“There’s no underlying need for Zambia to build reserves beyond the current US$1.8 billion hence the surplus should be directed at infrastructure investment to stimulate the local economy, observes Standard Chartered Bank head of research for Africa Razia Khan. And Khan has said there are possibilities of extra-budgetary expenditure in the run-up to the 2011 elections that may see the government to overshoot its planned domestic debt issuance.
Khan challenged the government to put in place measures that would ensure the economy to be ‘firing in all cylinders’ to result in satisfactory and meaningful growth that would subsequently reduce poverty levels in the country. Last year, Zambia recorded US$1.8 billion, which is about four to five months import cover due to increased inflows from the International Finance Institutions, mainly the International Monetary Fund (IMF), which boosted the country’s foreign exchange reserves.
However, financial market experts and analysts have questioned the motive behind the continued stockpiling of the reserves, saying Zambia should just save slightly above what is required as import cover and use the surplus for infrastructure development such as roads. It is also understood that there were several challenges in maintaining large currency reserves, which included fluctuations in exchange rates, low international interest rates and reduction in purchasing power of the reserve currency due to inflation.
The financial experts, who preferred anonymity, stated that there was no need for Zambia to continue stockpiling foreign reserves when the country’s infrastructure capacity which is key to enhance economic growth was not being developed. “Why do we want to keep so much money doing nothing instead of investing it into infrastructural projects that will help stimulate the country’s economy?” questioned the experts.
Commenting on the issue and giving a foreign exchange market outlook for Zambia last week, Khan said the Zambian Kwacha had started 2010 with a powerful advance, leaving the US$/kwacha at 4.2 per cent below turn-of-year levels and at 22.7 per cent below the K5,750 which was the 2009 peak.”
And that 22.7% represents the Kwacha income loss we’ve suffered in a year as a result! What a lot of sense this piece makes, though I don’t suppose anyone will listen!