ZAMBIAN GOVERNMENT MOVE TO CONTROL FOREX OUT-FLIGHT TIMELY

I fully support governments move to restrict Forex outflow from this country.

Why should the investor only excavate Zambia without leaving anything tangible for her children?

Zambian Kwacha doesn’t seem to strengthen as a result of too much freedom we have given investors to repatriate all the profits to home countries.

We have several local banks in which investors can save part of their profits. It’s high time we see our Central Bank start retaining the much needed forex in our vaults to cushion our deteriorating foreign exchange market.

I hope the BOZ will extend its financial and Forex movements in not only processing markets but also goods and money markets.

If supermarkets like shoprite, Game store, PnP,PEP etc have been repatriating all the profits to their home countries, this time around it must be brought to a serious control.

These chain stores should be made to save with any local bank and not a foreign Bank whose servers and control systems are in their home countries.

Again Bank Of Zambia should really scrutinize all the movements of Foreign Exchange and a limit of this financial out flight should be limited to a certain amount with a valid reason like payoff the debts or humanitarian reasons.

I know some Zambians are very skeptical with this move, but i wish to tell you that Forex and Financial controls have been in existence in many counties like USA, Britain, South Africa etc.No one is allowed to send cash abroad any how without valid reasoning.

Certain firms and companies will be gravely affected especially those fully in tax evasion system, mostly by over-bloating the costs against revenues so that they seem to be just breaking even or accruing losses.

This time all those finances to be used to pay off loans or any other transaction by these investors will have to be checked.

Prudency in financial management and fiscal policy by the central government must not only mean the wellness in collecting and disbursement of tax, but also the way finances are retained and utilized in the all the financial perimeters which includes Foreign Exchange market. It also entails taking into account and controlling all the finances flowing out of this country. There shouldn’t be freeness in financial repatriation by these investors.

Benefits of this Move (in summary)

(a)   Economic Growth and Development

Zambia government has been struggling in organizing funds to develop this country even from the mining sector. Once the companies start depositing their cash with our local banks, we expect the saving rate to rise hence increase the bank’s ability to provide loans to the citizens of this country at reduced interest rates. Part of these finances will certainly be used for small and medium scale investment which has direct bearing on the level of employment. Since many firms and financial institutions will be involved, the economic activities will certainly increase and this will push up the economic growth and thereby economic development. But this will certainly depend on the financial prudency of the government in allocating the resources.

(b)   Foreign Exchange Market Improvements

Again the much expected benefit is the likelihood of the Zambian Kwacha to appreciate.Currently, despite recording trade surpluses due to mainly huge mineral revenues, very little has found itself on the local foreign exchange to provide an economical cushion to the depreciating Kwacha.

Therefore, when the Bank of Zambia is mandated to directly control the forex movements from this country to the economies in the dispora, it will certainly store enough foreign Exchange in the reserves which can be used to take care of Deteriorating Kwacha.

(c)     Minimize Worker Exploitation

Besides, this move will reduce some level of exploitation of workers in the country. We have been facing labour conflicts between employers and employees more especially on wage adjustments. Employers will mostly declare losses to the state in order to qualify their refusal for any salary increase. And the government fails to prove this because all the profits by these foreign investors are kept outside the country.

But once profits are saved in the local banks, the government will easily detect the falsehood and mendacity in the employers. Our poorly paid workers will certainly start having good deals with their employers.

(d)   Reduce tax evasion and improve country’s fiscal position

Finally, the move will reduce almost all tactics of tax evasion by the investors since the state will be monitoring the movements of cash and amounts of profits being made by the many investors.

With reduced tax evasion, the government will experience a fair rise in tax collection, hence improve the fiscal standing of the nation and this will help in sectoral financing.

Thank you.

The writer is an Economist and Master of Business Administration Student and Copperbelt University

( For any question and additions use sokoedmond@ymail.com)

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REBASING (OR REDENOMINATION) OF ZAMBIAN KWACHA :Pros and Cons of the Policy

Currency rebasing or redenomination, according to Bank of Zambia article(2012), technical Guideline on rebasing, involves the diving of a currency unit by a defined denominator and adapting that rebased currency to every amount expressed in both notes and coins. Similarly, Ahmed Bello. D (2011) defined currency redenomination as the process where a new unit currency replaced the old unit with certain ratio that is achieved by removing zeroes from a currency. It is the looping off some zeroes from a given currency. For the Zambian currency, kwacha entails removing the last three zeroes or dividing by one thousand (1,000). Rebasing or redenomination has both the advantages and disadvantages to both individuals and economy at large.

MERITS OF CURRENCY REBASING

The process of rebasing of kwacha has several advantages, which will be analyzed below. Initially, the newly rebased kwacha creates a much greater confidence among citizens and foreigners. It is likely to uphold or raise the credibility of the local currency to the outside world. Mosley (2003: International Monitory Fund, 2003) show that redenomination is meant to ensure credibility. Enhanced credibility can not only improve government electoral fortunes, but can also improve a government’s treatment as a borrower, as a location for private Investments, and a defender of exchange rate in the eyes of global capital markets (Leblang, 2002; Jensen, 2005). For instance, a Zambia’s exchange rate of US$1 to K5, 210.41 will inspire less confidence to citizens and foreign investors than when US$1 equivalent to K5.21 after rebasing. The latter exchange rate will show much credibility to the Zambian kwacha as it will be viewed to have much more value. Others have argued that rebasing will simplify accounting and ease of expressing monetary values, thereby minimizing error associated with imputing of financial data. For instance, computation of numerous figures in trillions or billions of kwacha in accounting database is not only tiresome and clumsy but also prone to error, which might render the process useless. So rebasing would ease the systematic tabulation, as a figure like K250, 345.14 will be reduced to K250.35, which is easier to compute. Further, the rebased kwacha would evoke cardinal psychological effect, which creates a sense of identity. According to Lead Capital Limited (2007), the feel good effect of such reconstruction in currency presumes that the perception of the local currency would be enhanced because people invariably begin to subconsciously relate currency redenomination to revaluation. This would affect citizen’s identity and hence the legitimacy of the national government.Sometimes, this emotional effect can make citizens and foreigners increase the substituting of using the foreign currency for the local one, hence raise its demand. The Bank of Zambia (2012) has further argued that there will be significant gains in terms of efficiency that should anchor expectations of policy credibility. This implies that to avoid accruing more zeroes on the new currency, the government will remain committed to maintaining the necessary macroeconomic stability that is required before a rebasing exercise can be undertaken on efficiency. Certain writers have explained that rebasing or redenomination leads to a more portable currency and a significant reduction in dead weight of the money people carry and the associated risks. IMF, 2007; Tarhan, 2006) Lastly, Lead Capital Limited (2007) further identifies developmental effect of rebasing. It posits that government by reducing denominations in its currency would ordinarily introduce “high value” coins into the system. These coins can facilitate the introduction of vending machines, car parking meters and other machines, which were inexistent, and these are a subset of much needed investment.

DEMERITS OF REBASING

Rebasing of currency comes with several costs to the economy of the nation. Tarhan (2006) groups such problems into four main categories; these are inflationary effects of rounding off prices, menu and administrative costs, costs of printing new and psychological effects of income loss. Rebasing if poorly handled may lead to fast increase in inflation levels especially due to rounding offs and menu costs. For instance, a good costing K10, 285.72 will now be priced at K10.30 (BOZ, 2012), which shows an increase by K0.01. Other goods might increase by K0.05 or K0.5 and since there are thousands of such goods and services, general prices are more likely to rise, hence cause inflationary pressure. Worse still, when the rounding up is coupled with the accrued menu costs by retailers; inflation is more likely to increase than ever. Menu costs are costs acquired because of sudden changes in the price tags in markets. Most if not all price tags must be changed or reprinted, picture displays must be changed and certain labels need to be reprinted to accommodate the newly rebased currency. All documents preprinted in unrebased system will have to be discarded to accommodate the new policy. So all the costs accrued by retailers will certainly be passed on to the consumers, something that will cause inflation. Rebasing will raise the administrative costs in many sectors such as financial and non-financial institutions, mobile phone providers etc. For instance, earlier his year 2012, Standard Chartered announced that it would spend about K5 billion in this rebasing exercise. Zambia National Commercial Bank would spend K1billion kwacha, and all the remaining would spend almost the same amount during rebasing. All these costs will be passed on to the customers. Further, it must be known that rebasing is a costly exercise. For example, the Bank of Zambia will spend more 200 billion in executing the whole exercise. This will include printing of new currency, training of staff involved in rebasing, sensitizing of the public on the rebasing, costs of advertizing the changes to citizens especially in rural areas where information access is low changing of software and balance sheet/accounting recorder. Finally, these are psychological effects of lower income levels by the citizens. A marketeer at Chisokone market who sells tomato at K5000 per heap will feel as though she has lost much needed income after rebasing, as it will be tagged at K5 each heap. Hence, it is likely that after rebasing such marketeers will increase prices to K5.5 equivalent to K5, 500.In fact this rebasing might accelerate the loss of value of smaller notes that might1 be rendered useless

COUNTRIES WHICH HAVE REBASED OR REDENOMINATED THEIR CURRENCIES

Many countries have rebased or redenominated their currencies. However, in all countries where rebasing was done, inflation was very high. Some of the countries are; Angola rebased its currency in 1995 when inflation rate was 2,672 % while Brazil did the same when inflation in 1994 was 2076%. A similar reform occurred in Ghana where Ghana replaced the old 10,000 Cedi with a new 1 Ghana Cedi by removing four zeros from the old currency. When the reform was implemented in Ghana, it resulted in the birth of an entirely new currency with new symbols (Mbita Chitala, 2012). Similarly, Argentina in January 1992 rebased its currency by re-introducing peso to replace the austral at the rate of 1 peso=10,000 australs, and then pegged its international exchange rate at 1 peso=1US$. After rebasing, inflation dropped from 172% in 1991 to 1% in 1998.Congo D.R rebased her currency in 1993 and 1998 whose inflation rates stood at 1987%.Israel redenominated the currency in 1980 and 1987 with inflation at 131% and 307% respectively. Sudan in 1992 rebased because the inflation stood at 118%.

PERSONAL VIEW (CRITIQUE)

The fact of the matter is that there is not any ideology or economic theory postulates that a country that redenominated its currency would reap certain economic gains. It is just a symbolic reform without guaranteed benefits. Therefore, in my personal perspective I have never supported this policy as it provides more and clear disadvantages, but very few insignificant and blurred advantages. The first certainty is that Zambian government will spend billions and billions of kwacha in this exercise. These huge costs especially on printing new paper money and coins will cost the hard-earned taxpayer’s cash, which will never be realized. Bank of Zambia will spend more than 200 billion on the exercise, but this amount would produce more guaranteed and visible benefits if it was allocated towards road construction in rural areas or enhance farm input support program. Therefore, our decision to reallocate the much needed resources from more and obvious viable sectors with obvious outputs, to implement a policy whose benefits are not guaranteed, in both short and long run, is something that makes the whole process doubtful and unreasonable. When we look at countries that have redenominated or rebased currencies, they were experiencing hyperinflation and loss of economic confidence by private investors e.g. Zimbabwe (inflation at 1000% in 2003) and Argentina whose inflation stood at 106% in 1991). However, today, Zambia’s inflation is standing at 6.8% and is one of the major investor destinations seeing at how much investment has risen since 2002. Therefore, the reason of raising confidence and credibility is invalid, as we have seen that we still attracted enough investment using the current kwacha. Even the former Zambian Finance Minister Ngandu Magande criticized this rebasing. The Times of Zambia Newspaper, reported, “The Zambian Former Finance and National Planning Minister Ngandu Magande said the Government should have considered other options of strengthening the Kwacha rather than rebasing it.He said that rebasing was employed in an economy that wanted to run away from inflation but that the current inflation of 6% and the current depreciation of the Kwacha against other foreign currencies did not require such a move. There was no need for Government to rebase the currency to run away from inflation levels. The rebasing of a currency is normally done in a country where there is high inflation, where people are carrying a lot of money to buy products, but this is not the case in Zambia”.(Times of Zambia,25/01/2012) Then what is the point of spending K200 billion on an exercise that will not add to investment and create employment? The other automatic effect of this policy, which has prompted me to criticize it, is the fact that by the end of its implementation, the cost of living will surely rise. The inflation rates might not rise significantly but price of many products and services will certainly rise. The earlier mentioned menu and administrative costs will push up prices of many good. All the costs retail outlets will accrue in printing and reprinting price tags and menus re-calibrating machines, redesigning of adverts, re-documenting displays, retraining of personnel in new systems etc. will be for sure transferred to the customers whose budget lines will certainly increase. Besides, all the costs accumulated by the banks and mobile provider in re-calibrating automated teller machines, changing accounting software and accounts, reprinting documents, refining/ redesigning adverts, training of staff, hiring of experts in particular electronic software and many more, will be passed to their customers. Some of the fees in the banks will increase to recover the cash wasted during rebasing, ATM charges, book balances, monthly account fees, and any other fees. People will have to spend a little more in maintaining bank accounts in these banks. The unit charges in mobile providers and insurance companies will definitely increase in order to maintain the profit margins, which had dwindled due to rebasing costs. Again rebasing will definitely induce in some investors some sense of uncertainty and insecurity. These new investors might not be sure on how rebasing will impact to the economy of Zambia, hence can adopt the ‘wait to see’ attitude. Since they may not be sure of how rebased kwacha will fair; investors might start offloading the kwacha into dollar or any stable currency. In fact, others will decide to halt the investment until they are sure all is well in the economy. Therefore, it is more likely that rebasing will result in some percentage of capital flight as well as kwacha depreciation provided the kwacha is left to float freely on forex market; it will depreciate in a short run and later stabilize on a higher equilibrium.

CONCLUSION

The essay has in the first analysis explained dollarization as the adopting partially or fully of a more and stable foreign currency to replace the local currency. It has been shown why dollarization was initially legalized in the Zambian economy in 1994.Dollarisation was allowed in order to rescisitate the Kwacha and the entire economy. The paper went further to distinct merits from demerits of dollarization and explained why the government of Zambia decided to ban the dollarization through statutory instrument 33. The second analysis involves the rebasing or redenomination of the kwacha. In this component, the writer has defined the concept of rebasing and shown both the advantages and disadvantages of this exercise. Finally, the writer has provided a personal view on both rebasing and the banning of dollarization in Zambia, of which I have supported fully the banning of dollarization but criticized the process of rebasing

REFERENCES

Dornbusch et.al (1990). Extreme inflation: Dynamics and stabilization. Brookings Pap Econ.Activity:pp 1-64

Hanke.S (2008).Hyperinflation. Mugabe verses Milosevic: Globe Asia

Helleiner, E (2003): The making of money Territorial Currencies in Historical Perspectives Cornwell University Press, Ithaca.

International Monetary Fund (2003): lesson from the crisis in Argentina, at http://www.imf.org

Jensen, N (2005): the Political Economy of Foreign Direct Investment, Princeton University Press, Princeton.

Lead Capital Limited (2007): Nigeria’s naira Redenomination Strategy. http://www.leadcapitalng.com/resources/nairaredenomination Mosley, L (2003): Global capital and National Governments, Cambridge University Press, Cambridge.

Mosley, L (2005) “dropping Zeroes, Gaining Credibility? Currency redenomination in developing Nations” Robertson,J.The Zimbabwean Economy. The financial Gazette,23 April,2009

Soko .E. (2012).The Effects of Rebasing or Redenomination. Online article.www.edmonsoko.blogspot.com.23/06/2012. Times of Zambia Newspaper, 25/01/2012

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OLIGOPOLY IN ZAMBIA’S MOBILE INDUSTRY

OLIGOPOLY IN ZAMBIA’S MOBILE

TELECOMMUNICATION INDUSTRY

KEY WORDS

Competition Policy, Telecommunication Sector, Mobile telecommunication industry, Zambia Information and Communication Technology Authority (ZICTA),MTN Zambia, Airtel Zambia and Zambia Telecommunication Cooperation(ZAMTEL).

 

INTRODUCTION

Since independence, in 1964, Zambia’s industrial has taken several phases and faces. The continuous changes in the industrial nature of the country is attributed to several reasons ranging from political, economical and external influence especially from the foreign donors and International  Monitory Fund and World bank activities.

In the command economy where the government centralized service delivery and development ,Zambia’s industrial base was wide but very weak as citizens owed nothing in terms of companies or private firms, but the state through the president, Dr, Kenneth Kaunda dictated what industries to be planted in Zambian soils. So even if Zambia contained about 235 parastatals which showed as though the industrial base was wide, but these entities were running at huge losses hence depended heavily on the subsidies from the state. Almost all industries, mining, communication, energy, agriculture, manufacturing and processing were experiencing serious losses as a result  of political mismanagement, lack of recapitalization and the external factors like the oil crises of 1980’s. These industries from 1972 to 1991 operated in the protected environment in which competition and quality were not significant indicators of success, but after the change of government in 1991, came under increasing pressure to compete in an environment which was rapidly changing and becoming difficult to asses and predict. Hence, there was industrial transformation after Zambia’s adoption of the free market system. The country saw the birth and death of certain industries. Many parastatals which couldn’t take off were either liquidated or privatized to pave way for private sector participation in the resource allocation and service delivery. So certain state-owned firms like Zambia Telecommunication (ZAMTEL), Zambia Postal Services and some financial institutions were subjected towards stiff competition so that their viability could be tested.

One of the industries which experienced serious transformation and competition after economic liberalization was Telecommunication. Telecommunication in command economy was only populated with one centrally-controlled firm called post and telecommunication cooperation (PTC) which later changed to Zamtel and Zambia Postal Services after delinking it. But by today several privately owned companies in this industry have mushroomed. For instance, companies such as MTN Zambia, Airtel Zambia, Zamtel (state owned), Celpay, Digital Micro link, etc. operate in the Zambia’s communication industry. However, the first three deal in specifically cellular (Mobile phone) telecommunication i.e. mobile cellular telecommunication system. The organization for Economic Cooperation and Development (OECD) has noted that, “the telecommunication industry has been transformed by increasing vigorous competitions in an environment of rapid change.” (OECD, 2001, 1).

Therefore, the paper will analyze the operations of the mobile telecommunication in the Zambian economy and what market structure it can be categorized. It will show how in this selected industry, the main players compete for customers (market share) through both price and non price competition.Lastly,the essay will highlight how this industry is regulated by the state so that abusive competition practices  are eliminated.

ANALYSIS

INDUSTRY SELECTED

From the introduction, the writer has selected to analyze one of the cardinal components of communication called Mobile telecommunication industry or mobile phone telecommunication. “This is an industry which deals with digital communication technology in which (in contrast to baseband) the bandwidth (data carrying capacity) of a single medium such as a wire, cable, or channel is divided into several independent pathways. Using techniques such as frequency division multiplexing, broadband enables fast (45 Megabits per second or more) and simultaneous transmission of different signals (data, audio, video), and interconnection of different devices on network. (www.searchmobilecomputing.techtarget.com/definition, 24/08/2012)

MAIN PRODUCTS FOUND IN MOBILE TELECOMMUNICATION INDUSTRY

This industry deals in several products and services. It is interesting to note that the industry generally deals in homogeneous products which are at the disposal of each and every player in the market. These homogenous products are as follows;

(a)  GSM (Global System for Mobile communication) Network

This is one of the most important services offered which never existed sometime back in Zambia. It is a digital mobile telephony system that widely uses a variation of time division multiple access (TDMA) and is the most widely used of the three digital wireless telephony technologies (TDMA, GSM, and CDMA). GSM digitizes and compresses data, then sends it down a channel with two other streams of user data, each in its own time slot. It operates at either the 900 MHz or 1800 MHz frequency band.

Customers with mobile handsets communicate through different network providers using GSM.

(b)Internet Services

Customers communicate or research through this product provided by the network providers. People can access cardinal information, process data and send messages through internet. Customers can use internet in applying for jobs using internet being provided by the industry. Mostly this is competitively done through dongles or phones themselves.

 

       (c)Mobile Phones and other electronic gadgets

A mobile phone is an electronic telecommunication device, often referred to as a cellular phone or cell phone. Mobile phones connect to a wireless communications network through radio wave or satellite transmissions. Most mobile phones provide voice communications, Short Message Service (SMS), Multimedia Message Service (MMS),  and some of these phones may also provide Internet services such as Web browsing and e-mail.

The network providers besides providing cellular telecommunication for ease    networking, they provide other gadgets used in this communication. These include iphones, tablets and dongles (modems).

 

CHRACTERISATION OF MARKET STRUCTURE OF MOBILE TELECOMMUNICATION INDUSTRY IN ZAMBIA

This industry can best be categorized as an oligopoly.

An oligopoly according to Webster J.T “is an industry comprising very few firms producing homogenous or differentiated products; it is difficult to enter or leave the industry.”(2003:381)

So in Zambia the industry has been categorized as an oligopoly because it is dominated by very few firms/ producers who compete for customer base. These firms operating in the market seem to deter any entry by other firms from entering industry on the pretext that the market is very small hence can’t accommodate numerous firms.

MAIN PLAYERS

This market is dominated by three companies, namely Airtel Zambia, MTN Zambia and Zambia telecommunication Company (ZAMTEL).These players in the market compete for market, hence they show varying positions.

“According to a Zambia Information and Communications Technology Authority (ZICTA) assessment, Airtel Zambia and MTN Zambia hold dominant positions in various relevant markets for the period January 1, 2012 – December 31, 2012.Airtel Zambia and MTN Zambia, according to ZICTA, are dominant in local mobile voice, mobile termination and sms (short messaging service) while Zamtel joins them in the mobile and sms termination.” The Post Newspapers Zambia, (26/03/2012).

Additionally, certain documents have shown that it must be understood that their market shares measured in terms of number of customers, is very different. Reports by Zambia-advisor.com show that in early 2009 Airtel (earlier called Zain) had market share of slightly above 78%, while MTN stood at 26% and Zamtel (cellz) stood at less than 7%.

With this market share, it can clearly be seen that it is Airtel and MTN who are controlling the market while Zamtel follows.

As such Zambia has a highly competitive market in this industry as each one of them is trying to win as many subscribers as possible. So during the discussion the writer will concentrate on showing how the most dominant of the three-Airtel and MTN are competing with each other. ZAMTEL is not showing much competition in this industry as seems its expansion level has reached the climax signifying that the customer base it contains is enough and any further increase would bring communication distortions.

PRICING AND OUTPUT DECISIONS OF MOBILE TELECOMMUNICATION INDUSTRY

 

Price competition

Since this market comprises very few firms, they are usually very much aware of each others actions. Their existence is interdependence as for one firm to effect the price change is always aware of the reaction of the other firm.

Webster, J.W (2003, 471), shows that “oligopolistic industries are characterized by interdependence of managerial decisions between and among the firms in the industry.” Firms are keenly aware that pricing and output decisions of any firm will provoke a reaction by competing firms.

So the pricing system of one firm like MTN is dependent on how Airtel or Zamtel will react to that system. If MTN or Airtel decides to cut the intra-network or cross-network charges the market might react by following suit in fear of losing customers. But if the other firm leads in increasing the price of network system on voice calls, other firms may not follow the price leader, hence becomes relatively more expensive than the rest, so loses some market share.

For instance, in early 2010/11, Airtel due to its dominance of more 80% raised the charges for both intra-network and cross-network for prepaid and post paid customers.

“Ngabo Nankonde, the ZICTA Public Relations Manager, explained that Airtel was the most expensive mobile phone provider followed by Zamtel and MTN the lowest. It was explained that where Airtel charged K21/second for prepaid peak periods for intra-network, MTN K17/second (consumer diaries report, 2011 financial year).Since Airtel had become relatively more expensive than any other network; some customers migrated to MTN which had not followed the Price increase. As such Airtel lost more than 10% market share to MTN, and to retain it, Airtel must reduce the charges to “grab” part of the lost market share from MTN.

It is because competitors will not follow the price increase by one firm but might follow a price cut in fear of losing market as explained above.

As a result of this arrangement, the demand curve for these oligopolists, MTN and Airtel, isn’t straight as the case with the usual classical economic arrangement. It is flatter above the current price, with a sudden change of slope at the current price it shows a kinked demand curve characterised with sticky prices

                                 KINKED DEMAND CURVE

It is a model of firm behavior that seeks to explain price rigidities to oligopolistic industry.If Airtel is a price leader charging the prepaid subscribers K17/s intra-network, will have difficulties in changing price. If it decides to raise the price higher than K17/s, at K21/s as earlier seen, MTN or Zamtel won’t follow, hence Airtel’s services will be relatively more expensive, and so will lose some customers. But if reduced price below K17/s, to K10/s for the same arrangement, MTN will follow in fear of losing the market share to Airtel.Ultimately, Airtel might decide to leave the prices unchanged for quite sometime unless MTN decides to cut its own charges.

However, doing so reduces the revenue and there by profits.

This is the reason why economists have described oligopoly as experiencing sticky price especially in this arrangement where products offered are homogenous.

Pricing Of the Internet Bundles and Dongles

These Zambian ologopolists, MTN, Airtel and Zamtel moved further in internet pricing competition in 2010. With the introduction of internet connectivity using Dongles or certain phones, Airtel sold the internet bundle of 1GB at K200, 000, but when MTN introduced its own and set the price less than K200, 000, Airtel reacted by reducing it to K150, 000.MTN followed suit and set at K125, 000 per gigabyte. Airtel also reduced it to K125, 000 and it has remained at that price.

They are currently competing on the amount of time that 1GB of data bundle takes to be used up and expire.

Later these firms started also competing on not only data bundles but also dongles and handset pricing. When MTN entered into agreement with ZTE to produce cheap dongles which only accept MTN simcards to be sold at only K150, 000, Airtel and later Zamtel followed suit with their Huawei modems by Huawei Technologies of China and sold at K150, 000.

The competition behavior is the same on mobile phone and sim cards. Both Phones and Sim cards by Airtel were quite expensive and were sold separately. But when MTN entered the market, and started selling these products at reduced price and combined, Airtel for fear of losing out customer base reacted by cutting the prices and started also selling the combination of both Sim cards and phones fixed for the network only.

These firms have moved further in producing double-sim phones which can allow two sim cards provided one of the simcards belongs to that network. These phones are sold cheaply.MTN started by producing a cheap phone, but Airtel followed by producing a cheaper double-simed phone containing more features than the MTN one called HUAWEI which was sold at k180, 000.

So the pricing competition goes on, and currently the ‘war’ is on non-price competition.

NON-PRICE COMPETITION

It is the competition in other components other than price such as quality of service, after sales service, customer relations and quantity of product.

For this Zambia mobile phone oligopoly to win or maintain the market share, each one has instituted several strategies to overcome the other.

(a) Point Accumulation Plans

Airtel introduced the loyalty programme where customers are accumulating points for using Airtel airtime. For very K500 used, a customer earns certain number of points which can later be converted into either data bundle or talk time for usage. As that was creating an impression to customers, MTN reacted by introducing a similar point accumulative plan in which customers are also having points for certain amount of talk time used.

(b) Mobile Banking services

In their quest for to impress and woo more customers, these Zambian olygopolists have moved further into mobile banking services. Airtel started by introducing this service in which customers would easily transact from their phone like sending money, buying airtime, paying bills to various utilility providers such as Zambia Electricity Supply Co-operation(ZESCO),Muilt-choice etc.Later,MTN reacted by introducing the similar facility for its customers who had started contemplating on moving to Airtel to enjoy these services.

(c) Threshold plans

These are plans which work as follows: in MTN, when a customer uses airtime of K500, he/she earns 5 minutes free, Airtel responded by introducing the similar arrangement and called it 5X PLUS FREE calling Promo, where anyone who uses up to K6, 500  per day earns up to 72 minutes free to be used within the same day.

However, Zamtel is on the sluggish side of competing as the two giant firms in this industry fight for market share.

(d) Increasing network coverage

MTN and Airtel are also competing on the network coverage in Zambia. They understand that having a wide coverage is not only convenient to customers but also cheaper to them as they will operate only within the network (for inter-network is expensive). So they are heavily involved in recapitalization in order to expand their networks to capture new customers especially in rural areas. As such these firms will show competition even in their business themes on adverts. At one point in 2011,MTN showed, “MTN,everywhere you go” but later Airtel which also wanted to show that they had a better coverage…produce a statement, “Airtel, the network which is truly everywhere you go”. All these are meant to convince the customers on how wide they have covered Zambia.

(d) Corporation social responsibility

These firms, MTN and Airtel have extended their non-price competition into now the corporate social responsibility they understand that getting involved in either directly assisting people or supporting activities cherish by citizens, will win them some customers as a result of good will.

In recent times, MTN has been sponsoring soccer in Zambia and Africa at large for instance, Zambia’s premier league is called MTN/FAZ premier (super) league as it is sponsored by MTN.In response organized what is called Airtel Rising Star which is meant to groom the young soccer generation.

Finally on pricing and output, these oligopolists are involved in serious marketing and advertising of their products. They advertise to show how cheap or quality their products are. The competition in their quest for large market share has been extended to marketing strategies. They are ready to spend huge amount of money on any news media be it online, radio, Television or newspaper tabloids. It is due to this competition that has made MTN increase its market share from 27% in 2010 to 34% in 2012. Airtel has reduced to 60% from 78% while Zamtel has dropped to 6% from 7%.

So currently, according to Grant Thornton Budget Bulletin, 2012 shows this,

Airtel Zambia                             60%

MTN Zambia                             34%

Zamtel                                       6%

Source: Grant Thornton Budget Bulletin 2012, page 14

So the report shows that Airtel lost about 20% of market share to MTN (1 bid)

GOVERNMENT REGULATIONS OF MOBILE PHONE INDUSTRY

In the word of Kaira.T (2011, 35), “the essence of regulation should be to promote business entry, growth and socio-economic development by controlling and prohibing anything that prevents such development.”

Naturally and historically, oligopolies have a tendency of exploiting consumers through wrong pricing methods as well as other non-competitive practices. These companies may choose to enter into price-fixing or market-sharing cartels or collusion.

“Collusion is the desire to achieve point profit maximization within a market or pressure price and revenue instability in the industry” (tutor 2u, a level economics blog).To pressure out such exploitatory tendencies by MTN, Airtel or Zamtel, Government of Zambia instituted a body to regulate the activities of all players in communication and Technology fields. The body is called Zambia information and Communication technology Authority (ZICTA).

According to the online journal, the Zambian Economist, entitled Information and Communication Technology Bill 2009, ZICTA is an economic regulator with power to regulate tariff for “dominant’ players and agreements interconnections. “ (19/07/2009).

This institution, ZICTA was set up to check and regulate bad practices by these firms such as predatory pricing, collusion in setting up prices and any anti-competitive tendencies.

For instance, “in the first half of 2011 a way to ensure competition practices in the telecommunication market, ZICTA held consultative sessions with all operations in order to finalize and decide on issue of tariff forbearance. It also finalized guidelines to regulate their running of marketing promotions” (Grant Thornton Zambia-Budget Bulletin 2012: 14)This shows that ZICTA has been empowered through information communications and Technologies (ICT) act of 2009 to protect the rights of consumers of all types including the disables. ZICTA is authorized by the act to punish by withdrawing the licence of any firm not conforming to the set standards like quality provision of services, non-competitive practices which include predatory pricing. It can force the ailing to compensate or apologize to the customers affected.

The government through ZICTA mandates these mobile phone providers to display the costs of all plans introduced to the customers. For instance, early 2012, Airtel was forced to disclose the charges of their musical plan to customers and not to charge customers forcibly, but rather ask them.

ZICTA is also involved in regulating the dominance position of a particular firm and market concentration. For instance, when market power of Airtel was almost reaching 81%, it became a concern as that would reduce competition as it would monopolize the market and hence lead to serious customer abuse by Airtel. So, ZICTA systematically regulated the system to reduce the fast growth of Airtel by maintaining that other firms, MTN and Zamtel control certain regions before Airtel could move in.

ZICTA in some instances is mandated to regulate the market concentration for the firms. Market concentration entails the total number of competing firms in the industry. So in the mobile telecommunication industry, the market concentration is only three in Zambia as firms controlling the industry. Now if another firm such a Vodacom would want to enter the Zambian market, ZICTA is capable of determining whether it would plausible for the fourth firm to enter the market. After making necessary calculations, ZICTA can either allow or block the new entrant.

 

PRICING POLICIES IN MOBILE TELECOMMUNICATION

In this industry, there are no deliberate policies on the pricing of the product; it is a free-market system provided they don’t abrogate the ICT act of 2009 of being non-exploitative.

As opposed to Energy Sector where prices of products like fuel, electricity and water are priced in accordance to government regulations, the mobile phone industry pricing system depends on the forces of demand and supply and level of competition. As explained earlier pricing depends on competition, however, the state through ZICTA will only come in if the pricing system is full of exploitation of customers. For instance, in 2010 when Airtel formerly called Celtel (then Zain) was becoming very dominant with almost 80% of market share, ZICTA moved in to control this dominance as it would have created a monopoly of which monopolies are mostly exploitative.

CONCLUSION

 

In summary the writer’s choice, mobile telecommunication industry has been analyzed starting with its brief history. This is an industry which deals with digital communication technology in which the bandwidth (data carrying capacity) of a single medium such as a wire, cable, or channel is divided into several independent pathways. Using techniques such as frequency division multiplexing, broadband enables fast (45 Megabits per second or more) and simultaneous transmission of different signals (data, audio, video), and interconnection of different devices on network. The essay has shown further that this is industry can be categorized as the oligopoly as it contains only three firms namely MTN Zambia, Airtel and Zamtel who are actively competing for market share measured in terms of number of subscribers to the network.

These oligopolists compete strongly to win as much market as possible involving both price and non price competition. They have shown competition on how they price their products like voice calls, internet charges and communication gadgets. As such the demand curve for the Zambian mobile telecommunication industry players just like any other olygopolists is kinked.

Finally, the essay has shown how the government regulates the mobile telecommunication industry in Zambia. The industry is regulated by the body called Zambia Information and Technology Authority (ZICTA) set up by act of parliament.ZICTA was empowered by 2009 information bill to regulate and control the industry on any possible abuses by these olygopolists who are competing fiercely for the market share.

However, there are no deliberate policies set up by the government on pricing system to be followed by the players. Unlike the energy industry where the government through certain statutory bodies set and regulates the fuel prices, the mobile telecommunication industry’s pricing is under the influence of forces of demand and supply. The state through ZICTA only comes in if there is suspicion of exploitation.

 

 

 

 

 

 

 

 

 

 

 

 

 

BIBLIOGRAPHY

 

Consumer Diaries report, 2011

Ehueni A.G.M (2010), Informational Communication Technologies in LDCs (Zambia’s case)

Grant Thornton Budget Bulletin, 2012

International Journal of Economics and Finance. Volume 4.No 5, February, 2009

Kaira.T (2011), African Journal of Transformation and communication issue 2010/201.1

Khan, A.E (1971), the Economics of Regulation. Wiley Publishing Press. New York.

Post newspaper Zambia, 26/03/2012

Nicholson (1995), Microeconomic Theory, Basic Principles and Extensions, 6th Ed.Dryden Press. New York.

OECD (2001), Competition and Regulation issues in Telecommunications, Brussels.

Varian R.Hal (1992), Microeconomic analysis. Norton and Company New York

Webster.J.T (2003), Managerial Economics, Theory and Practice, Academic Press. New York.

www.searchmobilecomuting.techtarget.com 24/08/2012

www.tutor2u.com/A-leveleconomics 14/08/2012

www.zambia-advisor.com 16/08/2012

Zambian Economist Online Journal, 19/07/2009

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DOLLARISATION IN ZAMBIA

DOLLARIZATION

Different writers have defined the concept of dollarization differently. Bloch (2009) defines dollarization as the substitution of a domestic currency by a more stable foreign currency. It occurs when the inhabitants of a country decide to fully or partially adopt the foreign currency as a medium of exchange within the domestic country. However, the term does not necessarily mean adopting or usage of US dollar, but rather any foreign currency.

 

REASONS FOR DOLLARISATION (ZAMBIA AS A CASE)

In the 80’s and 90’s, Zambia, like many developing countries was faced with several economic hardships, which culminated the whole country to halt in development. It was characterized with both microeconomic and macroeconomic reversals where inflation was ever increasing to three digits, the foreign exchange market was in a crisis and both capital and money market were performing poorly. The oil crises and the plummeting of the price of Zambia’s main forex earner, copper, grounded the whole economy. This was worsened by the mismanagement of the parastatals by the government officials. As such, the kwacha was fast depreciating which made it becoming worthless in comparison to other currencies in the region. Generally, the whole economy had collapsed completely, and when there was change of government 1991, some economists and politicians in 1994, as one of the major economic reforms meant to attract investment, allowed other foreign currencies like US dollar to be used besides the falling kwacha. These harsh economic conditions gave a very good reason for dollarization. Thus, Chitambara (2009) supports that dollarization is predominantly a response to a loss of confidence in the local currency owing to severe bouts of microeconomic instability such as hyperinflation, currency crisis as well as high and volatile interest rates. Therefore, Zambia, which initially experienced economic instability in command economy and during structural reformation, hence creating a crisis in the kwacha, adopted the dollarization policy to rescisitate the “drawing economy”. Generally, most of the countries which dollarized in the past like Argentina, Bolivia, Peru, Zimbabwe, Russia etc were experiencing serious economic stabilities which included fast rising inflation and serious lose of value of their domestic currencies (Robertson. 2009)

 

Further, the Zambian kwacha had shown to be very unstable against other currencies, hence would not inspire confidence to the much needed investors. Between 1991 and 2003, Zambian government really needed foreign investment to boost up the economy, but this was partly hindered by the unstable kwacha and high inflation rate, which stood at 118% in 1998. Therefore, by adopting US dollar in transaction and trade it meant making the economy foreign investor friendly as that would reduce the transaction costs, exchange rate risks and the general inconveniences as a result of exchanges. We really needed to be very attractive to the investors by giving them confidence of our economy. Savastano, M (1996), showed that dollarization economies could invoke greater confidence among international investors inducing investments and growth. Investors from US.A, Canada and many other countries who readily use US dollar, found it cheaper and easier to come to the dollarized Zambia due to the currency uniformity in short. Dollarization was one of strategies adopted to attract foreign direct investment to rescisitate the Zambia economy in a ‘coma’.

 

BENEFITS OF DOLLARIZATION TO BUSINESS PEOPLE

Since dollarization was adopted mainly due to crisis in the economy and our currency, kwacha, it is clear that the firms and traders who were practicing it reduced the losses because of sudden changes in currency market.

Business people that hold on the dollar gain more kwacha when the same kwacha depreciates (as what has been happening recently). During depreciation of kwacha, a dollar buys more kwacha hence the trader gains. So quoting prices in dollars or any stable currency will ensure that a trader does not lose the purchasing power when the kwacha suddenly depreciates. Instead, such a businessperson will gain more kwacha in times of economic turmoil. For Instance, many traders who were quoting and selling their goods in dollar here in Zambia, during the global financial crisis in 2008, did not experience any lose of income but ended up acquiring more kwacha as this same kwacha was fast depreciating. Therefore, most cash crop traders who rely on export revenues gain more during the dollarization as their capital and profits are stored safely in a more stable currency.

Besides, cross border trade is accelerated when business people use the same currency as transaction costs are reduced. So transaction costs reduced when Zambian businesspersons who were holding US dollars traded with the dollarized Zimbabweans, as there was no need to be involved in foreign exchanging, which is not only costly but also inconveniencing.                                                                                                           Businesspersons involved in cross border trade accrue more benefits when there is currency uniformity since costs because of currency exchange, reduce, hence more profits.

 

BENEFITS TO THE ECONOMY /COUNTRY

Firstly, it must be understood that it is a cheaper and easier for countries using the same currency to trade in goods and services. For instance, before banning of dollarization, traders from other countries would easily bring and sell their goods to Zambia and Zambian to those countries without any complications of currency swapping. Rose (2000) applied the gravity model of trade and provides empirical evidence that countries sharing a common currency engage in significantly increased trade among and benefits of dollarization for trade may be large.

 

Dollarization of Zambian economy can bring out greater confidence among foreign investors, which can cause the increase in the investment levels and economic activities. The elimination of the currency crisis because of dollarization leads to a reduction of country risk premia and then lower interest rates. We know that the reduction in the interest rates have a potential of promoting small and medium enterprises among local investors.

 

Besides, official dollarization to a country like Zambia can promote greater fiscal and monetary discipline and this greater macroeconomic stability and lower inflation rates, lower real exchange rate volatility. Adopting a strong foreign currency as legal tender helps to eliminate the inflation-bias problem of discretionary monetary policy. For instance, Zimbabwe saw the hyperinflation reduce from 1300 % to less than 10% after dollarization.

 

Further, dollarization imposes stronger financial constraint on the government by eliminating financing of the deficit by issuing money, which has the potential of increasing aggregate demand and thereafter inflation.

 

DISADVANTAGES

Dollarization has several disadvantages to the dollarized nation. These are some of the demerits which made the government of the Republic of Zambia ban it.

Soko. E. (2012) explains that dollarization has the capacity to depreciate the Zambian Kwacha and render it worthless. Since, the government realized that if dollarization is left unbanned could lead to a further depreciation of the local currency, kwacha. For sure given chance between using a local currency and the strong and stable foreign currency, citizens and more especially traders and businesspersons in the country would easily switch to a foreign one. This would mean further lose of demand of the local currency against major currencies, hence depreciate further and further. So in order to strengthen the kwacha against dollar by increasing its demand, the government of Zambia decided to ban the usage and quoting of dollar during transactions. It realized that once the dollar continues to circulate, it would make kwacha even depreciate further and finally become worthless. The officials did not want to be like Zimbabwe. Dollarization did not strengthened Zimbabwean Dollar but has made it even become worthless.

 

Further, Hanke (2008) argues that dollarization deprives   a government of its money printing inflationary powers to financial fiscal deflects. This entails that a country cannot print the adopted cash to finance any project. For instance, Zimbabwe cannot print or reprint the US dollar to cover up the deficit incurred in the economy, as she has no right to do so. This shows that the country loses its seigniorage revenue, as well as monetary policy autonomy .The country might not be free to execute monetary policy without prior notice of the owner of the currency.

 

Again another disadvantage is that full dollarization results in the loss of an important emblem of national identity and pride, the national currency. Since citizens are allowed to engage in currency substitution, they may lose all the confidence in their local currency and completely stop using it, hence rendering it useless completely. Because of this, the local currency goes into extinction and that country will be known not to have any currency of its own, hence no national identity and pride. The government of Zambia did not want to lose grip on this important identity and asset, kwacha, and then leave Zambia without any currency.

 

Dollarization can easily be used as tool by the country whose stable currency is being used by a nation adopting its currency in influencing policy. Hanke (2008) clearly points out that dollarization may lead to loss of political autonomy and sovereignty as the dollarizing country may leverage its currency as coercive tool to force the dollarized county to adopt certain policies that may not be in their interest.

 

PERSONAL VIEWS ON DOLLARISATION

On my personal perspectives, I feel the move taken by the government to ban dollarization is a positive move. This is due to several reasons below.

 

Firstly, dollarization is mostly adopted by nations experiencing galloping inflation pressures.

Ize and Lvey-Yeyati (1998) commented that dollarization will increase with inflation volatility…” But then the Zambian economy today in 2012 has a very low inflation rate at 6.8% showing that the reason for dollarization in far as inflation volatility is concerned is invalid. Zimbabwe had to dollarize the economy in 2005 because of hyperinflation, which stood at 1000% in 2003.    Zambia had also dollarized in 1994 because of the escalating inflation levels of 183% in 1993. However, inflation of 6.8 % today 2012, provides no valid reason for dollarization.

 

Besides, Zambia has been experiencing a steady deterioration in the foreign exchange market in recent years. Kwacha had depreciated for more than 10% from August 2011 to April 2012. Each dollar sold at K4, 840 in 2011 but depreciated to K5, 210 by April 2012. However, since our objective is to see a stronger kwacha that will provide confidence to the new investors, allowing dollars as a legal tender or medium of exchange would not help, instead it sends a bad signal to other countries on how worthless Zambian kwacha is. Allow local currency substitute for other foreign currencies can marginally attract investment, but can largely signal the worthlessness of a local currency and the entire economy. For instance just after dollarization of Zimbabwe, the signal was sent to other countries that Zimbabwean Dollar and whole economy have deteriorated. Moreover, this is deterrent to the new investment. Dollarization of Zambia’s economy will not assist the depreciating kwacha. In fact, it will make it weaker. But we want the demand for kwacha increased by allowing all dollars brought to Zambia to buy the excess kwacha in the forex market and so mop up this excess kwacha thereby appreciating it to required equilibria.Having a stronger Kwacha will inspire confidence to the investors.

 

Further, a sovereign country is not only shown by boundaries but also the national identity, currency.  So Zambian kwacha defines Zambia and it uplifts this country. The world map showing different currencies will show Zambia with a Zambian Kwacha tag. When dollarization is allowed, this national identify, kwacha, will be submerged or obscured by other foreign currencies and render it and our country insignificant and uncultured. There will be no national pride, and nothing to show for when dollar continues to show itself in Zambia.

 

Even though certain sectors like Tourism are complaining that tourism will be affected negatively because tourists understand dollars more than kwacha, but it must be known that any foreigner in Zambia should be subjected to local terms and conditions of doing business in Zambia. It is the Zambians themselves who should make these tourists understand our Zambian currency. There is no country in the world apart from Zambia itself, which can allow Zambian kwacha to be used as a medium of transactions. All Zambians who go as tourist in U.S.A or Mexico or Madagascar are obliged to change kwacha for respective local currencies. If a tourist wants to buy locally made sculptural work, he should buy kwacha at bureau of exchange outlets and then buy what he needs. So on entry all foreigners including tourists should be directed to forex houses to buy the kwacha. As such we will not only increase the demand for kwacha and hence appreciate it, but also send a signal to the world on how much value we bestow on our national identity, kwacha. The fact is that many tourists from USA and Europe are undermining Zambian Kwacha and that is why they still want to stick to their currencies in other countries. So Zambians and any other entrepreneurs especially in the tourism industry should not assist in portraying Zambian Kwacha as a worthless currency by defending the usage of dollars.  

 

Finally, when we continue allowing dollars to be used in transactions, and later rendering kwacha worthless, Zambian government will be unable to have freedom to print or reprint the US dollar and so, we lose the freedom of seigniorage especially when badly needed. We needed BOZ to continue having monetary and exchange rate instruments, which are usually used in covering deficits, control of inflation and project financing. For instance, Zimbabwean Reserve Bank has no freedom to print U.S Dollar or SA Rand in circulation in order to finance a project, as the Zimbabwean Dollar, which is worthless, is no longer used.

 

COUNTRIES THAT HAVE DOLLARIZED

Apart from Zimbabwe, many countries have allowed other currencies to be used exclusively or trade by side with local one. Nations like British Virginia Islands, Palau, Ecuador, Panacea, Turk and Caicos Islands etc. These countries implemented full dollarization of their economies; hence, their local currencies have ever since diminished from circulation and their respective central Banks lost the freedom to print or sovereignty in seigniorage.Some of countries have allowed dollar other major currencies to circulate and be used as medium of exchange alongside their domestic currencies. Countries such as Liberia all owed U.S.A dollar besides Liberian dollar, in Haiti the Gourde with U.S Dollar, Vietnam (U.S Dollar alongside Dong), Lebanon (U.S Dollar with Lebanon pound) etc.When we view almost all countries that dollarized economies, they were experiencing ever-increasing inflation.

Thus, Robertson (2009) noted that dollarization has been adopted in the past by countries like Argentina, Bolivia, Mozambique… because most of them were due to hyperinflation.   

 

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