shillings for a while and there are a fair number of fakes in circulation. But the lack of an official printing press able to expand the money supply has given the pre-1992 shilling a certain cachet. Even the forgeries do it the honour of declaring they were printed before the central bank collapsed: implausibly crisp red 1,000-shilling notes, with their basket weavers on the front and orderly docks on the back, declare they were printed in the capital in 1990.
Abdirashid Duale, boss of Dahabshiil, the largest network of banks in Somalia, says that his staff are trained to distinguish good fakes from the real thing before exchanging them for dollars. Others accept the risk of holding a few fakes as a cost of doing business (shillings are often handed over in thick bundles of 100 notes). By this alchemy, an imitation of a thing which is already of notional value turns out to be worth something.
Shelling out shillings
A second reason for the shilling’s longevity is that it is too useful to do away with. Large transactions, such as the purchase of a house, a car, or even livestock are dollarised. But Somalis need small change with which to buy tea, sugar, qat (a herbal stimulant) and so on. Many staples are not produced domestically, making barter impractical. The shilling serves as well as shells or beads would as a medium of exchange. It also has a role as a secondary store of value. Once a year the economy gets an injection of dollars when goats are sold to Saudi Arabia to feed pilgrims undertaking the haj. Herders need to find ways to save money received then for spending over the next year. The shilling is one of them.
The shilling has a further source of strength. Since each party to a transaction is likely to be able to place the other within Somalia’s system of kinship, the shilling is underpinned by a strong social glue. Paper currencies always need tacit consent from their users that they will exchange bills for actual stuff. But in Somalia this pact is rather stronger: an individual who flouts the system risks jeopardising trust in both himself and his clan.
Having survived against great odds, the shilling now faces a serious challenge in the form of dollars transferred by mobile phone. Zaad, a mobile-money service, allows users to pay for goods by texting small amounts of money to a merchant’s account, and is proving popular in Mogadishu. But the shilling’s endurance suggests it should not be counted out. If it can survive without a government, it can probably brush off modern technology, too.
Labels: CURRENCY, INFLATION, NEOLIBERALISM, SOMALIA
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COMMENT - The IMF is forcing Malawi to devalue the currency. This so-called monetarist approach to increasing foreign investment comes at the cost of Malawian savers and Kwacha holders. They are the ones who are going to pay for it - as usual. Why does Malawi get highly tied 'aid', yet on the other hand the people are being robbed through currency devaluation? This is the IMF at work, doing what it always does - transfer national wealth to transnational corporations.
IMF squeezes Malawi to free Kwacha currency
By Gawo Sande, Nyasa Times
December 18, 2011
The International Monetary Fund (IMF) has minced no words but directed the Malawi government to institute a liberalized exchange rate regime as a way manage the overvauled local currency, the Kwacha.This is contained in a report titled ‘Liberalization of the foreign exchange regime for current account transactions and exchange rate flexibility’ on Malawi by IMF’s Mission chiefs Etibar Jafarov, Nadia Rendak and Kelly Eckhold with Morten Jonassen Norges Bank.
The report obtained by Nyasa Times says Malawi continues to have a severe shortage of foreign exchange in the context of an overvalued official exchange rate and tight administrative regulations designed to force economic agents to trade at these levels.
“The administrative measures are increasingly difficult to implement and a significant share of trade has moved to the parallel market. The loose monetary and fiscal policies have significantly exacerbated the situation. The mission recommends a fast but staged liberalization of the current regime and formulated specific reforms to achieve this,” the IMF says.
The IMF mission says it believes the recommendations must be implemented quickly, starting first with reversing the recent loose macroeconomic policies since unnecessary delays could further exacerbate the current situation.
The mission said further devaluation must be implemented within 3 months and all restrictions on forex transactions must be listed shortly after that so that the Reserve Bank of Malawi (RBM) should deregulate the forex market.
They noted that private sector contacts pointed to adverse effects of the current regime. In particular, the current regime not only hurts exporters, but also production and employment in general, as the chronic forex shortage has led to reduced imports of raw materials, fuel, spare parts, and other critical imports.
The say anecdotal evidence suggests that market players try to avoid these restrictions through under-invoicing, barter trade, side payments, and other similar activities.
“The authorities generally acknowledge the need to move to a liberalized exchange regime, but prefer to move gradually and guide market prices through mechanism such as an exchange rate band,” say the IMF.
They argued that low levels of reserves, the damage made to the credibility of the authorities by the loose macroeconomic policies and the authorities’ track record in the area of the forex regime have rendered any peg-like regime such as a band not credible at the moment.
The mission provided advice in preparation for a quick but staged process towards more exchange rate flexibility. In this context, the authorities were advised to immediately start implementing tight monetary and fiscal policies and reduce the liquidity overhang, created in July-October, through issuing short- and long-term instruments.
IMF says this should be followed by a large devaluation, an announcement of the intention to operate freely floating exchange regime, removal of restrictions on forex bureau rates, and setting the official rate with reference to traded markets.
The mission acknowledged that there are significant risks of illiquidity in the development stages of the market as there is significant excess demand for forex formed under the current regime.
It says in the transition process, the RBM could help the forex price discovery process through a daily 2-way auction or a so-called market fixing session, with information on these transactions fully disclosed.
Once floating is achieved, the RBM should be prepared to be a price taker on the forex market and transact with banks only, as opposed to dealing with exporters and importers directly so that in the medium term, the RBM should deregulate the forward forex market.
The mission stressed the need to improve risk management practices at banks and take prudential measures to deal with risks related to exchange rate volatility under the new regime and to maintain the stability of the financial system.
In this regard, the mission was encouraged by recent progress in building the RBM’s capacity in stress testing, with help from technical assistance under the IMF, Norges Bank, and RBM technical assistance project aimed at modernizing the operations of the RBM.
“Changes to forex regulations will be required to operationalize the liberalized regime. While concrete recommendations would depend on the policy choices made by the authorities, the mission formulated some of the key features of the reformed framework,” the IMF says.
They stress that all the proposals come from the talks they had with Minister of Finance and Development Planning Ken Lipenga, RBM Governor Perks Ligoya with many other senior government officials.
Labels: CURRENCY, IMF, MALAWI, NEOLIBERALISM
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Multiple-currency system to stay: Govt
Thursday, 28 July 2011 02:00
By Ruramai Gatsi
FINANCE Minister Tendai Biti says Government will continue using the multiple-currency system while addressing emerging challenges related to the shortage of change and small denominations.
"However, it is also apparent that the economy, although on a recovery path, remains fragile with a lot of challenges and serious weaknesses related to fiscal space, investment, indebtedness, balance of payments and reserves, among others."
He said the Government would continue to facilitate debate on the issue of currency reform.
"There is anxiety, particularly within the business sector, on the future course of Government with regards to the foreign currency regime," he said..
"This also follows Government pronouncements in previous Budget statements for a review of the currency system at the end of STERP II in 2012.
"Government will continue to facilitate debate on the issue of currency reform being guided by regional integration objectives, specifically those related to the formation of the Sadc Common Monetary Area by 2018."
Minister Biti said the review of the currency system was to be guided by attainment of certain macro-economic milestones.
This included the evidence of a sound track record of policy consistency and implementation, a fairly stable and strong economy characterised by a sustainable external position, a strong financial sector and overall confidence in the economy.
He said empirical evidence shows that there is economic stabilisation as a result of the adoption of the multiple currencies.
"Other benefits realised include immediate containment of inflation by arresting rapid price movements, creation of scope for medium- to long-term planning for businesses and individuals, restoration of the banking sector's financial intermediation role and a gradual building of confidence in the economy," he said.
He highlighted the need to continue with the multiple currency system in the medium term in order to allow consolidation of the prevailing fragile macro-economic environment and building of the necessary confidence for the ongoing economic recovery efforts.
These recommendations are also consistent with the agreed assumptions and objectives of the recently launched Medium Term Plan 2011-2015.
The minister also expressed concern over the shortage of smaller denominated coins.
He said in the 2011 Budget, Government undertook to facilitate the acquisition of smaller denominated coins to alleviate difficulties being faced by the public.
"Efforts to import small dollar coins to ease the small change problem are continuing, with the Bankers' Association of Zimbabwe now spearheading the process in liaison with US financial authorities.
"It is envisaged that the coins will be availed before the end of the year," he said.
The shortage of coins has created distortion in pricing and buying of goods in the country.
The retail sector has capitalised on the shortage of coins and in most cases the public is forced to buy unwanted commodities - among them sweets, biscuits and other smaller items - for change or to take vouchers, redeemable only at that particular shop.
Labels: CURRENCY, DOLLARISATION
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Mujuru wants Zim to adopt Yuan
by Staff Reporter
06/09/2010 00:00:00
VICE President Joice Mujuru said Monday that Zimbabwe should consider adopting the Chinese Yuan, in line with the country’s policy of using multiple currencies to tackle hyperinflation. Mujuru said China is now Zimbabwe’s biggest trading partner, with the Asian giant absorbing most of the country’s mineral and agricultural produce.
“Adopting the Chinese Yuan would be a logical step and could help solve some of the country’s liquidity constraints,” Mujuru was quoted as saying by South Africa’s 702 Talk Radio.
The multiple currency regime announced in January 2009 has been fraught with difficulties. Retailers are supposed to accept the Euro and the British Pound but those two currencies have never caught on, with most transactions being conducted in United States dollars, the South African rand and the Botswana Pula.
Shops have also struggled with change, forcing Finance Minister Tendai Biti to announce plans to import foreign smaller denomination notes and coins. Retailers have resorted to asking shoppers to take other goods in lieu of their change.
In some cases shoppers are given a "credit note" instead of their change when buying goods. The credit note can be redeemed for more goods later but only in the same shop.
Recent reports claimed some people had taken to washing dirty US$1 bills, worn-out from over-use to improve their appearance.
With the export sector still trying to recover from a decade-long economic crisis and the hoped-for windfalls from foreign donors not materialising, Zimbabwe has been hit by a liquidity crisis.
Finance Minister Biti last week said the multiple currency regime would remain in place until 2012 when ministers hope it would be replaced by a single currency for the Southern Africa Development Community (SADC).
Labels: CURRENCY, JOICE MUJURU, YUAN
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SADC regional currency to replace Zim dollar?
by Business Reporter
29/08/2010 00:00:00
FINANCE Minister Tendai Biti says the existing multiple currency regime will stay in place until 2012 when it is likely to be replaced by a single currency for the Southern Africa Development Community (SADC).
Biti told a meeting of the Institute of Chartered Accountants of Zimbabwe in the resort town of Victoria Falls that it was likely the Zimbabwe dollar would not be brought back into circulation.
“We have said the currency regime will only be looked after 2012.
“The debate is then what happens after 2012. It will depend more on regional integration as you know that respective states are working towards integration and the possibility of using a single currency,” he said.
However the regional block says it hopes to achieve monetary union in 2016 and implement a single currency by 2018.
The country abandoned use of the virtually worthless Zimbabwe dollar in 2009 opting for more stable currencies such as the South African Rand, the Botswana Pula and the United States Dollar.
The decision helped end years of hyperinflation and reverse a decade-long economic decline.
Still, the coalition government appears divided over the issue with members of President Robert Mugabe’s Zanu PF insisting on re-introducing the Zimbabwe dollar while the other coalition partners argue that the country’s economy has not recovered sufficiently.
Meanwhile Biti also confirmed that the debt-ridden Reserve Bank of Zimbabwe would sack at least 2000 employees from its bloated workforce as part of efforts to streamline its operations.
The bank’s staff complement rose from under 1000 to 2600 over the last few years as the institution printed money for various quasi-fiscal operations that included provision of direct funding to nearly all economic sectors.
Critics claim these activities helped stock inflation while the bank insists they prevented the country’s total economic collapse.
Biti also said the government would not take over the bank’s US$1.1 billion debt until the legal requirements were satisfied adding the matter was being discussed by the coalition principals.
“Legally, the Government cannot just inherit the debt. It will be against the law, and what it means is that there has to be a legal instrument put in place by an Act of Parliament,” he said.
President Mugabe recently invoked the presidential powers temporary measures legislation to bar the seizure of bank assets by companies owed various sums the institution.
Labels: CURRENCY, SADC, TENDAI BITI
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Zim to import change: Biti
by Staff Reporter
18/07/2010 00:00:00
FINANCE Minister Tendai Biti says there are plans to import lower denomination notes and coins to help ease the shortage of change in the country. “Under the current multi currency regime, the inadequacy of smaller denominations has posed a number of challenges in transactions.
“Treasury will, therefore, be facilitating in the last half of 2010 the importation of foreign smaller denominations and coins,” Biti said last weeks fiscal policy review without giving details.
Zimbabwe ditched its virtually worthless dollar in January last year replacing it with the US green-back as well as the South African Rand and the Botswana Pula.
But with the export sectors still trying to recover from a decade-long economic crisis and the hoped for windfalls from foreign donors not materialising the country has been hit by a liquidity crisis as well as the shortage of change.
Recent reports claimed some people had taken to washing dirty US$1 bills, worn-out from over-use to improve their appearance. Retailers have resorted to asking shoppers to take other goods in lieu of their change.
In some cases shoppers are given a ‘credit note’ instead of their change when buying goods. The credit note can be redeemed for more goods later but only in the same shop.
Meanwhile Biti also said the multiple currency regime would remain in place until 2012.
“The current multiple currency regime will prevail until 2012 … Thereafter, currency reforms will be guided by developments in macro-economic fundamentals.
“Meanwhile, Government is receiving and compiling various submissions on the appropriate currency regime, and will produce a “white paper” that will facilitate public debate at an opportune time,” he said.
Labels: CURRENCY, TENDAI BITI
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Local Currencies: The Key to Economic Recovery
by Richard C. Cook
Global Research, January 7, 2010
Steven Pearlstein, business columnist for the Washington Post, published a column on January 6 entitled, “Recession Over? Not Unless We Make a Major Shift.” The problem is that the “major shift” Pearlstein writes about won’t solve the problem even if it takes place.
So is the recession ending? The professional cheerleaders from Wall Street think so, now that the Dow-Jones has surged past 10,500. Fed Chairman Ben Bernanke is also cautiously optimistic as the Fed begins to dismantle some of the emergency bailout programs it had implemented to help save the financial system from total collapse after the meltdown of 2008.
How did the apparent turnaround come to pass? Pearlstein notes: “My best guess is that the current upswings in economic output, confidence and financial asset prices are largely a reflection of the extraordinary fiscal and monetary juice provided by Treasury and the Federal Reserve, along with the natural rebound that occurs after a collapse in consumer and business spending like that which occurred in the first half of 2009.”
There is in fact a consensus among commentators that it’s been government money that has made the difference. But the government money has all come from borrowing. It’s why the national debt rose from about $9.5 trillion to almost $12 trillion in a little more than a year. Interest on the debt now approaches $400 billion a year.
But the debt can’t continue growing at such a rate. President Barack Obama has already said that with the emergency behind us the federal deficit must start to come down. The reason Congress is about to pass such a terribly flawed health care bill is that the Congressional Budget Office estimates that it will reduce federal health care costs by forcing millions of uninsured people into the private insurance system, cutting back on Medicare, and imposing a five percent tax surcharge on the wealthy.
So what is the economic engine that will keep the economy on track? Pearlstein dismisses all four of the most likely possibilities.
He says that consumer spending, with unemployment staying high, will not come back, writing, “It’s hard to see how American consumers can again become the engines of the U.S. or global economies.”
On more government spending, he says, “that’s also hard to imagine. State and local governments, in fact, are still cutting back spending in response to falling tax revenue, and there’s no political consensus for running up bigger federal deficits than we are running now.”
Another possible source of growth is new investment, but the economy is already built to overcapacity in many sectors, “including excess hotel rooms, airplanes, office buildings, shopping malls, cargo ships, aluminum smelters and the like.” Regarding another housing boom, forget it. Pearlstein writes, “…with 5 million vacant apartments and another wave of home foreclosures on the horizon, don’t count on the housing sector to lead the way out of this recession.”
Finally, there is trade. But even though the U.S. trade deficit has come down, its persistence “reflects a fundamental reality not likely to change anytime soon: We no longer produce much of what we like to consume, and cannot make up the difference with exports because of trade barriers and an overvalued currency.”
So what is left?
Here Pearlstein returns to a focus on investment by noting that American consumers have started to save again and that during the downturn businesses saved money by living with aging production equipment, physical plant, and computer systems. He comes out in favor of tax breaks for business to encourage investment, along with new government expenditures for infrastructure such as “basic research, clean-energy development and expanded public higher education.” These things, he says, will create new jobs which in turn should lead to more consumer purchasing power.
The trouble is, Pearlstein already dismissed the investment and public expenditure alternatives earlier in his analysis as being insufficient. More government debt could also lead to high levels of inflation and further devaluation of the dollar. Inflation caused by government and central bank “printing of money” kills enterprise at every level.
Pearlstein fails even to mention the severe constriction of bank lending to businesses that has made conditions much worse for the small business sector where half of all start-ups already fail within a year. Business giants can take refuge in their cash reserves, but even they cannot grow if consumers can’t buy more of their products.
Pearlstein’s prescriptions are mainly platitudes. Let’s be frank: without small business and the revitalization of local and regional economies, a real recovery cannot take place, and an unemployment rate that has terrorized the middle class with loss of jobs, incomes, savings, and health care cannot be overcome.
What is the answer then? It’s one that Pearlstein and the Washington Post, being in the mainstream of economic commentary, dare not mention: it’s local currency systems that alone can fill the gap left by the collapse of public finance due to debt and the failure of the banking system to function at all levels of the economy and not just for the benefit of the super-rich global capitalists.
If the federal government announced that it would begin to accept local currencies in payment of taxes, and state and local governments did the same, we would see an economic miracle that would astound the world.
Richard C. Cook is a former government analyst who writes on public policy issues. His website is www.richardccook.com. His new book is “We Hold These Truths: The Hope of Monetary Reform.”
Richard C. Cook is a frequent contributor to Global Research. Global Research Articles by Richard C. Cook
Labels: CURRENCY, LETS, LOCAL CURRENCIES
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Biti eyes SADC common currency by 2013
by
14/12/2009 00:00:00
SOUTHERN African countries could have a common currency as early as three years, Zimbabwe Finance Minister said. Tendai Biti said the currency would likely be the South African rand “by another name”.
“We are happy to go that route,” Biti said during a lecture at the University of Manchester last Friday. Biti said he expected the currency to be adopted first by the 14-nation trade bloc, the Southern African Development Community (SADC), and could expand to include countries in the Common Market for Eastern and Southern Africa (Comesa).
But the minister said the plan depended on regional powerhouse, South Africa, giving its nod.
Biti added: “There is some way to go, certainly there would be a need to create a SADC reserve bank. We could end up with a union along the lines of the European Union.
“If South Africa is flexible, then this dream for some of us would not be a dream anymore.”
Biti said the economies of Southern African countries, taken individually, were too small to attract big money international investors.
“We must create one big market to be competitive. A single currency would also strengthen our union and foster regional integration.”
Biti said the push for a common currency could spell the death of the Zimbabwe dollar which is currently suspended following Zimbabwe's decision to dollarise earlier this year.
Angola, Botswana, the Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe currently form SADC.
Zimbabwe, Madagascar, Seychelles, Mauritius, the DRC, Swaziland, Malawi and Zambia are also in Comesa along with Burundi, Comoros, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Rwanda, Sudan, and Uganda.
Labels: CURRENCY, REGIONAL INTEGRATION, SADC, TENDAI BITI
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COMMENT - African leaders need to form a united front against the idiocies of Neoliberal Economic Theory (privatisation, deregulation and free markets for corporate capital). This 'currency devaluation' to 'increase exports' is a scam which will cost the Malawian people because of a Kwacha price increase in the price of imported goods like fuel, capital goods, etc. Now if Malawi had a malawian owned manufacturing base, they could go the route of China. The President is absolutely correct in rejecting this policy prescription.
Bingu lashes at IMF, declares Kwacha will not devalue
By Nyasa Times
Published: September 22, 2009
Malawi President Bingu wa Mutharika has stood his ground that he will not devalue the currency, the Kwacha as argued by economicsts and has challenged International Monetary Fund (IMF)to tell what benefits will it be to Malawi if the currently is devalued.
Economists have been arguing that strong kwacha has been hurting the economy by making Malawi exports more expensive for foreign customers and also creating shortage of forex.
But Wa Mutharika in video interview post on: said the assertions are misplaced.
“The shortage of foreign exchange is not because that the Kwacha is not devalued. Infact, people are saying overvalue it and I am asking economists to tell me what is the correct value, because above that is overvalue, below that is devalue, what is correct. They don’t say,” said Wa Mutharika.
Wa Mutharika, an economist who worked for the World Bank, said he could not buy the theories to devalue Kwacha.
“These are things we put in economic textbooks. They are saying if we devalue the Kwacha then we will make our exports competitive. Which exports? Tobacco is never affected by the kwacha. You can devalue anything, it will not be affected. Tea is not affected. There are fixed markets. Cotton is not affected, so you devalue the kwacha, who benefits?” said the Malawi leader.
He said devaluing the currency will invite national economic depression.
“The day you devalue the kwacha, the price of oil, everything will go up for the ordinary person. Even tomatoes the price will go up, even onions will go up. So the inflation goes up,” said Wa Mutharika.
The economist-President of Malawi said IMF are contradicting themselves on economic orthodoxies.
“Am saying that the IMF has a contradiction in their mind, they don’t know what they are talking about. They talk about macroeconomic stability. What is stability? Stability is a level. The moment you take one of the parameters and devalue that stability is disturbed. Because then inflation comes in. And they saying they are following macroeconomics. I don’t know what kind of economic are the IMF,” said Wa Mutharika.
“And I am ready to meet them. I want one person to tell me one good reason or one advantage that are good to Malawi for devaluation. Perhaps ten years from now, if we have range of products that we are manufacturing that are going on the international market, perhaps the case of devaluation will make sense,” pointed out Wa Mutharika.
“But at the same time, have you ever heard the Americans, the British, the Germans, the French, the Chinese [and] the Japanese- devaluing? When did you hear them devaluing their currencies? But they are asking us to devalue, they themselves do not devalue,” Malawi leader said.
“So,” the President concluded “I am just keeping my ground and really until someone convinces me, Kwacha will not devalue.”
Malawi Kwacha has been trading at MK140 against the US dollar in recent days.
This is not the first time Wa Mutharika has defied IMF. In 2005, the President resisted that IMF restrictions on subsidising agriculture and introducing ‘Farm Input Subsidy programme’ that has transformed the country, that was once reliant on international food aid to feed half of its population, into a maize exporter.
Labels: ARTHUR MUTHARIKA, CURRENCY, IMF, KWACHA (MALAWI), NEOLIBERALISM
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Anti-foreign currency law nears enactment
Written by Chiwoyu Sinyangwe
Wednesday, July 29, 2009 3:08:43 PM
THE Bank of Zambia (BoZ) has announced that legislation barring the use of foreign currency in local transactions has undergone review and operation modalities and is expected to be enacted soon.
And the establishment of a supervisory regime for the secondary market in government securities has been postponed from last June to end of September this year because of uncompleted consultations.
According to the BoZ, legislation to prohibit the usage of the United States dollar in domestic transactions was expected to be implemented soon.
The central bank did not however give the time frame.
“The draft Statutory Instrument on dollarisation is undergoing some review and operational modalities are also being developed. This process is expected to be completed soon. Accordingly, the media and the general public will be informed in due course,” the central bank stated.
And the Central Bank said the process of establishing a supervisory framework for the secondary market for government securities in the country was underway.
“In this regard, the Bank of Zambia has prepared a draft supervisory framework, which will be subjected to a consultative process with key stakeholders,” stated the Central Bank. “This consultative process is expected to be finalised by end-September, 2009 upon which the approval process will follow.”
The country currently does not have a secondary market for trading securities, a move which most financial analysts say has hampered the enhancement of liquidity in the domestic financial market.
“To further stimulate the growth of the secondary market, the government will set up a supervisory regime for the secondary market in government securities by end-June 2009 (structural benchmark),” the Ministry of Finance stated recently. “This will entail the issuance of harmonised regulations to govern trading.”
Most key financial players in the country have welcomed the recent decision by the government to establish a supervisory regime for the secondary market in government securities, saying the move will increase liquidity in the market and develop the domestic financial market.
Standard Chartered Bank Zambia head of Financial Markets, Stanley Tamele who described the move as excellent however said it was crucial to get all the fundamentals right before a supervisory regime for the secondary market in government securities was officially launched.
And Bankers Association of Zambia (BAZ) president Saviour Chibiya said the establishment of short-term benchmark rate(s) in the money market was another excellent move as it would lengthen the kwacha yield curve and form a basis for more competitive pricing in the market.
Labels: BOZ, CURRENCY
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Kwacha appreciates by 10%
Written by Joan Chirwa
Saturday, May 09, 2009 4:11:44 PM
THE local currency on Thursday recorded a significant appreciation of 10 per cent to trade at K5,100 from the week's opening levels of between K5,600 and K5,700. The kwacha's appreciation of 10 per cent within a week has not been achieved in the past two to three years, according to experts.
"This appreciation is on the back of the International Monetary Fund (IMF) loan to Zambia to boost the country’s foreign exchange reserves," said Miles Sampa, a financial markets expert and former president of the Financial Markets Association of Zambia.
"We saw evidence of offshore investors bringing the money back, looking to invest in government securities. There was indication that some inflow came in. Even people holding foreign exchange in accounts started to convert into kwacha."
Sampa indicated that the next psychological level to look out for was whether the kwacha would break the K5,000 mark.
The IMF has since disbursed US $160 million out of the approved a US $250 million loan to Zambia to boost the country's foreign exchange reserves.
And Citibank Group economist David Cowan's analysis of the sub-Saharan Africa currency stability which looked at Zambia's kwacha, Tanzania and Uganda's shilling and the Ghanaian cedi, indicated that the kwacha would find a new equilibrium level of ZMK5,250 against the US dollar despite the recovery in copper prices seen in the first quarter of this year.
"The Zambian kwacha appreciation will not be significant," Cowan stated. "There has been a sharp weakening in many sub-Saharan Africa (SSA) currencies in fourth quarter of 2008 and first quarter of 2009. Notably the Ghanaian cedi, the Tanzanian and Ugandan shillings and the Zambian kwacha have all fallen to historical lows against the US dollar. This currency adjustment has come after a period of stability and has to some extent created a crisis of confidence in the economic outlook for SSA."
Cowan stated that chances of further withdraw of portfolio investments from Zambia and other countries in the region seem limited.
"We expect that all four currencies will stabilise against the US dollar in second quarter of 2009. However, we think that stabilisation will depend to a considerable extent on the speed with which domestic demand for foreign currency wanes, which in turn will depend on the policy responses of the central banks going forward," stated Cowan.
"Of the four economies [Uganda, Tanzania, Ghana and Zambia], the Zambian current account outlook is the most dependent on the price of one commodity, in this case copper, and the rebound in copper prices in first quarter of 2009 means that the deficit could prove to be much smaller in 2009 than the IMF is currently forecasting. Put another way, the recovery in the copper price may not boost the kwacha, but may place a floor under further falls."
Labels: CURRENCY, DEBT, DEFLATION, IMF, KWACHA, MILES SAMPA
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Kwacha records 1.2% depreciation
Written by Joan Chirwa
Wednesday, April 22, 2009 6:06:24 PM
THE kwacha last week depreciated by 1.2 per cent against the US dollar
on mismatch between supply and demand for the foreign currency.
The Finance Bank treasury market update indicates that the local currency opened the week trading at a buy rate of K5,610 and sell rate of K5,630 on the inter-bank market.
There were some US-dollar conversions on Tuesday which saw the kwacha firm to K5,535 and K5,555 levels in intra-day trading, but retreated to close the day at weakened levels of K5,640 and K5,660. The local currency depreciated further on Wednesday to K5,690 and K5,710 and remained largely unchanged for the rest of the week in lackluster trading conditions.
“Despite the recent improvement in the world equity markets and the rising optimism about world economic outlook which has seen copper prices rise by more than 17 per cent this month alone, the kwacha has continued to be under pressure. Copper prices hit a six month high last week closing just above US$4,803 a tonne but this did little to positively influence the kwacha’s levels. It would appear the kwacha is not responding to mere sentiments but actual US dollar flows to establish its levels,” stated Finance Bank. “This week, we are likely to see a stable to bullish kwacha as players trade cautiously.”
Labels: CURRENCY, INFLATION, KWACHA
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Zimdollar mop-up to cost US$13m
Business Reporter
AT least US$13 million is needed to mop up the Zimbabwe dollar held with banks follow-ing a one-year suspension, Economic Planning and Investment Promotion Minister Elton Mangoma has said.
"The Zimbabwe dollar has died a natural death. Its funeral will cost about US$13 million, which is the estimate for mopping up the balances with banks and reserve money," Mr Mangoma told a workshop in Pretoria on Monday.
A decision would be made on "when and how" to reintroduce the national currency but this would depend on the performance of the productive sectors.
The South African Rand was chosen as the reference currency and books of accounts are being kept in either the Rand or United States Dollars.
Early this year, the government allowed the use of foreign currency as the local unit failed to sustain unprecedented hyperinfla-tion.
The highest note previously in circulation was a "rejected" $100 trillion Zimbabwe dollar note.
The Reserve Bank of Zimbabwe lopped off a total of 22 zeros from the local currency in the past two years.
Finance Minister Mr Tendai Biti told the Senate late last month Government was con-sidering buying the depositors’ money held with banks.
There has been uncertainty as to what would happen to depositors’ funds after the demise of the Zimdollar.
Banks are holding about $1,8 million depositors’ funds, according to the RBZ.
Many accounts are holding quadrillions which, accumulated through "burning" where people took advantage of the wide gap between the transfer rate and the cash rate. The transfer rate attracted higher returns.
Turning to the economic turnaround, Mangoma told the workshop, Government was committed to ensure that Zimbabwe "starts working again".
He said efforts would be directed towards reforms from both the political and economic arenas — to ensure there is a restoration of economic stability and growth, among other things.
"Stimulating investment has been adopted as one of the strategies for the restoration of economic stability and growth.
"The objective is to increase investment from the current level of four percent of Gross Domestic Product to a minimum of 25 percent of GDP," said Mr Mangoma.
The process to re-engage the international community was underway to mobilise support for the resuscitation of social services and utilities.
"A multi-pronged approach to engage the international community will focus on the unlocking of critically needed balance of payments financing, fiscal balance support, foreign debt rescheduling and renegotiations as well as clearance of outstanding external payment arrears," the minister said.
He said Zimbabwe would create a conducive investment climate for investors.
He urged South African investors to take advantage of the existing investment opportunities in Zimbabwe and advance lines of credit to assist the economy in recovering.
"There is a strategic window of investment wide open in Zimbabwe at the moment. There is a strategic window for the donor community to strengthen democracy in Zimbabwe and Africa at the moment.
"Let us seize the moment before this window shuts."
Labels: CURRENCY, INFLATION, NEOCOLONIALISM, ZIMBABWE DOLLAR
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Knocking off zeroes from kwacha needs strong economy – Chigunta
Written by Fridah Zinyama
Tuesday, March 03, 2009 12:20:35 PM
UNIVERSITY of Zambia (UNZA) Development Studies lecturer Dr Francis Chigunta has observed that knocking off zeroes from the local currency will require a strong and growing economy.
Commenting on Bank of Zambia (BoZ)'s intentions to drop off the three zeroes on the kwacha, Dr Chigunta said the country's economic fundamentals such as inflation and production costs needed to be at a lower level.
“In the absence of such, the zeroes quickly climb back,” he said.
Dr Chigunta cited examples of countries like Zimbabwe which had persistently knocked off zeroes from its currency but had experienced no change in the value of its currency because the process lacked a strong economic background.
“The economy is in free fall and inflation is wild and raging. In this case, knocking off zeroes is a non-starter,” he noted.
Chigunta, however, observed that the situation was not the same as Mozambique which had successfully knocked off zeroes from the metical.
“They knocked the zeroes off the metical two years ago and it seems to have worked for them,” he said.
He explained that redenomination had worked in Mozambique because of the country's strong economic fundamentals.
Dr Chigunta said dropping the three zeroes off the kwacha would equally work in Zambia but added that the central bank would have to be cautious bearing in mind the current depreciation of the local currency.
Labels: CURRENCY, FRANCIS CHIGUNTA, KWACHA
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Kwacha in free fall
Written by Joan Chirwa
Wednesday, February 18, 2009 7:52:29 PM
THE kwacha on Wednesday broke yet another psychological level of K5,700 against the US dollar, depreciating by 16 per cent since the beginning of the year.
And financial markets expert Miles Sampa has described the kwacha’s K5,700 trading level against the US dollar as exaggerated since it is not supported by a real surge in foreign exchange demand in relation to last year’s recurring demand like oil payments.
The local currency has lost its value by about 16 per cent from January’s trading levels of around K4,900 per US dollar to the current level of K5,700, making it the highest depreciation level the kwacha has reached in years.
The current situation has put further strain on most businesses in the country as they largely depend on imported raw materials to operate.
“The kwacha has lost 10 per cent since February. The depreciated levels are quite exaggerated and the reason being that the cause is all about sentiment and speculation on where the kwacha will reach,” Sampa explained. “When it was announced that we will import maize, there was a general feeling of high demand for US dollar. The levels of the kwacha are therefore exaggerated because they not supported by real demand, they are not supported by real trade transaction. We are likely to see the kwacha correcting to around K5,000 in the short term.”
Sampa said there is no trade to support the current trading levels of the kwacha against the US dollar.
“The local currency will be recollecting slowly in the coming days,” Sampa said. “Reasons for the K5,700 level is due to, among other reasons, the resurfacing of maize importation, slight reduction in foreign exchange converted by the mines to meet local kwacha payments and the US dollar pegging of prices by some retailers. These have led to market sentiments against the kwacha and consequently rendering it bearish.
“However, despite new external transfers not having actualized yet, there is general market anticipation of new demand that will arise from the latest maize importations once payments are due.”
Sampa however said the kwacha was unlikely to reach levels of below K4,000 per US dollar in the short term considering that copper prices on the international market were still way below last year’s peak.
“Levels of below K4, 000 will depend on other external factors. The time the kwacha was below K4,000, copper prices were at peak. In the shortest period, we might not go below K4,000 per US dollar,” said Sampa.
Labels: CURRENCY, KWACHA
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Zambia, Mozambique sign currency repatriation pact
Written by Chiwoyu Sinyangwe
Sunday, February 08, 2009 7:48:20 PM
BILATERAL trade between Zambia and Mozambique will now be conducted directly in local currencies of the two countries following the central banks’ agreement on repatriation of bank notes.
Under the agreement between the Bank of Zambia (BoZ) and the Banco de Moçambique, citizens of the two countries would now be able to pay for goods originating from the other country with the currency of that country, eliminating the need for currency conversions by citizens.
The currencies involved in the transaction are the Zambian kwacha and the metical of Mozambique.
During the signing ceremony in Lusaka on Wednesday evening, BoZ governor Dr Caleb Fundanga said currency repatriation was important as it allowed the two countries to adjust the currency circulation which was a key component of reserve money, an intermediate target in monetary policy implementation.
Dr Fundanga said the agreement provided for a legal basis for commercial banks, bureaus de change and other financial institutions to freely accept each country’s currency and repatriate it through the banking system with full accountability.
“Cross-border trade has hitherto been hindered by the need for traders from both sides of the border to convert funds into United States Dollars and then convert funds back into the other currency when purchasing goods and services,” Dr Fundanga. “By so doing, cross-border traders incur foreign exchange losses as well as other conversion costs in the process.”
Dr Fundanga also said the agreement would not only enhance trade cooperation but also increase cooperation between the two central banks.
“The agreement provides a platform for sharing information on the bank notes in use by the two central banks. This information exchange initiatives should not only end at central banks, but be extended to all economic entities that will use and benefit from this development, especially our hardworking farmers who should be paid genuine currencies when they sell their produce,” said Dr Fundanga.
And Banco de Moçambique governor Ernesto Gouveia Gove said the two central banks had agreed in principle to accepting each others currency provided it was done through official channels.
“The central banks in this regard are to be involved only in providing the framework in terms of operational guideline, otherwise the actual transactions have to be confined to commercial banks, exchange bureaus and other legally established financial institutions in both countries,” said Gove.
Labels: CURRENCY, MOZAMBIQUE, PANAFRICANISM
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Ngwenya welcomes proposals of a single currency for Africa
February 3, 2009
COMESA secretary general Sindiso Ngwenya with Russian Ambassador to Zambia Boris malakhov when Mr Malakhov presented his credentials
Common Market for Eastern and Southern Africa, COMESA, Secretary General Sindiso Ngwenya has hailed calls for the introduction of Africa’s single currency. Mr Ngwenya said a single currency would help reduce the cost of doing business on the continent.
Mr Ngwenya told ZANIS in an interview, today, that a single currency could also promote cross border trade and investment necessary for economic growth on the continent.
The Comesa Secretary General said the currency would ensure that prices of commodities will be easily compared in the region.
He emphasized that if European Countries have been successful in having a single currency, the Euro,nothing will stop African countries from doing the same.
Mr Ngwenya also acknowledged plans to form United States of Africa saying it a thoughtful idea adding that the only challenge that exists is how to form the continental Union.
He said that African countries will definitely benefit from this. He later noted that if Africa speaks with one voice it will be stronger.
He stated that African countries might be moving at a different economic development pace but what is important is that they are moving toward the same direction.
He said that the time is now for those countries who want to integrate to do so and that they should not wait for other countries.
He urged the countries who are sitting on the racing chair to continue and those who are not to be compelled to sit on that chair and race with others.
ZANIS/CMC/MM/ENDS/MM
Labels: COMESA, CURRENCY, GLOBAL CURRENCY
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UN team warns of hard landing for dollar
By Harvey Morris in New York
Financial Times, 1 Dec 2008
The current strength of the dollar is temporary and the US currency risks a hard landing in 2009, according to a team of United Nations economists who foresaw a year ago that a US downturn would bring the global economy to a near standstill.
In their annual report on the world economy published on Monday, the economists said the dollar's sharp rebound this autumn had been driven mainly by a flight to the safety of the international reserve currency as the financial crisis spread beyond the US.
The overall trend remained a downward one, however, reflecting perceptions that the US debt position was approaching unsustainable levels. An accelerated fall of the dollar could bring new turmoil to financial markets.
"Investors might renew their flight to safety, though this time away from dollar-denominated assets, thereby forcing the US economy into a hard landing and pulling the global economy into a deeper recession," the report said.
Publication of the annual survey by the UN's Department of Economic and Social Affairs, its trade organisation Unctad and UN regional bodies, was brought forward by a month in the light of the financial crisis. It was launched in Doha to coincide with the UN-sponsored development financing conference in the Qatari capital.
The UN team said that, as the financial crisis spread beyond the US, there had been a massive shift of global financial assets into US Treasury bills, driving their yields almost to zero and pushing the dollar sharply higher. At the same time, however, the US's external debt had risen to new heights that could provoke a dollar collapse.
The report recommends reform of the international reserve system away from almost exclusive reliance on the dollar and towards a globally backed multi-currency system.
Rob Vos, a Dutch economist who heads the UN's policy and analysis division and who is responsible for the annual economic review, said the global economic pain could be eased if governments co-ordinated a spate of stimulus packages that were already under way.
"There has been a sea change in attitudes in favour of intervention and concerted action," he told the Financial Times. He welcomed statements from US president-elect Barack Obama's transition team in support of spending on infrastructure.
Labels: CURRENCY, RECESSION
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Zambia records K700bn outflow
Written 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
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Kwacha shortage hits Lusaka bureaus
Written by Fridah Zinyama and Joan Chirwa
Wednesday, November 05, 2008 5:59:23 AM
A kwacha shortage yesterday hit selected business houses in Lusaka, forcing some of the bureaus de change to close before time.
But a financial market expert has explained that the shortage of the kwacha in some bureaus could have resulted from over-buying of dollars or their unwillingness to further purchase the foreign currency since the kwacha has started posting gains against the dollar.
A check revealed that financial-related businesses like Western Union and some bureaus de change had no kwacha available to pay their clients.
Western Union branches in town, Northmead, Arcades and Manda Hill did not have enough kwacha to pay their clients.
“People started shying away from buying the dollar when they saw that the kwacha had appreciated against the dollar,” an expert noted.
The kwacha appreciated against the dollar by about K400 and is currently trading at an average of K3,800 and K4,300 for buying and selling in most of the bureaux.
On the interbank market where banks borrow and lend to each other, the kwacha appreciated by more than K800.
And according to the Standard Chartered daily newsletter, the kwacha appreciation was mostly driven by interbank players who sold dollars on the market.
“This was also exacerbated by the mines and some government ministries who also sold the kwacha lower,” the bank stated.
The Central Bank tried to intervene around K3,800-K3,830 and bought dollars, but this was not enough to curtail existing supply as players' still dumped dollars on the market to touch a low of K3,710-K3,730 before market retraced up to its closing levels.
Market froze around K3,710-K3,730 as players only showed levels and the kwacha is expected to trade within a wide band of K3,900-K4,300 on Tuesday.
Labels: CURRENCY, FOREX, KWACHA
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