Excessive depreciation of the Zambian kwacha against the US Dollar; firms, households and government; what is the way forward?

Abstract

The main aim of the study was to explore possibilities of trading directly with ZMK/YUAN as the Zambian firms and household’s trade with China. The study employed the Multivariate cointegration test and Vector autoregressive (VAR) model to analyse the data. The findings indicated that exchange rate variables namely ZMKYUAN, ZMKUSD, ZMKRAND and ZMKFRANC do not have long run relationship among each other in the system of equations. Furthermore, short run results in the VAR system also showed that ZMKUSD and ZMKYUAN do not have short run significant effect on each other. These findings indicates that changes in ZMKUSD do not have long run and short run effect on ZMKYUAN. The implication for Zambian firms and households is that they can avoid cost of appreciation of US Dollar by trading directly with ZMK/YUAN rather than trading with ZMKUSD and later with YUAN/USD as they import goods from China. Therefore, this calls for government to liberalise the transactions in ZMK/YUAN.