Dr Situmbeko Musokotwane says Zambia in the coming months faces a “real risk” of resorting to print money so as to artificially meet its financial obligations.
In a write-up titled ‘Zambia’s debt crisis: watch out for high inflation’, Dr Musokotwane, an economist with very high expertise in monetary economics, observes that Zambians had already been stressed by rising prices, deteriorating business climate, stagnant incomes and yet “facing numerous new and increasing levy payments to the government”.
He says delaying salaries might therefore lead to labour discontent which the government was unlikely to want to see as “we approach the election year, 2021”.
“The chances are therefore high that the government could start defaulting on some loans and obligations so as to meet local needs. But the highest and most devastating of all risks facing our country right now is that the government may start to print money so as to artificially meet its financial obligations,” Dr Musokotwane says. “Such a situation has materialised before in this country and in countless others who faced similar quagmires. As everyone knows, taking the route of printing money quickly leads to loss of value in our Kwacha and rapidly rising inflation akin to what happened in Zambia during the 1980s and the 1990s. It is the real risk facing Zambia in the coming months. Finally, it begs the question: does this government have the capacity to resolve the problem of the national economy? Clearly not; otherwise they would not have caused the problem in the first place! The problem of the debt crisis and all its negative effects has been created by the PF against all advice. Since 2012, observers have been warning the government against its unsustainable appetite for borrowing. Local economists, opposition parties, the international media and international organisations like the IMF and the World Bank all called for caution. The advice fell on deaf ears.”
Dr Musokotwane says the government, even now, still underplays the existence of a debt crisis in the country.
“Now and then, casual references are made to the debt situation but the words ‘debt crisis’ have been angrily refuted or denied,” says Dr Musokotwane giving a summary of negative effects of the debt crisis:
“Firstly, a higher than usual number of businesses in Zambia will be closing for lack of customers. This includes both big and small businesses. This is caused by reduced availability of money in the country since large quantities of it will be externalised to go and service debt outside Zambia. In short, there is little money in the country. Secondly, some critical government expenditure will decline for lack of funding. Completion of on-going infrastructural works will suffer the same fate. Thirdly, the national foreign exchange reserves will continue to decline. In 2013 the reserves were in excess of US$3 billion. Today, the Bank of Zambia has only about half of that amount in reserves. With the reduced levels of reserves, our kwacha is at [a] very high risk of losing value against the US dollar and other currencies anytime. In short, Zambia does not have enough money to meet the important expenditure categories of running government, development projects, debt servicing and public salaries. In the past few years, the government handled the problem of cash shortage by suspending some development projects… Meanwhile, debt serving, which is the main cause of all these problems, has been spared as the government remained current on this expenditure item. By making debt service payments the number one priority, the release of funds for salary and wages will often be delayed. This is why salary arrears have emerged. Once salary arrears start, it is not easy to dismantle them within months because they are huge.”
Unfortunately, Dr Musokotwane is very right. And the picture he paints is not even complete.
We seem to have forgotten what money is. Money is not a piece of paper. Money used to be something of stable intrinsic value that could be used to buy other goods.
The invention of money was a good thing because it replaced a cumbersome barter system used in commerce. If you grew cassava and wanted fish, you had to find a fisherman who wanted cassava and that was very cumbersome and commerce was slow.
Somewhere along the line our ancestors decided they would accept gold in exchange for goods. Thus, money was invented. Commerce and trade took off making civilisations wealthier. Why gold? It was a stable commodity and it kept its value relative to goods. More importantly, it couldn’t be easily made, unlike our paper money. It worked pretty well for thousands of years.
The thing we need to understand is that we had to produce something in order to get money. Whether it was cassava, fish, labour, or something else other people wanted, we had to offer something of value to our fellow human beings. Nobody gives away fish for free.
But today the foundation of our current monetary system is literally just a nice piece of paper. It’s not based on production and it’s not backed by anything. The Bank of Zambia can print money – more likely by a keystroke – at will. This is why it is so easy have inflation.
Yes, people want Kwacha … until they don’t. The Bank of Zambia today can just print money at will and some people think like a little machine the economy will respond and everything will be fine. Not so. If we could create wealth by just printing money, then we could end poverty so easily.
Why do prices go up when the government prints money?
First, it’s important to not confuse prices rising and falling because of supply-demand issues. “Inflation” is when pretty much all prices rise in an economy. If there is an oil shortage and fuel prices go up, assuming the supply of money is stable, the extra money spent on fuel means you have less to spend on other goods and those prices go down as fuel prices go up.
All prices go up because more money is created (supply) than people want (demand).
Central banks and governments create new money mainly by “printing” it (quantitative easing). They buy treasury bills and notes from major banks and pay for them by a few keystrokes that increases the bank deposits of the seller banks. They also create money by lowering interest rates which makes borrowing more attractive to bank customers.
Banks create money by lending their customers’ deposits.
Thus, money is created out of thin air.
So, not only will prices go up but the entire economy will be distorted by money printing. Some economists say that “inflation” is not just prices going up, but it is actually money printing itself that is “inflation” and market distortions and rising prices are the result.
Zimbabwe is one of the best examples of modern hyperinflation where central bankers had no clue what they were doing because they didn’t understand what money was. They just printed and printed. The government used the new bills to pay for stuff and, there being not accompanying increase in production, prices climbed geometrically and Zimbabweans soon realised that the paper was worthless and they got rid of it as soon as they could because they knew that prices would be higher the next day. As prices climbed, their Zim dollar bought less, and the end result was their famous $100 trillion bill. Ultimately goods disappeared from shelves and the economy collapsed.
Is that the way we want to go?/LM
Chris K. Tshani
Sent from my Android phone with mail.com Mail. Please excuse my brevity.