Many Zambians have been asking questions about what UPND President Hakainde Hichilema meant when he told the nation during a radio programme recently that the kwacha will immediately appreciate when he becomes President. Some doubting Thomases believe that it is next to impossible for the battered kwacha to immediately pick up when HH becomes President in August this year.
What HH said is not fiction. It is based on sound economics. Here is why.
The first reason why the kwacha will appreciate is because of a market intangible commodity called “CONFIDENCE ” in the economy. Many players in the economy look forward to the type of leadership that will run the economy to make decisions in the foreign exchange market. Based on their EXPECTATIONS, the players in the market can decide to buy or sell foreign currency. If in their assessment of the type of leadership that will drive the economy, they conclude that the economy is going to get worse, they will quickly buy foreign currency in preparation to leave the country or indeed store their hard earned income in a stable and convertible currency such as the United States Dollar. The cumulative high demand for the foreign currency will result in the kwacha depreciating or losing value as supply of foreign currency will be less than demand.
On the other hand, if players in the market assess the new leadership and find that they have the capacity to improve the economy , they will develop CONFIDENCE in the economy. Based on their EXPECTATIONS, they will take it easy and prepare to remain in the country. There will be no need for them to panic and buy foreign currency to leave the country. Some of the investors sit on the fence waiting to see how the elections go before committing themselves to huge investments in the country. The moment they know that the correct leadership has taken over the running of the country , they will develop confidence in the economy and pump huge sums of money in the economy in terms of investment. The cumulative total of their decisions will result in increased supply of foreign currency in the market , resulting in appreciation of the kwacha as the supply of foreign currency will be more than the demand.
It is therefore sound economics to expect the kwacha to immediately appreciate when HH takes over the leadership of this country in August this year because many players in the market are expecting change of leadership and have expressed confidence in the leadership of Hakainde Hichilema.
The second reason why the kwacha will appreciate is tied to the first explanation above. Huge foreign direct investments in the Zambian economy will improve the supply of foreign currency in the market. President Hakainde Hichilema has already demonstrated his ability and commitment to attracting investors to Zambia. During his trip to the USA recently, he managed to secure about $25 billion in investment pledges upon his ascendancy to power. This amount of $25 billion is actually almost equivalent to Zambia’s current total of all the goods and services produced in the economy ( which economists prefer to call the Gross Domestic Product or GDP). The impact of such huge investments in the economy will be to increase the supply of foreign currency in the market. There will be too much foreign currency in the market compared to demand, resulting in the appreciation of the kwacha. Apart from the kwacha appreciating, a lot of employment will be created leading to better standards of living.
The third reason why the kwacha will appreciate is that the leadership of Hakainde Hichilema will embark on massive exports . The production of goods for export will bring in foreign exchange. It is only through the massive export of value added products that the country will ensure sustainable foreign exchange supply. Obviously , the current Patriotic Front regime has also been singing about value addition, diversification and exports. The bottom line is that they have been in power for 10 years and have failed to do it. They have no capacity and no leadership to manage the economy.
The fourth reason and perhaps the most critical in the Zambian situation to strengthen the kwacha is to manage the choking foreign debt.
Currently, most of the foreign exchange being generated by the country is going towards foreign debt repayment. Under such a situation, there is scarcity of foreign currency in the market because demand is more than supply of foreign currency. For as long as the foreign debt is not resolved, the kwacha will continue to depreciate.
To resolve the current foreign debt crisis requires new leadership. The current leadership has lost credibility in the eyes of lenders. They cannot be trusted to restructure the debt or stick to any agreement on debt management.
Part of the solution to resolving the debt crisis and the depreciating kwacha is to change the leadership of the country in this year’s presidential and general election.
President Hakainde Hichilema has already put his cards on the table on how he is going to tackle the debt crisis.
First, he will place a moratorium on debt. This means that there will be no further reckless borrowing. Secondly, he will seek a debt write off from as many lenders as possible. Thirdly, he will restructure the remaining debt by replacing expensive loans with cheap ones. The lenders can only agree to help Zambia if they have confidence in the leadership of the country. The current leadership has failed and will never manage to carry out any of the above actions. No donor will agree to enter into an agreement with the current Patriotic Front regime because they have lost confidence in them. They luck credibility.
In conclusion, the kwacha will stop running mad with the installation of a new leadership in Zambia through the presidential and general elections in August this year . A combination of short term solutions such as the kwacha appreciating upon the change of leadership and long-term solutions such as attracting foreign investors and debt management are the medicines for the kwacha’s madness.