Africa-Press – Zambia. Zambian Kwacha has suddenly appreciated against the dollar. Some analysts are speculating that the appreciation is natural while others are saying that it is artificial.
Kwacha has artificially appreciated. The reason why the Kwacha has appreciated is because offshore investors are “buying” government securities (bonds). I will use lay man’s language to explain the meaning of government securities and how they affect exchange rate.
Sometimes government borrows from the local financial markets through the Bank of Zambia by issuing what we call Bonds or Treasury bills (government securities).
Let us say that you have K50, 000 and you will like to invest it, you can give the Bank of Zambia your K50, 000 and they can give you back probably K75, 000 after 2years. In this case, we say that you have invested in bonds or government securities.
In a similar scenario, offshore investors are converting their Dollars into Kwacha so as to invest in government bonds (This market operation transaction can be a one week or any period specified by BOZ).
This has increased the demand for Kwacha, thereby reducing the exchange rate. Political instability in other countries is also causing investors to consider Zambia as the alternative investment hub.
Bank of Zambia has collected (borrowed) a significant amount of cash from offshore investors. BOZ will have to pay back with interest. This is not sustainable, because once offshore investors stop demanding kwacha, exchange rate will go back to default setting and kwacha will start depreciating.
The only sustainable way of managing exchange rate is by increasing production of goods and services so that we can have surpluses for exports. More and continuous export of goods and services will bring more and continuous inflow of foreign currencies.
We need to start thinking of becoming export oriented as opposed to import oriented. We don’t need to worry about exchange rate (dollars) if most of the things we import can be produced locally. There is need to support agriculture production, mining production, manufacturing, tourism, entertainment, etc so that we start exporting and earn forex.
Unfortunately, production can’t increase because UPND through Bank of Zambia is fighting SMEs by increasing the monetary rate. Below is how bank of Zambia is working against growth of SMEs both in short and long run:
EFFECTS OF INCREASE IN MONETARY RATE BY BOZ Recently, Bank of Zambia raised the Monetary Policy Rate by 50 basis points from 8.50 to 9.0. As a consequence, the cost of borrowing will go up. Effectively, borrowing rates in financial lending institutions will go up.
The immediate impact is that individuals and SMEs with existing loans in almost all banks and microfinance institutions whose lending rates are linked to the MPR, will have their agreed lending rates increased by 0.5%.
The medium term impact is that loan repayment periods will be increased to compensate for this increased rate or the monthly repayment amount will marginally go up.
Lending rates in Zambia are already high and are currently above 20% per annum for banks and above 15% per month for the informal market. It remains to be seen if BOZ and government will ever be able to bring down the overall cost of borrowing to a single digit.
The cost of borrowing in the developing world like Zambia remains to be one of the biggest hurdles that continue to dampen innovation and entrepreneurship.
With these increase on the already high (over 20%) cost of borrowing, entrepreneurship, housing finance and start up business finance remains a preserve of the small segment of high income earners.
For More News And Analysis About Zambia Follow Africa-Press
