Dutch Disease
According to Investopedia, the Dutch disease is an economic term that refers to the negative consequences arising from large increases in the value of a country’s currency. It is primarily associated with a natural resource discovery but can result from any large influx of foreign currency into a country, including foreign direct investment (FDI), foreign aid or a substantial increase in natural resources prices. The origin of the term Dutch disease was derived from the Netherlands when oil resources that were discovered made the Dutch Guilder (currency of the Netherlands from the 17th century until 2002) to rise sharply while increasing unemployment and imports coupled with reducing capital investment. Below we shall discuss foreign direct investment and a substantial increase in natural resources from a Zambian perspective. We won’t discuss Foreign Aid as this could be a great opportunity for you to read Dead Aid, a New York Times best seller, by Dr Dambisa Moyo, the Harvard and Oxford graduate born in Zambia, which explains it in detail perfectly.
Foreign Direct Investment (FDI’s)
A large increase in the money supply because of FDI, which is usually in foreign currencies Like the Euro, Dollar or Pounds (which have to be exchanged to Zambian kwacha for use), causes high inflation in the long ran. Truth is no developing country can do without FDI’s, especially in a country were the capital markets are not well developed. FDI’s provide capital for long term projects like infrastructure and manufacturing which in turn provide jobs. In my analysis these were some of the factors that caused the high inflation rate starting the end of 2015 going into 2016. The Kwacha Appreciated in the short term against currencies like the U.S dollar and the South African rand at around K5.20 and K0.5 (50 ngwee) respectively in the years prior (let’s not forget the rebasing of the Kwacha had a psychological effect of appreciation too). This is because $1.25 billion Eurobond had to be converted to about K6.25 billion which was injected into circulation 2015. In the long ran (longer time frame) considering the previous Eurobonds of US$750 million in 2012 and the $1 billion in 2014 with the boost from a slowing global economy inflation hit 22.9% in Zambia (Trading Economics, 2016). This caused prices to rise astronomically because too much money was chasing few goods and services. The Kwacha depreciated against major currencies like the US dollar and the Great British Pound Sterling at K13.41 and K19.86 respectively. Conversely, infrastructure development encourages investors to live in the country and spend their profits rather than wiring the money back home. It should be noted that this was a great time to be saving in foreign currencies because your money would have doubled value and buying some goods and services denominated in Kwacha like Land were about 50% cheaper hence the saying the “RICH get RICHER”!! The only logical way to fight inflation in economics is to reduce money in circulation by a tight monetary policy.
Increase in natural resource income.
In case of resources, copper reached its highest price of about $10,000/tonne in 2008 and hasn’t reached that level since (Research Gate, 2014). It is important to point out the huge investment that took place in the North Western province, which saw the booming of new mines like Lumwana and kalumbila which attracted over US$1 billion investment which came with increased mineral taxes. With Copper and now other resources like Gold, Gemstones and Cobalt becoming our new sources of foreign currency revenues, this increases the value of the kwacha making other non-resource exports (sugar) to be non-competitive on the world market. This is why the Chinese Yuan is apparently devalued according US President Donald Trump. The Chinese have been funding infrastructure projects around the world like roads and buildings to name a few which have increased the government’s taxes on land and infrastructure. We can all admit that goods (including machinery) and services made at a lower cost abroad (china) have benefited the Zambian citizens across all the income classes with the pinch of disruption in prices. Prices of some goods and services have become lower e.g. cosmetics, ink/toner, production/construction machinery, house hold appliances, furniture, car spares, phones, laptops, clothes and toys which were usually bought from South Africa, the Americas and Europe (globalization a two edged sword) at the cost of manufacturing jobs in the Zambia. Some Zambians are silently complaining about the Chinese but we gladly patronize their businesses (what a paradox!). The truth is Zambian consumers have the right to purchase whatever they want, we will talk about this in detail in our next article about globalization and value addition which is the basis ECONOMIC WARFARE.
Works Cited
Research Gate. (2014, July). Research Gate. Retrieved December 5, 2018, from Reseach Gate Web site: http://www.researchgate.net/figure/Times-series-of-LME-copper-prices-US-per-tonne-and-BTP-recorded-live-copper-cable-cable_fig1_263848408
The Economist. (2015, July 24). The Economist. Retrieved dec 3, 2018, from The Economist Intelligence Unit: http://country.eiu.com/article.aspx?articleid=1823377766&Country=Zambia&topic=Economy&subtopic=Forecast&subtopic=Policy+trends&u=1&pid=833450867&uid=1
Trading Economics. (2016, December 7). Trading Economics. Retrieved December 4, 2018, from Zambia inflation Rate: http://tradingeconomics.com/zambia/inflation-cpi
About the author
Joshua Mwangu is a Capital and Financial literacy ethusiast, Securities trader, and consultant. In 2013 he served as public relations officer for the university of Namibia Economist Society.
