2014 has been very tough on the wallets and purses of people in Zambia. It started out with the prices of talk-time and clear-beer both being raised in line with pronouncements in the 2014 National Budget. To add insult to injury, the Kwacha then experienced an aggressive weakening against major global currencies between February and June this year:
1. Fuel price hiked
Zambia does not produce its own petroleum products meaning that fuel has to be imported from oil producing nations – using dollars. A weaker Kwacha increases the cost of importing fuel. The prices of petrol, diesel and kerosene where increased by 7.2 percent, 8.75 percent and 9.54 percent in April as a result of the weakening Kwacha.
2. Higher import costs
Zambia does not make a lot of its own products - from toothpicks to cars. Buying a used car from Japan for $8,000 on January 1 2014 meant paying the Kwacha equivalent of K44,080. But if you had bought the same vehicle for the same price on September 5 2014, you would have paid the Kwacha equivalent of K50,240 – K6,160 more because of currency depreciation. The same applies to other things that are imported. This is a double whammy for car owners who also have to pay more for fuel.
3. Higher school fees for students studying abroad
Parents have to pay more in tuition and upkeep (fancy word for pocket money) for students who are studying in the USA, UK, a number of countries in Europe and Australia as well. This was especially painful for people making tuition payments towards the end of May when the Kwacha had depreciated by 28 percent, 26 percent, 29 percent and 33 percent, respectively, against the US dollar (K7.04), Euro (K9.58), British pound (K11.78) and Australian dollar (K6.51).
4. Negative impact on company earnings
Zambeef is one of the 23 companies listed on the Lusaka Stock Exchange so the general public is privy to their financial statements and plenty of other information. Exchange losses of K29.5 million were one of the main reasons that the company made a first half 2014 loss of K38.3 million (same time last year they made a profit of K34.8 million). Of course there are a lot of other companies negatively affected as well, privately and publicly held.
5. Higher servicing of the Governments foreign debt
The Government has felt the pinch of a weaker currency as well this year. It had approximately $4.2 billion dollars of foreign debt outstanding after issuance of the $1 billion Eurobond in the first quarter of the year. Interest payments have to be paid in dollars so when the value of the Kwacha declines, more of it is required to buy dollars used to repay interest on foreign debt.
6. Higher interest rates
In the first half of the year, Bank of Zambia used its ‘monetary toolbox’ to help strengthen what was at one point the worst performing currency in the world. This gave the Kwacha strength but also resulted in interest rates rising significantly – commercial banks could charge as high as 28 percent on a loan whereas micro-finance institutions could go up to 46 percent.
The fundamentals that drive Zambia’s economy are still quite strong. However, the recent Kwacha depreciation (now more than ever) highlights the need for a much stronger manufacturing base which needs more entrepreneurs to take charge and start making quality products that consumers can buy HERE rather than relying largely on imports.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *