Has The Kwacha Stabilized?

I would like to apologize as I have been out and about to blog on a few things that have been happening. Sadly, the kwacha was the main issue that has been happening and a blog with that name should surely have been providing the needed updates. Nonetheless, I will try and make up for the lost time.

There are many stories that surround the dive that the Kwacha took and many of these are close to the truth. Kwacha economics has a perspective which I feel is closer and need attention to all that are concerned.

To begin with, there are many factors that can lead to a currency to fail that quick in such a short time. Many of these can be explained not necessarily immediately but after careful analysis of the happenings. 

Monetary Policy and Only with Fiscal Policy

I am a firm believer that monetary policy and fiscal policy should work together to affect certain desirable positions in the economy. The Kwacha's fall once again proved that better than any text book would do. We all remember the amounts of dollars that were off-loaded on the Zambia markets, the effect they had on the falling is as good a guess as any. Check this [here], [here] and [here] Maybe a series of analyses can look into a it but we need to examine how things changed when the fiscal policy was called to the war.

So why was the offloading of dollars so ineffective? 

The simplest form of understanding exchange rate market (that some senior made me to believe way back), is that you have a basket of dollars (or any other foreign currency) and another one with Kwacha (or any local currency), and you are comparing the values. If there is less dollar than the local currency, the value of that foreign currency will appreciate as there will be more local currency than the itself at any value. So for every dollar that exist in that basket, more and more of the local currency will be needed to equalize the status quo. 

So from the above, a depreciated currency will entail there is a lot more of that currency that the foreign currency. So the two things that can happen is to flood the economy with the foreign currency - which the Bank of Zambia did, or suck out the local currency! I believe the two are better handled using the different policies of monetary and fiscal. Monetary policy can flood the economy with foreign currency effectively and efficiently while the fiscal policy can suck out the local currency very efficiently.

Our handling of the fall in the first few weeks was a 'flooding of economy with foreign currency' strategy which did little too late. The use of both flooding and sucking out worked!! Monetary policy and fiscal policy produced wonders!

Why this should be have been expected!

It is interesting that this was not expected! But having little history of this, maybe we should not expect people to realize what was happening. So lets look at the signs on the ground.

Zambia has not been in a position where they have invested so much in infrastructure development in long time. Lets just look at roads for the time being. I don't remember a time that so much money has been put in road construction. Specifically "Link Zambia 8000" or even Lusaka's "L400". Before these projects started, the only other "major" road construction was the election linked "Formula 1".

The two projects of "Link Zambia 8000" and "L400" have had a major cash injection for materials, equipment, employees, etc. The materials and construction equipment are imported. So no matter how much Kwacha is dished out, the contractors will need the Dollar to import the materials and equipment to be able to undertake the construction. So there is a leakage of Dollars and this is not in small amounts, but huge cash outflows from the Zambian economy. Such outflows will put a strain on the local currency and will serious lead to its depreciation. Its a simple demand and supply phenomenon.

Taking into account all such flows of money, the Kwacha was bound to be severely hit. 

So the counter measures to this scenario was to ration the disbursement of road construction funds or plan the release in such a way that the Fiscal  and Monetary policy worked on that issue together. Of course we have to remember that such happenings are new to everyone around and in institutions that are handling these policies. So a future happening can be handled much better.

If All Else Falls, Get Your Money Back!

The last kick in the system is when all else fails, the fiscal gets its money spread around in commercial banks back to the Central bank and let the invisible hand be helped with a loaded dice. It always works. No one can have more money that the fiscal machinery unless there is a sick economy arrangement or there is need to spend.

Sweeping of fiscal related accounts produces good results for the entire economy when there is need to control the exchange rate depreciation, but works against expansionary fiscal happenings. Banks will have no money to create more money with, and the fiscal can be assured of a greater demand for the local currency in a short time period that other methods. The opposite stands true when an appreciation is needed to be controlled.

The current arrest of a free falling Kwacha sums up the rules of the game - Monetary policy and Fiscal policy are different sides of the same coin. It just depends on which side you picked to start the tossing of the coin!

So now has the Kwacha stabilized for good?