Zambia Chamber of Small and Medium Business Associations

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Implications of Re basing of the Kwacha on the MSME’s

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The decision to re base the local currency was made on 23rd January 2012 following Cabinet approval. This raised a lot of views and suggestions from the various stakeholders in the country some of whom felt that there must be a deliberate policy to bring the Zambian currency in line with other regional currencies.
The decision to rebase the local currency was made on 23rd January 2012 following Cabinet approval. This raised a lot of views and suggestions from the various stakeholders in the country some of whom felt that there must be a deliberate policy to bring the Zambian currency in line with other regional currencies.

The process of re basing basically involves dividing a currency unit by some denominator meaning that from the face value, this process should not result in any gain or loss of revenue.

There are so many questions that have been asked mostly on the implication of this monetary policy on different sectors especially the MSME’s. Although it has been difficult to establish the actual potential outcome of this move, it is imperative to note that any change in monetary policy impacts the economy differently - sometimes in a positive way and sometimes in a negative way.

Assurances from the Government are that this development will have a neutral impact as the move will not change the purchasing power of the Kwacha. Some experiences from countries that re based in the past shows that this process has secondary effects which cannot be ignored. As an organization looking after the affairs of the Micro, Small and Medium Entrepreneurs (MSME’s) in Zambia, we strongly believe that the Government should out-rightly put on the table all the possible impacts so that a right signal can be sent to the private sector.

We understand that this development will address the costs associated with accumulated losses in the value of the currency, reducing the risks involved in carrying huge amounts of money, time taken to input accounting information and reducing the time incurred in customizing standards accounting packages etc. This is definitely a good development which ZCSMBA supports as it will contribute towards reducing the cost of doing business.

However we are also aware that any development comes with positives and negatives which can either be direct as a result of a measure or indirectly coming into play as a result of certain fundamental changes in economic factors. There are short term effects this is likely to have which among others may include too much liquidity in the economy which in the end may result in exchange rate fluctuations as more and more people will try to convert their local currencies into other foreign currencies and finally inflation which may come as a result of people’s demand for goods and services goes up.

With too much liquidity, in any economy whether developed or developing, there are parallel economies that exist, and mostly their financial capital and profits do not find their way into the mainstream economic business. Hence this stream of financial resource has little influence on the economy. However during the time when the country is about to change its currency, this financial resource will have to definitely find itself in the mainstream economy. The reason for this is that the players under the parallel or underground economy will have to keep the legal tender recognized by the state so that at whatever time this money can easily find itself into the system.

Since this money is not banked and cannot easily be changed at once for fear of being found on the wrong side of the financial regulations, and Anti-Money Laundering Act 19 of the law of Zambia. This is the money that will be injected slowly and overtime into the system resulting into too much liquidity in the economy. This may cause the economy to boil an outcome that should be closely checked. Further high inflation causes a drastic loss in the value of the money.

Too much liquidity in an economy pushes the demand curve outward causing prices to go up resulting in inflation. Cost push inflation affects the MSME sector in a negative way as they cannot expand at a pace that can propel them to contribute positively to economic growth and the resultant of reducing the capital base more especially the import dependent MSME’s.

Further, the need to change the local currency into other foreign convertible currencies is likely to weaken the local currency further as more kwacha will be chasing a few foreign currencies.  Exchange rate instability has been one of the major factor problems affecting the competitiveness of the private sector and a major contributor to limiting economic diversification and growth. 

Observing from the behavior of the local currency against other tradable, kwacha has depreciated by almost ZMK200 despite having huge deposits from the copper industry. Taking the US as a benchmark, the kwacha is now trading between ZM5200 to ZMK 5300 from the January figures of ZMK 5,108.89 and 5,128.89 representing about 3.6percent depreciation. Such fluctuations in exchange rates over a short period of time are not good for the private sector. Financial experts have indicated that kwacha is likely to be trading at this rate for the next few months.

Zambia has experienced policy inconsistency in exchange rate regime since independence. A fixed exchange rate system was implemented in 1964 but later abandoned in 1976. A floating system via an auction system was introduced in 1983 and this was later modified in 1986 to introduce Dutch Auction System. Between 1986 and 1989 the Government suspended the auction system and introduced official parity rate. Between 1990 and 1992, the Government introduced the dual exchange rate system, comprising the official rate set at a lower value, and the managed float set at a higher value.  Since 1992 to date, Zambia has maintained a flexible exchange rate regime.

The current regime is still volatile. The risk for the economy is that the continued volatility in the foreign exchange markets and in the price of the Kwacha has negatively affect investment levels in the "real sectors" of the economy. This is basically because the private sector does not like price volatility, as this creates uncertainty about the real cost of inputs and the real returns on production and hence makes investment decisions today which will only have a pay off at some time in the future more risky.

This is not good for the economy more especially an import dependent one like Zambia. Actually this is one of the greatest worries for the MSME’s especially those engaged in cross-border trade as imports tend to be very expensive in the long run.

ZCSMBA has taken note of the progress the Government is making in ensuring that the long awaited measures to address the cost of money are implemented. The recently announced measures by the Bank of Zambia to reduce overnight lending; reduction in statutory reserves for the commercial banks and the Government tax measure to reduce the corporate taxes for the commercial banks from 40percent to 35percent, are all in the right direction.

ZCSMBA is alive to the fact that all these sound macro-economic management policies by Government have a greater influence in reducing inflation, stabilizing the economy and to some extent help reduce interest rates. However the Government should now start focusing on micro economic fundamentals which can easily impact positively on the operations of the business more especially the MSME’s.

MSME’s in Zambia face a lot of constraints in running their businesses. The most common constraints include inaccessibility to cheap finance and markets; high cost of borrowing from the commercial banks even when the country has recorded a single digit inflation for the third consecutive year; shortage and high cost of inputs; poor infrastructure; lack of appropriate tools and machinery; lack of skilled labour; shortage of affordable and decent premises; unavailable utility services; low technical and entrepreneurial skills and a harsh business environment.

ZCSMBA believes Government efforts to help the MSME’s sector should be targeted towards addressing the above key fundamental issues constraining the growth of this key important sector. On the cost of finance, the Government through Bank of Zambia should go beyond just issuing statements imploring the commercial Banks to reduce the interest rates and make money available to the private sector; instead it is time the central bank used its instruments at hand to address the issue.

Government’s effort to diversify the economy will always be frustrated by the high interest rates as no firm especially at MSME levels will risk borrowing from the commercial banks to venture into lines of business. As a result the country will remain a mono economy with a limitation cap on number of jobs to be created. It is a well known fact that sustainable economic growth of any country is dependent on the growth and development of the MSME sector.

This article is extracted from ZCSMBA’s position paper on the implications of re basing the kwacha on the MSME's

Last modified on Friday, 20 April 2012 14:54

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