By DAVID PUNABANTU –

AS the debate over the effects of Statutory Instrument (SI) 33 and 55 fades, a post-mortem of the SIs indicates that the instruments, although well-intended, exposed existing distortions in Zambia’s foreign exchange (forex) policy.

SI 33

For starters, SI 33 that prohibited the quotation in and use of the United States (US) dollar locally, created a brief but short-lived appreciation of the Kwacha.

The brief appreciation was doomed to fail as the new supply of US dollars onto the local money markets were bound to be absorbed as the Kwacha appreciated, because the US dollar supply was limited.

SI 55

It is here that SI 55 intended to use the high US dollar revenue from the mines to briefly flow through Zambia’s money markets before being externalised.

Thus it assumed as observed in SI 33, that the increased US dollar inflows under SI 55, would create a sustainable Kwacha appreciation.

However, the reality on the ground saw the Kwacha fall as SI 55 did not automatically transfer the mine US dollar inflows onto the market, but into local commercial bank accounts, owned by the mines, awaiting authorisation, under SI 55, to be exported.

Naturally, local commercial banks moonlighted on these growing mountain of US dollars by lending the funds to foreign banks in overnight facilities, against the back drop of a global US dollar shortage as the US Federal Reserve Bank reined in its Quantitative Easing Policy.

To this, the Kwacha fell as interest rates domestically failed to move upwards to counteract the value mismatch. 

Forex policy

Consequently understanding the failure of SI 33 and SI 55 indicates that it is deep-rooted in Zambia’s forex management policy.

Understanding this policy can easily be seen in looking at the Argentine forex policy.

In Argentina, for instance, the chief aim of government before 1939 was to provide itself with enough forex to pay the interest on government debt.

Accordingly its forex regulations were framed with the primary objective of providing cheap forex for paying government debt and forex for other payments by foreigners and locals.

Every Argentine citizen (or foreign resident in Argentina) who came into possession of foreign currencies or in any other way, was compelled to sell them to the Argentine government, taking pesos at a fixed exchange rate.

The Argentine government thus came into possession of a large volume of foreign currencies.

It used what it wanted to pay its own debts in foreign currencies.

The remainder, it put up to auction among the holders of pesos who wanted to exchange them into foreign currencies.

Thus up until the outbreak of the war in September 1939, the official rate at which the Argentine government brought forex was 15 pesos per sterling pound.

But the rate at which the forex was sold fluctuated around 17 pesos per sterling pound.

The government thus got the forex it needed at the lowest price and in addition made a profit on the forex it did not want.

The Argentine situation at first appears to reflect Zambia’s pre-market liberalisation days when UNIP government nationalised the mines to create Zambia Consolidated Copper Mines (ZCCM), whose US dollar revenue management was determined by a Bank of Zambia directive.

That directive gave the forex to government that used it to develop the country, pay national debts and profits from forex sales added extra funds to run the party and its government.

When Zambia liberalised the her markets, it basically transferred the ownership of forex from the State that paid Zambia’s international debts with the funds to the now privatised mines that have no obligation to pay Zambia’s debts, interest or develop the nation, as the Bank of Zambia’s directive allowed for 100 per cent direct retention through exports.

This directive was originally an incentive to attract foreign investors by the Movement for Multiparty Democracy (MMD) government and its Harvard boys then, while debt forgiveness became critical to the balance of payments which was a defacto SI 55 in reverse.

Consequently, the mines buy US dollars at a cheap rate of “15 pesos” using bars of copper, and sell only a fraction of the US dollar revenue at “17 pesos” at a profit to cover local Kwacha costs, which sets the exchange rate for ordinary Zambians and local firms.

In effect, a two-tier exchange rate system manifests structurally that SI33 and SI 55 collapsed under.

It is this “incentive” that the Patriotic Front (PF) Government tried to alter to address the balance of payments and Zambia’s growing debt obligations through SI 55 to create a cheap US dollar like the mines.

Forex equity

Sadly, the hard reality of Zambia’s so-called liberalised reforms when placed against other liberalised markets of the US, Japan and the European Union (EU) shows that Zambia’s money markets are not liberalised due to structural imbalances in allowing for equal access to US dollar inflows.

The US and EU markets follow SI 33 except it also includes exports, as the US dollar cannot buy directly anything from the EU unless it’s changed into Euro first.

The same applies for the euro buying anything from the US.

This implies that the structure of a true liberalised economy for Zambia is that copper has to be sold in Kwacha, meaning copper buyers with US dollars first have to change the US dollars into Kwacha on Zambia’s money markets and use Kwacha to buy copper.

All the US dollar inflows from export first pass through the market, rather than mine bank accounts, so that every firm and person can have equal access to the inflows.

If the mines wishes to externalise 100 per cent of their Kwacha revenue, they would go onto the market and buy the US dollar just like any other person or firm with no questions asked or restrictions on amounts externalised.

If SI 33 covered exports as well, then a level playing field would occur, but it is up to Zambia’s captains of industry, and not Government to coordinate the buying and selling of Kwacha/US dollars flows in and out of the money market.

This is meant to create certain value exchange regimes to favour briefly exporters or importers or bring in Foreign Direct Investment (FDI) or re-equip and modernise Zambian firms at points in time as the Kwacha breathes in and out by appreciating and depreciating, as a result of the collective actions of Zambia’s industrial captains.

An uncoordinated management in Kwacha/US dollar money market flows however, will create a mad and uncontrolled rush on Kwacha/US dollars market flows, creating a market collapse so often described as Black Monday or Black Friday in liberalised markets when panics occur in buying and selling.

As for SI 55, it should have been a surcharge of 20 per cent duty on exporters who directly sell their exports in currencies other than Kwacha.