eBusiness Weekly
Dr Keen Mhlanga
The Kwacha is Zambia’s official currency. In the last decade, the country’s foreign exchange regime has been unstable, with many adjustments and changes aimed at achieving stability, such as the floating exchange rate, fixed exchange rate, parallel exchange rates, Special Drawing Rights (SDR), foreign exchange auctioning, and a liberalised exchange rate.
To create stability in the foreign exchange regime, the Zambian government implemented measures in 1991, which resulted in the liberalisation of foreign exchange controls and the establishment of a freely floating exchange rate regime governed by market forces.
According to the Bank of Zambia’s 2020 Foreign Private Investment and Investor Perceptions Survey Report, Zambia’s macroeconomic conditions deteriorated in 2020, but the investment environment remained generally favourable.
The country’s regulatory environment promotes business operations and the stronger protection of property rights. In the World Bank’s 2020 Ease of Doing Business Report, Zambia was among top five in Sub-Saharan Africa and 85th out of 190 countries.
Zambia gained independence from Britain in 1964, inheriting a private-sector-driven economy dominated by the foreign-owned mining sector, which contributed approximately 50 percent of GDP. By 1973, the majority of businesses had handed over ownership and control to the government.
The former Northern Rhodesia’s initial post-independence period, was largely successful, with a burgeoning mining sector ensuring Zambia’s economic prosperity with year-to-year export earnings between 1964 and 1980.
Zambia was the developing world’s largest copper producer and the world’s third largest copper producer after the United States and the Soviet Union in 1969, accounting for 12,2 percent of global copper output. Copper incomes fell dramatically during the 1970s global recession, affecting the economy.
This was in addition to the challenges caused by liberation wars in neighbouring Angola, Mozambique, Namibia, South Africa, and Zimbabwe. This put Zambia in a constant state of war, with infrastructure such as roads and bridges being destroyed on a regular basis, putting a damper on economic growth.
Over time, real GDP per capita fell to K290 in 1987, then to an all-time low of K202 in 1989. With rising real total external debt and inflation, the balance of payments situation deteriorated further. Between 1980 and 1990, the low-income Consumer Price Index (CPI), a proxy for the rate of inflation, increased by 4 000 percent.
Dr Keen Mhlanga
With the transition from a one-party state to multi-party democracy in 1991, the new government embarked on economic liberalisation, privatisation of state-owned enterprises, and other structural adjustment programmes.
With these programmes in place, there was a greater emphasis on private ownership of business entities as opposed to the state-owned ownership promoted in the early 1970s. Private enterprise ownership was thought to increase efficiencies, resulting in an economic boom, as was the case during independence when the economy was driven by the private sector.
With this shift in economic regime came the narrative promoting foreign direct investment (FDI) as the panacea for much-desired economic growth, as stagnation had worsened in the mid to late 1980s.
The Zambian kwacha is the world’s best performing currency against the US dollar, rallying more than 18,5 percent from January 22 to September 1. The Zambian Government has managed to reduce inflation from 24,4 percent in August 2021 to 9,7 percent in June this year.
Last November, the government’s monetary policy committee decided to raise the monetary policy rate by 50 basis points to 9 percent. Until now, the rate has remained unchanged. The ultimate goal was to reduce inflation to between 6 percent and 8 percent by mid-2023, and a decrease in inflation was achieved when the committee met again in May 2022.
To help agriculture and livestock, the government eliminated a 5 percent customs duty on cattle and chicken breeding imports. Food price inflation fell from 12 percent in July to 11,3 percent in August.
The exchange rate is the most important component of an open economy, and it directly affects macroeconomic indicators such as FDI and GDP.
Every increase in the exchange rate, provide investors with a competitive advantage in international trade. When a country’s exchange rate rises, domestic export items become less expensive, increasing domestic and international demand for commodities while decreasing imports.
In anticipation of accelerated social and economic growth, Zambia shifted its economic growth model from command-oriented economic growth to profit-led economic growth in 1991.
The shift in economic growth orientation, as well as the state’s and policymakers’ eagerness to ignite economic growth, not only resulted in high debt accumulation, but also in the privatisation of state-owned enterprises and illusory economic growth. The growth was illusory in the sense that it had no positive impact on job creation or poverty reduction.
Considering Zambia’s unprecedented trade and investment ties with the global village over the past decades, trade increased to more than 76 percent of GDP between 2010 and 2018, up from less than 60 percent of GDP in previous years.
Over the last few decades, the export sector has grown significantly. Total export earnings were estimated to be US$1,0 billion per year on average from 1990 to 1999. However, from 2000 to 2018, export earnings increased to a high of US$10,6 billion in 2013, with an average of US$5,3 billion per year.
The improved export performance was attributed to higher metal export prices and increased production as a result of increased investment in the mining sector following privatisation and the opening of new mines.
Zambia’s export revenue increased by 14,2 percent to $5,9 billion in 2021, demonstrating the country’s positive business recovery. Copper contributed $4,4 billion to total earnings that year, according to the Bank of Zambia. Another effort to boost exports was announced by local mining company First Quantum, which announced a $1,25 billion expansion of the Kansanshi Copper mine.
According to a Fitch Ratings article dated April 5, 2022, the Zambian government reached a staff-level agreement on an IMF programme in December 2021, clearing the way for the convening of an official bilateral creditor committee to discuss potential debt treatments.
The confirmation of Zambia’s “CCC” Long Term Foreign Currency IDR demonstrates that the government is still servicing its local-currency debt. Zambia has an ESG Relevance Score (RS) of “5” for Political Stability and Rights, as well as Rule of Law, Institutional and Regulatory Quality, and Corruption Control.
These results reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Zambia has a medium WBGI ranking of 38, reflecting a recent track record of peaceful political transitions, a moderate level of political participation rights, moderate institutional capacity, an established rule of law, and a moderate level of corruption.
Dr Keen Mhlanga is a global financial expect, key note speaker, investment advisor with high skills in digital banking, corporate and development finance. A dedicated, hardworking financial genius and business magnate. He is the executive chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.
