Why is the kwacha gaining value?
Those who follow the English Premier League (EPL) and are connected to social media platforms such as WhatsApp and Facebook must have seen an illustration that mocks the lack of consistency by Arsenal Football Club.
The illustration, showing an elephant clutching on to a tree branch upside down, has a caption that reads: “Arsenal on top of the EPL table is like an elephant on top of a tree. Nobody knows how it got there. But everybody knows it will fall.”
This illustration came to my mind when I noted that our beloved kwacha is gaining in value (appreciating) against the dollar and other major trading currencies. From requiring K765 to buy one dollar last week, this week one needs around K725 to get the green back.
Why is the kwacha gaining in value? This is the question many who have noted the trend are asking.
But, need we ask such a question when it is a seasonal occurrence and that the kwacha is only fulfilling its cycle?
What is happening to the kwacha is reminiscent of events of July last year when, between July 1 and 29, the kwacha fell or lost value by around 12 percent against the dollar from buying one dollar at K453 to K509 as of July 28, according to RBM figures.
That time, RBM accused banks of being “driven by greed”; hence, it restricted the daily movement of kwacha within a certain band.
Briefly, RBM attributed the kwacha’s sharp depreciation or loss in value to speculative tendencies by some dealers in authorised dealer banks (ADBs) entrusted with the responsibility of working out the exchange rate values.
Exchange rates—the price of a country’s currency, such as our kwacha, in relation to the currency of another country or region like the euro—are critical and sensitive.
In an ideal situation, values of exchange rates, like all other commodities, should be decided by market forces of demand and supply. This means that where the demand for the dollar (or any other currency) exceeds what the banks have in stock, then the price or value should go up.
When the kwacha depreciated in July 2015, the irony was that it was losing value at a time the marketing season for tobacco—touted as the country’s main foreign exchange earner—was in progress.
Fast forward to March 2016, we are in an almost similar situation where, as an economy, we have not exported or produced anything substantial to earn the forex to stabilise our battered currency.
There are several schools of thought among “idiots” discussing the kwacha’s apparent stability. For example, some are suggesting that with the tobacco marketing season around the corner, some dealers in ADBs could be playing around with the rates so that they buy the dollars at rock-bottom rates from poor farmers.
Personally, I have known most of the financial market dealers to be fine bankers not driven by greed. However, having followed the case of one fine London banker, 36-year-old Tom Hayes, who was found guilty of manipulating and fixing the London international interbank lending rate (Libor) to make quick bucks, anything is possible.
Back home, one financial market dealer confided to me sometime back that in the wake of cut-throat competition for forex, some dealers or banks were deliberately distorting the market. That was at the time the kwacha was gaining value against all odds.
From the look of things, speculation seems to be the driving force behind the kwacha appreciation. The true value of the kwacha is being distorted. This is bound to haunt us one day or another; as they say, you can run, but you cannot hide.
The Arsenal FC illustration sums up the false hopes the Gunners give their fans year-in and year-out only to falter when it matters most. In the same way, the kwacha is gaining in value, but nobody can tell exactly why.
