ECONOMIC THEORY VS REALITY
Before 2021, it was understood that the exchange rate was pulled by the excessive debt Zambia had borrowed in a short period of under 7 years, beginning 2011 to around 2020. The amount was more than USD12 billion.
The last time Zambia had accumulated such high debt was over a period of 17 years beginning in the 1970s to the mid-late 1980s. That amount was USD 7.9 billion.
In the pre-2021 period, it was consensus that the high demand for foreign currency partly led to the depreciation of the local Kwacha, this created undue external pressure from international lenders. Remarkably, the technocrats at Ministry of Finance and the Central Bank kept the domestic economy afloat by ensuring that liquidity was available in the financial market for borrowing and other activities.
It is important to make this distinction because a large part of the pressure to repay was driven more by perception and fear. This is because the Eurobond market is highly sensitive market that easily rely information which information dictates the financial decisions that players make.
The result of that external pressure created twin challenges of depreciation and inflation that became major factors in the impending 2021 elections, this was compounded by the normal market reaction were local and international players alike are apprehensive in their spend in an election year.
Three years after the elections, these twin challenges remain largely unresolved. Prior to the 2021 elections, the Central Bank offloaded local currency into the domestic market as well as United States Dollars (USD). By 2019 November, the Central Bank in its quarterly Monetary Policy Report marked inflation at over 9%. The 2020 Economist Intelligence Unit (EIU) mid-year report showed inflation for that year at 15%. Very high.
Fast forward, the debt has been resolved ONLY to the extent that no large amounts of Kwacha will be converted enmasse for immediate externalisation to service debt. According to information released during and after these negotiations was that the saved amounts would be used domestically to create economic efficiency. However, one wonders if all the work merely resolved the misinformation about Zambia and not necessarily transfer economic relief.
The understanding, in text was that delayed debt repayments would release some liquidity into the economy. By understanding, that liquidity would go some way to cure inflation and the exchange rate, to a degree. But it has not. Needless to mention, the drought has affected production in the real sectors – Agriculture and mining to an extent.
Yet and still, one counter argument is that the removal of liquidity in the market by increasing the Statutory Reserve Ratio (SRR) has had an equally deleterious effect in the financial sector and ultimately in the price of money. Money, or liquidity, is the lifeblood of any economy and whatever decisions are made therefore, like any blood, the life of an economy must be priority.
