Zambia's Strong Currency Brings Concern

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Pride in Zambia's surging currency is giving way to concern as farmers, manufacturers, tourism officials and aid groups start to feel the sharp edge of the strong kwacha.

The Zambian currency gained 30 percent against the dollar in just a few weeks last November, the result of high international copper prices and rising foreign investment. It is currently trading at about 3,600 to the U.S. currency.

Zambia's governing party has hailed the development as an economic victory. But others worry a strong and unpredictable kwacha is doing more harm than good to this southern African country, the world's 11th largest copper producer, where 73 percent of the 11 million population lives in poverty.

"It has a devastating effect on our sort of business," said John Henderson, a manager at York Farms, a vegetable exporter on the southern outskirts of the capital, Lusaka.

The sudden appreciation made his vegetables more expensive for international buyers and subjected them to new competition from cheap foreign imports. The company has laid off nearly 2,000 employees and is struggling to maintain its share of the European market amid high fuel prices and fierce competition from farms in Kenya and Tanzania.

"Suffice it to say that there are 2,000 people on the street who would otherwise be employed," Henderson said.

Dealing with the downside of a rebounding currency is a dilemma few African nations have had to confront, but Zambia does have company. South African mining firms have struggled to maintain production levels amid a strengthening rand, which took a downward turn recently against the dollar.

Zambia's key copper mines, which account for more than 60 percent of national exports, could also suffer exchange rate-related losses topping $80 million this year, according to the Zambia Business Forum.

"There's nothing wrong with a currency appreciating, but that sudden surge clearly has implications," said Ohene Nyanin, the World Bank's representative in Zambia.

Several factors contributed to the currency surge, officials say. One is high global copper prices, driven in large part by demand from China to fuel its booming economy. China and other foreign investors have also been pouring money into Zambia's mining industry.

The currency received another boost last year when international donors agreed to cancel all but $500 million of Zambia's $7.2 billion external debt to reward sound fiscal and economic policies and good governance. Foreign aid increased, and investors poured money into government securities late last year.

With elections looming, President Levy Mwanawasa has been touting the strength of the kwacha as proof of his government's fiscal prudence as he seeks a second term.

The strong kwacha has been a boon for retailers and appears to be making some imported luxury goods — televisions and second-hand cars from Japan and South Africa, for example — less expensive, according to a May study by the Zambia National Farmers Union.

Some manufacturers have taken advantage of the surge to buy inexpensive imported machinery, central bank Governor Caleb Fundanga noted in June.

Government critics counter, however, that the cost of staple foods has not changed much. And the quick appreciation, coupled with high oil prices, has squeezed firms in the agriculture and manufacturing sectors. Those businesses are struggling to gain a regional foothold and are critical to diversifying the mining-heavy Zambian economy, analysts say.

"No one is buying our flowers, our tobacco, our cotton. It is a huge problem," said Bruce Imboela, a development studies professor at the University of Zambia. "The current situation is really not sustainable."

Exporters who buy raw materials locally and pay their workers in kwacha appear to be suffering the most.

"You have to use more dollars to convert into kwacha to buy the raw materials," said S.B. Vora, managing director of Fallsway Timbers Ltd., which exports timber products from the border town of Livingstone to South Africa, Botswana and Australia.

Daniel Ball, a honey exporter who trains rural beekeepers in Zambia's remote Northwestern Province, is also struggling. Raised in Zambia by Canadian missionary parents, Ball has been selling his products to buyers in the United States and Europe for more than eight years. Now, he says, his company's earnings are down 60 percent.

"We've got farmers whose livelihoods are being seriously affected," Ball said.

Zambian hotels locked into dollar-based contracts with international tour operators are also seeing their profit margins shrink and raising prices accordingly, said David Thompson, vice chairman of the Tourism Council of Zambia and general manager of the Lusaka Hotel.

There are early signs travelers are thinking twice before spending their dollars in Zambia, despite its political stability, abundant wildlife and famed Victoria Falls, he said outside his office on bustling Cairo Road, the commercial heart of Lusaka.

The foreign aid agencies Zambia relies on to help combat poverty and HIV/ AIDS were also caught by surprise. They suddenly have up to 40 percent less money to achieve the same results. This could jeopardize future funding, since aid spending is often tied to performance.

The Health Services and Systems Program, a U.S.-funded non-governmental organization that provides technical support to the Health Ministry, is reducing its activities and cutting half its 76 staff due to the kwacha squeeze.

"The quality of support from NGOs will definitely also be affected," said Cosmas Musumali, who heads the program.

Industry groups say they want government to ensure a stable and predictable currency. Government insists market forces must drive the exchange rate and tells exporters to become more efficient.

The government is also dealing with a kwacha crunch, however. Appreciation has led to reduced customs revenues and budget red ink, spawning talk of spending cuts or higher taxes on foreign mining companies.

On the streets of Lusaka, many Zambians say they have yet to reap any benefits.

"The kwacha is appreciating on paper," said taxi driver Justin Siamafumba, who is struggling with high fuel prices. "We're still feeling the heat."