Determinants of the exchange rate and policy implications for Zambia

Exchange rate policy in Zambia – as in most countries – excites a certain amount of emotion and controversy. On one side, politicians often want to see a ‘strong’ currency (i.e. where a unit of the local currency buys more rather than less foreign currency), since imports, especially those of consumption goods, would then be cheaper. On the other side, many economists want to see a ‘competitive’ currency (i.e. where a unit of the local currency buys less foreign currency), since that makes exports and import-substitutes cheaper, enabling local businesses, especially in businesses outside of the traditional mining products, to compete more effectively and grow their markets.