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?

Kwacha Depreciation

I have always looked at the way we handle the depreciation of the Kwacha and the panic that is associated with it in wonder. There is nothing wrong with an floating exchange rate to float! That is why it's called floating.

Let the Kwacha Depreciate

If it needs to, let it depreciate. However, just ensure that there is stability on this depreciation path. It's safe economics.

The worst thing that can follow such a move (which mostly has happened in the past in this country) is to come up with funny policy changes and falling into the trap of the people you had been trying to catch. There are a lot of theories on what can happen and why it is happening. The safest is to look at the decisions that need to be done and then work your way in ensuring that those do not negatively affect the economy.

I love it when there is so much work on the background by people affected by one measure and how they convince the world that is we do this, things would change. The interesting part is that, that same thing has absolutely nothing to do with the other. You feel like you are watching leverage season "Zambia".

Why is it Falling?

Why is the Kwacha falling? That is easier to find than MH370! We surely don't even need the satellite. There is tones and tones of statistics that can be used to gauge this. We even have SI 55 as a tool to use for extra input into our analysis. We just need people seating on it and working through. If there is nothing major but supported by the expected economics that we are bringing less and less of the dollar into the economy, we simply go out there and work our way into correcting that. That is how it works. If we see a policy not related to this and no major economic explanation, we may have used politics over economics - the worst possible way out of this.

Kwacha Economics will watch this unfold and will surely love to write on the outcome of this issue.

The Kwacha Dives!!!

This has been a sad week for this blog. The Kwacha has been given a serious beating. I have been running some analysis on how bad this has been. As usual, my analysis includes looking at data that has been provided around the environment of the Kwacha. To ensure I present only facts, I have to take my time and look at the details surrounding the issue. As usual it is not a good thing to be doing when you want quick answers. It still needs to be done properly.

All economic talk in Zambia has been on the exchange rate (Just to be on the same page - An exchange rate is the current market price for which one currency can be exchanged for another). The Kwacha has depreciated beyond all manner of psychological barriers. Currently selling at K6.0443 to a US Dollar and K10.1214 to a GB Pound (zanaco.co.zm - 7th March, 2014. Checked: 10.00hrs CAT). 

What are the causes is the biggest topic in this dive. The answers are still being looked at, but the politics associated with that "answer" are disturbing to say the least. Online media has done their "online analysis" and it has gone as far as looking at the appointments at the Central Bank. I like many friends of mine are hoping that Monday proves the online media houses wrong  and the appointed Deputy Governor is no way close to what they have been publishing. I don't think there will be anything to talk about if the seriousness that is required in the appointing of people charged with looking after the Kwacha and related to that, goes to levels of mere patronage. You can read some articles here and here. Many other online media houses have touched on this subject, but I have not linked some articles which I feel are not respecting the profession of giving information as it is and choose to take the political stand instead. Feel free look them up on google.

What really causes our currency to dive like this I still ask. I have written on this issue (in serious foras which I cannot quote), and I still believe the argument I have had still stands - we don't produce demand for our Kwacha. With a few in the lines of Maheu and Sweets exports, little value is sent to the world for them to demand our Kwacha. The mines would have been the best option, but the Swiss connection seems to take us out of the equation.

Over the past years, according to Trading Economics, the Kwacha against the dollar has been on a rather bad trend. One which should make us re-think our development agenda and encourage us to build what will make our Kwacha stable.

The trend has not been good against the dollar over the years. On average, the Kwacha is depreciating at an alarming rate.

Source: Trading Economics

That's a jump from around K4.7 to K6 in a period of less than four (4) years. The depreciation has been worse since 2012 on average.

I am alarmed to see that the dive in the past week is shockingly higher than any other time in the past three (3) years. I will monitor this and get information on the possible causes in the next few days for an update.

Mining and Employment

I love the debates that comes out of mining sector. But most of it is actually lack of understanding of several issues. That is where the problem is.

Mining essentially involves depleting of natural resources and degradation of the environment when extracting the needed resource from the ground. The official definition will go as: mining means extracting minerals from the earth. So whatever decision one has to make about mining, it should address the depleted resources, the negative externalities of that depletion, the cost on environment (wont include this in externality), the positive externalities (such as job creation, revenue for tax collectors, etc), etc

Now a rational decision on this issue will have to weigh the costs and benefits before any decision to allow mining to take place anywhere. For Zambia and other developing countries, I think the costs and benefits should also take into account the costs of collecting that revenue in the wake of tax avoidance and tax evasion. It certainly wont pay, to include revenue which no one will ever collect!

So can we sum all the costs and then the benefits? Will any mining project pass that test? Frankly, I think mining in this country has more costs than benefits since the privatization jump on our roofs. We have seen more depletion and rarely few positive outcomes! Even Switzerland makes more tax revenue from our mines that we do. I think we are lost in the "employment" fight we don't see the real costs to this nation. If our aim was to really get the maximum benefit from mining, a lot of things would be done differently. Since that is not the aim, but employment, our aims fall short of any benefits. Let me explain.

Mining Efficiency

For this country and indeed any country to achieve mining efficiency, that is, extract the minerals at least cost and sell them at high price, we need to look at the costs of that extraction. Costs are many and include, royalties, labour, fuel, rentals, licenses, etc. A reduction in one of those elements will reduce the cost of extraction and surely makes for a good bargain.

However, the country imposes a cost on the mines through demand not to lay off workers. Hallo! We want efficiency, so the mining company would really do good in that area if they reduced the work force and instead invest in capital equipment that would extract the minerals cheaply compared with a man with a pick! Are we then saying we can do with the inefficiency in the mining sector as long as the people are employed? I have heard people say, they would rather have that since mines "cheat" in taxes. My view is different, if we need to do something, we must do it the best way we can. If we can't do that, we should as well close the mines and find something else to do. Mining companies may actually be motivated to "cheat" on the basis of balancing their books since we have bloated there work force. Now if we offer no conditions to them, we will have a better bargaining stand since all mining companies need to do is carry out an efficient operation.

My take on the mining would actually be to run them on a whole new platform that will force efficiency and productivity in the country. Many compare with Chile. This is a wrong comparison. They don't even need value addition as it is useless for them. Our case if different. We own less in the mines compared to 50% of which they own. Therefore, our aim should be to get more from these mines in form of value addition. The country will get more from the value added compared to exporting of raw minerals. If the companies want to export the raw minerals, we control it through taxes. Anyone exporting should pay export tax! Right now, there is no motivation to add value to the copper that we export. Tax revenue has also eluded the country. Meaning we are losing out on both fronts!

What Value Addition?

The value addition I talked about, still remains. It is here.

The setting up of "support industries" around the mining sector will bring in better rewards, especially if we stop the export and tax leakage in the current exports of the mining sector.

Environment Stance

There exist a principle in environment which states that: Polluter pays principle. This simply means whoever will bring about harm to the environment will have to clean it up and pay for all the costs related to that pollution.

So our position for someone to setup a mine in a lake is simple, how then will that person clean up the environment. When that issue has been clearly sorted out, we move now to the other costs, then look at the revenue one will make and address the positive externalities on that end. 

But what shocks me, is people talking about the employment that will be created by the mine and ignoring the cost of that environment! We are doing it wrong, lets start from the cost aspects and only move to looking at the employment when the cleaning up of the environment has been addressed. What value is a mine employing 2000 workers and then a million die from environmental degradation? Are we really so into making jobs available that we will even jeopardize our environment to get people employed?

What are our cost - benefit analysis on this issue? Environmental issues are one thing that should come first, everything else second. What villagers are there who would cost the country's environment to be employed. What genuine revenue will come out of this.

Mining Should Not Be For Employment

Mining sector should therefore not be looked at as an employment engine. It is a resource sector whose returns should be pumped into the economy, clean up the mess it generates and ensure these returns are pumped back into high growth sectors of the economy.

The "support industries" should then be the area of focus for employment. These will employ more and will have great efficiency in the mining sector. The people will benefit more from this than imposition of employees on the mines. It is a modern world which uses modern technology, the mines are not any different. If they can't contribute to tax revenues, do we really need them to operate in this country?

2014 Budget and Tax Measures

2014 starts on an interesting footing. So I thought I remind you of the tax measures expected to start today. Most of these where in the 2014 Budget speech. 

Airtime

Excise duty on airtime has been increased by 5%. So it is now 15%. Expected result is the reduction of the minutes you spent per Kwacha! Assuming you took note of the minutes you used to spend, it will surely drop in the new year. Moreover, you bundles are also expected to be hit by that change! Less MBs per Kwacha.

The increase was justified as raising money for variious developmental programs that the government will be implementing. If it has anything to do with projects like roads and any other infrastructure development, I have no problem with my drop in "units"!

Clear Beer

Beer has had an excise duty of 60% for a long time. However, this was suspended by a statutory instrument to 40%. So beer has been working with 40% excise duty. As of 1st January, 2014, the effective duty of 60% will kick in and everyone will have to pay that 20% they have not been paying.

Clearly, beer has long been known not to be affected by changes in prices - not that much anyway. So we should expect the same quantity of consumption and drunken behavior but now at a higher price. The money is also intended to be pumped into developmental projects.

Tourism Packages Standard for VAT

Tourism packages that are sold from 1st January, 2014 will now be standard rated. The 16% VAT will apply and tourists will pay when they procure a package. I am a firm believer in standard rating of all goods and reduction to the barest minimal of the exemptions and zero-rating of goods and services for VAT purposes. I think this is a good measure and one which should be used to improve our VAT performance. 

I wish many more goods and services would be moved to standard rate. Eliminate the zero-rating and exemptions to the barest minimal. VAT would be boosted. 

However, I believe we need to also look at the VAT chain and see where the tax leakage is. This will ensure all VAT paid or should be paid, is paid and to the right institution for it to be used in the right way. This is important and critical for Zambia.

Property Transfer

Property transfer rate has moved from 5% to 10%. This means all those selling property like houses or mining right, will pay an extra 5%. So those who plan to sell property in 2014 have to take into account this change as you may find yourself paying a little extra for property transfer tax.

Withholding Tax on Rentals

Withholding tax on rentals has dropped from 15% to 10% and has been made a final tax. Because it is now a final tax, it would not be used for deductions in one's final tax liability.

It is expected that this would bring in a "net increase" in collections under this tax even though it has been reduced. This is because there will be no more deductions claimed against it. So those in lose making positions will have to deal with this tax separately as it is a "stand alone tax". (I hope my attempt at simplification has not introduced a different meaning :) )

Public Benefit Organisations (PBOs)

These are charitable organisations approved by the Minister of Finance for various rebates, refunds or remissions when they import or buy goods for charitable works.

As a result of general rationalizing of tax incentives, various items which were previously available for refunds or remissions, will no longer receive such treatment. In particular, no motor vehicles will be "exempt" from paying taxes when imported by the PBO. All motor vehicles imported by these organisations will need to be paid for in full.

It seems like a harse decision to take, but when you hear stories of some churches which imported Hummers, X5, etc for their "pastor" in "helping" the need in society, who would look at this measure as "harsh" seriously, there is need to make people pay the due taxes in full and the right amount.

Though this measure was legislated in November, most PBOs will feel the effect in 2014. Being a 2014 budget measure, it suits to be discussed here.

Access to Banking Information

Zambia Revenue Authority (ZRA) will have access to information, notwithstanding obligations and secrecy imposed under the Banking and Financial Services Act, the Evidence Bankers Book Act, Legal Practitioners Act and the Accountants Act, required for tax purposes. 

Any person or organisation that had preveneted the ZRA from accessing information on "secrecy" or any such reason, will have an interesting find in 2014.

Grant Aided Institutions

Grant aided institutions that will now be required to deposit their revenues in the general revenues has been increased with the addition of Zambia Environmental Management Agency (ZEMA), Patents and Company Registration Agency (PACRA), Competition and Consumer Protection Commission (CCPC) and Weights and Measures Agency. This is in line with annoucements in 2013 Budget which say the first statutory bodies' (ERB and ZICTA) revenues being brought into the general pool. 

I hope this will truly bring about prudent management of revenues by the institutions in questions and ensure that government will have enough resources to provide for public services efficiently.

These are a few issues that will be brought on board by the year 2014 on the tax and budget front. We hope to see positive outcomes at the end of the year that we can talk about.

Happy 2014

Happy New Year - 2014

Happy New Year to Kwacha Economics readers and followers. May you find this year as you hope and may the blessings shower on you and enable you to achieve all your dreams.

Kwacha Economics has only one resolution for 2014 - move to a Zambian domain and have frequent posts.

Good bless and we hope to be together and closer in 2014.

What Is Value Addition in Our Mining Sector

I love to hear people talk about value addition in the mining sector. There is a smooth flow of joy with that topic. Why?

Value addition will entail we export the products of the mines at high value. We then get good returns on the produce. This is compared to the current situation where we export "soil" or concentrates at very low value and get little to no return at all. So value addition is the way to go.

But what shocks me is the famous "value addition" direction we have. Seriously, smelting and refining to me is not value addition to sing songs about. There is a value that has been added in the process, but for that to lead to no export duty is a miss-placed thought. If our export duty is to gain returns on the items being export, we should maintain an amount of export duty on these items since they are products of the mining sector which in all fairness, is a wasting asset. In addition, we should now look at the idea of encouraging and developing manufacturing or fabricating industries/ infrastructure that will move that cathode, copper blister or anode to a wire, a circuit, a electronic component, etc. These are the items that we can produce and gain meaningful returns on.

What good will the export of anodes and cathodes bring to us when we can do so much better?

Infrastructure Development

Few years ago it seemed impossible to embark on serious infrastructure development that was worth talking about. The few years that I have looked at the plans and money involved in road development through Link Zambia 8000 and Lusaka L400 projects has just brought one idea that every Zambian should now embrace, we can develop any infrastructure if we have the desire to do it. So the fabrication and mining related industries can be done. We need the money of course, but ultimately, we need the desire to do it.

We have to be frank in our thinking, mines don't employ people any more. The whole process is constantly becoming mechanized. But on the other hand, forward linked industries will employ more people as the products from those industries have higher value. This is a sustainable way of using our natural resources and get the benefits from such.

A deliberate policy to develop value addition sectors (not merely smelting), will see this country increase its take from the mining sector. Such sectors have also high growth potential compared to many other sectors. Moreover, the fact that our products will eliminate the cost of transportation of the copper, they will be produced cheaply compared to any other country that will get the copper from Zambia and put it on a truck/train or ship. That mere transport cost will be an advantage to Zambia.

A full scale infrastructure development of mining sector "support" industries in the forward linkage should be Zambia's priority after the roads development have been completed. We need to setup a full scale mining infrastructure support project.

Loss Making Position
I have always had problems with companies which are in loss making positions for years and years, yet taxes are paid elsewhere (ok maybe I watched too much stealing Africa but that does not change the facts). If people can own a company and not get any profits from it for years, whats wrong with us doing the same? Its such a perspective which makes me want to have my hands on the mines and run it myself and see for sure if I will enjoy the "loss making position" seriously.

We need to work on our own issues and find a way to deal with this particular element of loss making. We made a lot of mistakes in selling the mines that we will continuously suffer the problems associated with the sell.

Real Value Addition
The only possible real value addition is reach a level of fabrication and manufacturing products with high returns that the mining products we export. I believe all mining products should be taxed and taxed it should be in a way to encourage value addition. The value addition being referred to here is 'real' value addition. I don't think producing copper anodes/ cathodes/ blisters is real value addition as it will be exported to be processed further. So why don't we work on that element of ensuring we also process "further". That is the real value addition and its returns to the country will be more than what we currently.

We should look at mines as a source of an opportunity to reach that "further" processing cheaper than anywhere in the world as transportation costs will be lower than any one - with the exception of other mineral producers. That is the direction we need to be looking at.

This value addition will bring in employment and profits. We should face the fact that mines will never bring in employment as the whole sector will have to be more and more mechanized. But support sectors will need skilled labour to be able to handle and produce a variety of goods on the market. We should aim at moving from cable production to circuit boards or computer mother boards which may only need addition of other elements to be complete. The copper we have will do much of the work.

We need to identify products that can easily be produced here and find a way to encourage that production. Who ever thought China would be the Hi-tech hub of the world? All hi-tech items where produced in the west. Now we look to the east. So lets aim at making it come from the South, after all, we own the ingredients!

True value addition! Lets forget about the anodes, cathodes and copper blisters. Lets move and progress!