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Zambia: Rethinking AGOA summit

Published date:
Monday, 25 April 2011

As Zambia awaits to host the African Growth and Opportunities Act (AGOA) Forum this year on June 8 and 9, it is hoped it would rejuvenate trade between Zambia and the US under AGOA.

Trade between Zambia and the US has increased to about US$1.4 million in 2010 from $121,000 as recorded in 2009.

Consequently AGOA to mostZambian businesspersons has been interpreted as a commodity export stimulus package for Africa, giving it an opportunity and gate way to earn US dollars by trading with the US.

Hence AGOA has been cast as a commodity based incentive initiative. This is well illustrated in the views of the Organic Producers and Processors Association of Zambia (OPPAZ) chief executive officer Munshimbwe Chitalu who indicated Zambia can earn about $1.3 billion from groundnuts, another $25 million from honey and $450 million from pineapples and otherorganic exports through AGOA.

Despite trade between Zambia and the US being insignificant, it must be remembered that AGOA was born at a time when China was not as economically strong as today.

Therefore, the eco-political tone of AGOA has changed from a US viewpoint.

The long term worries of AGOA for the US is what will happen if trade real grows within the AGOA framework? Will the US accept African nations exporting commodities to it in return for US dollars that end up in Africa? When these US dollars end up in Africa will they be spent in China on its cheaper commodities, making again China an even stronger economic power?

Will the US then be forced to issue treasury bills to China to get back its liquidity to avoid another economic melt down as experienced in September 2008?

The US is intending to increase its borrowing ceiling, but its Congress is yet to decide on the new level as Republicans and Democrats battle it out in give and take concessions.

If the US fails to raise the borrowing ceiling, while trying to cut down on its expenditure, the US, government by June this year may default on its debts.

Thus from an American policy point of view AGOA's failing is a blessing, meaning no US dollar out flows that end up in China.

However, for the US AGOA serves as a powerful public relations aphrodisiac to re-ignite theromanticism of US concerns for African economies in the face of growing Chinese influence over African economies and Africa's resources.

For African firms the infatuation of earning US dollars and concessional access to US markets is the carrot to escape local markets and their weak domestic currencies.

A new AGOA

The principle foundation of AGOA is that it is meant to add value to African economies and not individual firms and this requires newpolicies that think outside the AGOA commodity box.

A new approach in AGOA policies could serve as the magic wand to rejuvenate not only Africa's economy, but the US economy to usher in a whole new era of prosperity to such an extent to rival the economic progress that the Chinese economy has made with its trade with Africa.

The two keys words to this new era of prosperity between Africa and the US under AGOA are 'commodity' and 'stimulus.'

As noted in the current AGOA mindset, commodities are viewed as groundnuts,pineapples, honey etc but it must be realised that money too is a commodity that can be bought and sold.

If AGOA is to stimulate economic growth in Africa, then as seen in the financial crisis of September 2008 'stimulus packages,' as trillions of US dollars were pumped into the US economy to avoid a full blown meltdown, Africa currencies must be part of the AGOA formula.

Money is important in economic growth as observed in the Industrial Revolution was not one of machinery that always existed, but financing the production of machinery and products.

To this, the secret to the Industrial Revolution was in banking as British sterling pounds carried more assets than liabilities as compared prior to the Industrial Revolution.

For AGOA to succeed a revolution in banking and finance between Africa and the US has to occur.

From a Zambian point of view, allowing Zambian Kwachas to be accepted to be changed into US dollars in the US rather than in Zambia alone is the key to enhancing trade under AGOA.

The question here is what would a US businessperson want with an African currency like a Kwacha? Well a Kwacha can buy a bar of copper without an out flow of US dollars from the US.

Secondly if AGOA allowed African currencies to be traded directly on US soil, Africa would start to economically communicate with the US at a cheaper price level.

It means the US financial markets would have to treat African currencies as convertible currencies and let price determine the degree of convertibility.

Thus if an American wanted goods fromZambia he or she would buy those goods in Zambian Kwacha meaning changing their US dollars into Kwachas just as Europeans do when buying goods from the US they need to change their Euros to US dollars first.

This pushes US dollars inflows directly onto Zambia's money markets to which every Zambian person and firm would have equal accessto buy and then externalise if they desire rather than into individual company accounts that side step Zambia's money markets.

By side stepping the market it reduces the available volume of US dollars on the market. This creates an artificial shortage which raises the cost of buying US dollars in Kwachas and increases the cost of doing business in Zambia.

Consequently in currency cast AGOA system two exchange rates would manifest. The first would be in the US in which Kwachas would be changed into US dollars against which their supply and demand would create a US dollar/Kwacha exchange rate in the US.

Similarly the supply of US dollars in Zambia against Kwacha cover offered would give a Kwacha/US dollar exchange rate in Zambia.

If the exchange rates between the two countries vary, then exchange arbitrage, the buying of one currency in a cheap market and selling it in the dearer market would occur, to equalise quotations between both markets.

Naturally a free cross rate floating exchange system would manifest driven by African currency trade to buy commodities between both countries.

The current failure of AGOA is reflected in Zambia's current exchange rate system. As observed the April 19, exchange rate parity of the US dollar and the Kwacha was about K4,710.21 per US dollar, while the sterling pound was worth K7,635.19.

Dividing the Kwacha value of the sterling pound with the US dollar Kwacha value, one gets the exchange rate between the two Trans-Atlantic nations.

This effect is known as a fixed cross rate and implies Zambia's money markets have the same trade value and foreign exchange currency liquidities day in and day out as the two Trans Atlantic nations domestically in Zambia'smoney markets.

The reality on the ground does not reflect this. This consequently over prices Zambian goods and inhibits trade with the US.

However, using a free floating cross rate exchange system AGOA offers opportunities to both countries as noted in 1948.

Then in 1948 the International Monetary Fund (IMF) managing director M. Gutt at Harvard University on the February 13, 1948, presented a paper entitled 'The Practical Problem of Exchange Rates.'

He said,"the official direct sterling-US dollar rate ruling in Britain and the US is one sterling pound to $4, but the lira-sterling and lira-US dollar direct rates are such that the sterling pound-US dollar cross-rate in Italy is one sterling pound to $2.6.

Americans found it cheaper to purchase goods from the UK via Italy until the IMF stepped in and imposed the IMF fixed cross-rate system in favour of the UK and not Italy nor the US.

Corporate Britain lost out on the increased consumer demand, as Americans demanded from the UK British products that appeared cheaper through the Italian money markets.

Corporate America also had to pay more US dollars to import goods direct from the UK, rather than at a reduced cost via Italy.

Corporate and ordinary Americans at the end of the day, because of the IMF fixed cross-rate system, had to pay out more US dollars for the pound, while corporate Italy lost out on US dollar in flows because the market price of the US dollar to the sterling pound was temporary in apseudo-free floating lira driven market system based on available lira liquidity against US dollar inflows, and sterling liquidity as found in Italy's money markets as opposed to the different price levels set on the UK's money markets that had different liquidities and cash flows.

Thus for AGOA to be driven by trade its exchange rate price level between the US and the kaleido scope of African currencies and their money markets with different liquidity levels it must reflect the economic and financial realities of African economies as observed in the 1948 condition which would occur amongst African states with the US.

This would make the price of commodities cheaper for corporate America to buy through other 'Italy' like African countries.

What free floating cross rates implies for AGOA is that if the US is to get around the problem of acquiring cheaper imports to deal with China's cheap exports so as to be more competitive, it entails the US getting a cheap "1948 sterling pound" being a Kwacha under AGOA.

For Zambia and in particular for Africa, it translates into a greater demand for its products at prices driven by trade based on their currencies linked to commodities produced in their countries to establish economically viable exchange rate prices between both countries.

Naturally the question that arises under AGOA is can Zambia, for example, sell copper or other exports to the US and make a profit in Kwacha?

Cheaper Raw Materials

To understand the selling of exports like copper and its derived price, a look at the London Metal Exchange (LME) is necessary.

The LME clearing policy permits only the use of the sterling pound, the new Euro, the Japanese Yen and the US dollar.

Neither the Zambian Kwacha nor the South African rand including other African currencies of other African producers that have supplied the LME with commodities for over a century are still banned in this age of liberalisation.

It is this financial racism in global trade that AGOA can exploit by allowing African currencies to determine the price of their exported commodities and liberalise Africa's currencies to trade freely and allowing the degree of convertibility be determined by the exchange rate price.

As observed the permitted currencies of the LME are guaranteed by UK banks and not Zambian banks, which under AGOA US banks can guarantee African currencies together with African banks, as ninety five per cent of the world's tin, aluminum, copper, lead and nickel pass through the LME together with over $10 billion a day through broking firms.

It is all about the supply of copper against a demand for it by those willing to pay US dollars and not Kwachas or African currencies.

It is not about Adam Smith's forces of supply and demand of currencies buying each other to have access to their goods produced in their countries but it is about Benjamin's forces of supply and demand buying goods its economy never produced.

If AGOA is to directly buy African commodities with US dollars then it would add little to no value to Africa's economies and their currencies except to a few firms and individuals, while side stepping the positive socio-economic impact AGOA is meant to have on the ordinary lives of Africans and Americans.

As seen Kwacha liquidity has nothing to do with pricing copper prices. Added to this is that Zambia's exchange rate is driven by a small proportion of US dollars released onto Zambia's money markets for Zambians to buy against the remaining amounts of foreign exchange which gets directly externalised through its 100 per cent direct retention policy.

Consequently the exchange rate is not driven by the high levels of copper production, high copper prices and exports as the Zambian Kwacha is not used to buy its copper or exports nor does all the US dollar export revenue flow through Zambia's money markets to give equal access to foreign exchange by all firms and people in Zambia.

What drives Zambia's exchange rate are the US dollars converted on Zambia'smoney markets to Kwachas to cover wages and domestic costs and tax obligations.

This is one aspect AGOA has to address by having all exports to the US be paid for in Kwachas or in their African currencies of origin, meaning US firms changing US dollars to Kwachas on Zambia's money markets first and using those changed Kwachas to pay Zambian exporters if AGOA is to have a positive impact on African economies.

If the firms wish to externalise their Kwacha revenue they can go to the bureau de change and buy US dollars just like any ordinary Zambian.

A re-casted AGOA should seek 100 per cent forex retention only through Kwacha purchases for Zambia.

As noted, the LME in one day may sell 70,000 tonnes of copper, for example, at a price arrived through market forces of $10,000 per tonne.

The total revenue in a day would be $700 million for copper producers.

However, Zambian mining companies naturally demand $10,000 per tonne as if they produced and contributed 70,000 tonnes in a day, and earned $700 million.

Reality shows Zambia produces less copper, say for example 700 tonnes in a day, and thus can earn $7 million.

By demanding LME prices, Zambia is claiming a ghost production of 69,300 tonnes and a ghost revenue of $693 million.

It must be noted that the LME prices are based on an aggregate supply of copper from many countries whose currencies are ignored against an excessive US dollar liquidity when compared to Zambia's market parametres and Kwacha liquidity.

Zambia's Kwacha liquidity is worth in US dollar terms $500 million, with less in banks, against the $10 billion guaranteed by UK banks flowing through LME.

Looking at it another way is what would happen if the LME accepted only Kwachas as its trading currency.

Kwacha liquidity worth $500 million.

Would the LME be able to derive the same copper price of $10,000 per tonnes in US dollar terms based on Kwacha liquidity worth just $500 million?

With the same Kwacha in circulation that has to run domestic demands, at what price would be the price of copper if the Kwacha was the sole LME accepted currency?

Would the LME Kwacha driven price be less than a US dollar driven LME price in value terms? Would this be another 1948 condition?

What then would be the impact on markets prices and production costs in the US and their market edge of producing quality products if the Kwacha run the LME or copper was sold in Kwachas under an AGOA African currency payment for exports in a currency of origin policy?

The Kwacha would become extremely strong as US dollars flow into Zambia's money markets to be changed into Kwacha if African currencies were part of AGOA system.

This strength in turn would set he US experience a demand for its goods or machinery making African currencies depreciate as imports are purchased, making again their exports cheaper.

Hard commodities and hard currencies

It is here that if under AGOA the US accepted African currencies then exporters can depreciate the price of their exports in Kwacha as they have a greater production rate per unit time, against Zambia's smaller market currency liquidities which they can influence.

By stimulating Kwacha driven price discounts, exporters can influence the direction of the exchange rate and the corresponding value of their Kwacha in US dollar terms.

Having African exports being paid for in local currencies has to become the corner stone of AGOA, just as African nations pay for US imports in their currency, the US dollars.

The advantage of reducing the price of exports if payments are in Kwachas or giving a price discount to stimulate exports is important for economies like Zambia as it turns copper and discounted exports into hard commodities much like hard currencies.

As observed, Zambia has a Kwacha liquidity worth about $500 million as compared to the London money markets at around $1 trillion plus.

The impact of exports being discounted by 20 per cent if payments are in Kwacha to stimulate sales, indicates sudden US dollar inflows occurring into Zambia's money markets to be changed into Kwachas.

The impact of this would be greater on a $500 million liquidity economy than on a $1 trillion money market, if those discounted exports generated US dollar inflows worth, for example $50 million.

The effect of $50 million in one dayon a $500 million liquidity economy would be about 10 per cent and instantaneously felt, while on a $1 trillion liquidity economy it would be insignificant.

Consequently by discounting the price of copper below the LME US dollar driven price through a Kwacha driven price, it would shift capital flows into the Zambian money markets to buy cheap copper in US dollar terms below the LME price.

As this occurs, the Kwacha would appreciate as US dollar inflows would be injected directly into Zambia's money markets, rather than the current policy of 100 per cent direct retention that sidelines direct US dollars inflows into Zambia's money markets but into company accounts which in turn are externalised to China.

As the Kwacha appreciates in a Kwacha export driven system, this would occur until the Kwacha price of copper or exports would be equal tothe LME price or competitors in US dollar terms making ituncompetitive unless another discount is given or the Kwacha depreciates through imports from the US.

Increased imports would cause the Kwacha to depreciate making gradually Zambian exports cheaper and the process repeats itself as the Kwacha floats against the US dollar based on its products and their prices.

Copper producers and exporterts hus do not become dependent on LME prices, and fixing the Kwacha parity against the US dollar to remain locally viable, but can bring US dollar cash flows into Zambia's money markets by discounting prices in Kwachas to attract US commodity markets through AGOA and influence the rate through trade.

Thus a Kwacha would be as good as having a bar of copper. Cheaper commodities in US dollar terms for the US will definitely be the magic wand the US needs to deal with China's cheap products and thus make US products globally competitive in a win-win situation for Africa and the US under AGOA driven by African currencies.

Without free floating cross rates and the US accepting to pay for imports in African currencies to link trade with the prevailing economic and financial realities of value existing between African and American economies under AGOA, then AGOA will be like the current value of fixed cross rates seen across African currencies of the two Trans Atlantic nations, caging Africa's trade potential.

It's up to the Lusaka AGOA forum to make AGOA a dynamic synergy engine forAfrican economies and their currencies to create wealth.

David Punabantu

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