[Please don’t send panic signals in the market,  the economy will soon be just fine… Trust me…]

Signs of panic show up in many forms and last Sunday I read the Bank of Zambia Governor’s statement on the recent developments in the foreign exchange market and to say the least, it’s a serious display of panic.

Our BOZ Governor is dead scared. He is merely telling us an old tired metaphor; “When China sneezes we all catch a cold” but went on to suggest absurd solutions like we should cut off our noses to get rid of the cold.

Below is an excerpt of what he said…

“The movements in the exchange rate are sending clear signals that our economy needs an EXPANDED EXPORT BASE and a reduction in UNNECESSARY IMPORTS. We all need to engage in expenditure-reducing and expenditure-switching activities going forward.”

What solution in hell is that?

Very disappointing…

Dr Kalyalya is supposed to be an economist and he should by now know that none of what he’s suggesting as a solution can heal our current forex market blues. In fact it’s myopic.

My usual disclaimer: I am not an economist or financial analyst though my last born daughter is both; but you don’t have to be an economist to realize the current correctional trends in world markets cannot continue for long. The global economy is interlinked and Kalyalya should be aware of an equally valid metaphor; “the butterfly effect.” This means bad news of the Zambian copper mines going bankrupt could send world copper prices skyrocketing and cause similar devastating effects on the world economy.  And to propose that we should expand our export base and reduce on imports is not only a simplistic solution but clearly shows short-sightedness and a serious lack of a helicopter view of the world markets at the BOZ. (I’m really sorry Dr. Kalyalya—you should know better).

First of all Dr. Kalyalya quite correctly said the world trends have affected the entire world markets and closer to home he mentioned Africa’s largest economy South Africa (sorry Nigeria) has also been badly hit, with the South African rand reaching its lowest R14.2 to the greenback in recent two decades. So we can rudely ask Dr. Kalyalya…, is the export base of South Africa not large and mixed enough to have cushioned the impact? If it is; which is a true statement to make, what then caused the fall of the rand?

The Governor’s statement also mentioned Ghana, a country whose top 5 major export products are Gold 44%, Crude petroleum 18%, Cocoa beans and paste 17.5%, manganese ore 1.3%, then he mentioned Tanzania whose exports are Gold 33%, raw tobacco 5.9% precious metals 5.6% coffee 3.4%Coconuts, Brazil nuts and Cashew 3.3%, and Uganda exports coffee 17%, refined petroleum 5.1%, cement 4.1% Fish fillets 3.9%, Broadcasting equipment 5.4%.

But when we look at the Top 5 export destinations in these countries, they’re all somewhat intertwined:

South Africa exports to: China 8.3%, United States 8.1%, India 7.8%, United Kingdom 7.2% other areas 6.7%

Ghana: exports to: South Africa, 27%, United Arab Emirates 9.9%, Switzerland 7.9%, France 7.3% and Italy 6.7%.

Tanzania exports to: South Africa 19%, Switzerland 15%, India 8.5%, China 8.3% and Kenya 6.2%.

Uganda exports to: Sudan 15%, Rwanda 8.8%, Democratic Republic of Congo 8.7%, Kenya 5% and United Arab Emirates 6.5%.

Zambia’s top 5 export destination (excluding Switzerland) include: China 48%, South Africa 10%, Zimbabwe 8.6%, South Korea 6.0% and Egypt 5.6%. The major export products are refined copper 44%, raw copper 29%, corn 5.5%, raw tobacco 4.9% and raw cotton 2.5%. Data Source:

So as we can see, China is the common export destination, but we also have quite a large bouquet of export products and export destinations other than China spread amongst the 5 countries mentioned in the Governor’s advertisement to the extent that even if Zambia was to expand its export base and include a small percentage of every other product currently exported by the other 4 countries, we still could have found ourselves in the same deep forex trouble.

And if the counter argument be that it’s the reason these countries like Zambia are in trouble is the exports base spread is inadequate then this would trigger the next question  which is, does a new export base spread that has not been affected by the current worldwide markets decline exist? The answer for our purposes is No…except for the moment, an opportunity/window has occurred in the energy export sector, and if Zambia had been well placed in other energy sources other than hydro, now would have been the time to mine and profit in the energy sector. What I am trying to say is that; not a single economist not even the worlds renown Nobel laureates were able to forecast and forewarn the world about the current economic down turn…period. So Dr. Kalyalya was just shooting in the dark hopping to say something that would make sense that would in turn make him look reasonably well informed and on top of the Zambian forex disaster when in fact not.

Dr. Kalyalya then went on to suggest something even more preposterous when he said we must take action against UNNECESSARY IMPORTS. Again, if we may ask him a silly question; what should we classify as “necessary imports?” Who will determine what is necessary with one’s own needs and desires? Let’s ask another silly question; we have seen Dr. Kalyalya in a top of the range Mercedes Benz and SUVs, now is he suggesting somebody should restrict those Zambians with their own hard earned kwacha cover even when its trading at K10 to the dollar not to aspire to drive the same model cars as Dr. Kalyalya? He wears designer suits, and neck ties, is he suggesting everyone else should tone down and stop buying and wearing similar clothes as his—if they can afford them? Or is Dr. Kalyalya saying we should all be Fiating around or is it ‘Toyotaring’ around while he and others go about in Mercedes Benz and Large SUV 4X4 cars?

It is possible Dr. Kalyalya meant we should try as far as possible to refrain from importing wasteful luxury goods and reserve the scarce foreign exchange to urgent industry raw materials? Fine, so who’s going to determine what is urgent or important class of industry raw materials? From the tone of the statement, one can see Kaundanomics taking shape in Kalyalya’s thinking process and I guess he already has an answer to that. It would not surprise if he announces some form of exchange controls and import licence restrictions. But I can assure him; should that warped economic system be allowed, he should forget about expanding the export base and economy despite copper prices bouncing back soon to beyond breakeven.

But what’s making most Zambian economists pessimistic on copper is when they read analysis such as in the MetalMiner’s monthly copper forecast; “Copper is expected to end third quarter 2015 near its lowest levels in 5 years.” Or; “copper-price-forecast-july-2015-china-demand-rules-all”. Some experts also argue that copper is near a support zone – but supports are there to be broken. Furthermore, other forecasters also say “we don’t see strong trading volume supporting prices as we near the end of Q4 and this means selling might again overcome the buying pressure, causing prices to fall more.”

“Fundamentals don’t seem to differ from the price action. The copper market seems to be shifting into a supply surplus, or at least market watchers do not foresee a significant deficit.” But the LME inventories are telling a different story, copper inventories have remained at their lowest levels, yet these analysts say “we shouldn’t pay attention to this since inventories have been falling with prices since their peak in mid-2013.”

But they create more doubt in their analysis when they say: “Because copper lacks strong fundamentals, we wouldn’t expect copper to make significant moves upward while commodity prices remain low. Buyers should keep riding the trend down and only hedge if prices move above $7,500/mt.” But  seriously, already we can see one major commodity, crude oil, has left the U$40/barrel mark and heading past U$48 towards U$50/barrel.

These financial analysts and market forecasters can’t just admit that they’ve had no clue about what caused the copper, oil and other commodity price movements since 2013 when the downward price trend began in earnest.

But, mark my word; copper prices are coming back up. Dr. Kalyalya shouldn’t panic and make silly economic decisions that’ll derail the economic rebound. He should exercise restraint and think through his basic economics 101 about world markets because by 4th quarter end we should start to see a significant rebound in copper demand and prices. Copper prices have to quickly start to go up unless the Chinese and other western nations want to starve their natives by stagnating their economies—and only a foolish economist would dispute this argument— but here is why we’re optimistic:

The Chinese did not accumulate U$4trillion in reserves to become the second largest economy in the world by acting foolish or copying the western economic models to the letter. The Chinese economy has to rewind to being more low value goods export driven than consumer dependent. Their experiment with the American model of growth based on local consumption has obviously been tried too soon for the majority Chinese to participate in the economy and as a result it has overheated so they must wait until every other Chinese is ready to start to consume at the same rate as the low wage manufacturing export receipts used to produce and contribute to its rapid double digit economic growth rates.

Unfortunately the Ghost cities they built and the rural people they brought in truck loads and forced to occupy them so as to prop up an organized consumer spending economy will continue to remain empty and the local consumption based economy they hoped to generate will remain subdued meanwhile the average Chinese wages for the more than 650 million wage workers have grown and this has made their exports expensive.

In case you’ve forgotten, since 2011, the Chinese economy has been undergoing an international monumental transformation from an export-dependent manufacture of low-margin trinkets to a consumption driven economy powered by its own internal growth.

It’s a well-known fact the Chinese leaders don’t like being dependent on the west for its exports, so it intentionally began focusing on growing it’s over one and half billion population domestic demand based on raw materials and semi-finished goods from emerging countries where they’ve invested heavily.

China’s 12th Five Year Plan (2011-2015) prioritized more equitable wealth distribution, increased domestic consumption, improved social infrastructure and social safety nets. The plan was representative of China’s efforts to shift its emphasis toward domestic consumption.

Then what has happened is that wages in China have been growing by around 12% a year in real terms over the last decade. That’s been making Chinese exports more expensive, especially compared to other lower wage Asian neighbours like Vietnam and Cambodia. To get back to low value export competitiveness, unlike what western economists in their mainstream media are telling us, the Chinese Yuan, despite the U$4 trillion in reserves, had to be artificially devalued otherwise what other reasonable explanation would pass for the action which at first sight seems a paradox?

So we have a situation similar to what the Americans were complaining about when China low wage manufacturing began overtaking most western economies— lost American and other western factories to lower wage China, the Chinese leadership have realised that they can’t suddenly lower wages to remain competitive as doing so would not only lower current spending habits, but it would impact negatively on their consumption driven economic growth model already in place, the solution is to devalue the Yuan and continue on a two pronged growth model or they’ll start losing most of their low margin labour intensive export- oriented- manufacturing that has been the base of its economic growth and employment generation over the last 20 years over to lower wage economies. Thus the drop in exports arising from a decrease in labour intensive manufacturing exports as a result of placing emphasis on a consumption driven economy since 2011 has been the major cause of China’s gap in its gross domestic product, drop in its August  Purchasing Managers Index PMI  and hence the drop in demand for commodities including copper.

So Chinese leaders have realized that lower end labour intensive export manufacturing has to continue on its growth trajectory for the their consumer driven economy to continue on its expansion path and this means Chinese demand for ferrous and none ferrous metals and other commodities can only start to grow and not decline. This is the reason we’ve seen oil begin to go up and we’re optimistic copper demand and prices are headed for a rebound before this year end.

And any economist reading the mainstream media who also agrees with them and disagrees with this thought process is bound to lose his shirt. When copper prices recover, we are also bound to see the dollar lose its present stronghold on all major currencies and of course the kwacha will begin to strengthen. And Dr Kalyalya can take this to his bosses at the IMF or whoever is telling him that nonsense in the advertisement, and tell them to f*** off.

Like I always keep saying, I’m not an economist, you can take my advice or leave it, but trust me… don’t send panic signals in the markets- whichever way you look, the Zambian economy will soon be just fine…

Just a thought,



Categorized | Analysis

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