THE term real economy is typically used in economics to refer to those sectors that influence core economic activities in a country, such as agriculture and mining.

The real economy can refer to primary and secondary sectors: primary sector includes those relating to raw material activity such as agriculture and mining loosely referred to as the extractive sector.

Secondary sector constitutes those that add value to raw materials or create some kind of cyclical value in the economy such as banking or insurance.

In most cases, the rate of inflation is informed by how well the real sectors are performing.  Even so, it is important to distinguish that inflation alone can be an inaccurate measure of overall economic activity if it is being pulled by factors outside the real economy.

These external factors can include foreign obligations such as foreign debt repayment than activities in the domestic economy. One common example occurs when nations borrow from commercial markets, such as the Euromarkets, were lenders use information or misinformation to gauge a nation’s ability to repay loans.

Because most of these loans are denominated in a foreign currency, it creates an exchange rate risk that can dictate the exchange rate of a domestic currency from a debt perspective. In other words, the exchange rate primarily becomes exposed to impressions of a nation’s ability to repay debt, than productivity in the real economy.

The fact that the exchange rate is an interplay between two different currencies means that a trade will occur between those currencies. This means that the price or value of currency will be dictated by the stronger demand created by that currency which the country needs to repay its debt.

In this case, inflation will be a factor of debt repayment created by perception and demand for one currency over another than trade in goods and services – or the real economy.

A few things are obvious from history: firstly, that inflation is a function of activity in the real economy because real economy creates productivity which generates the buying and selling of goods and services domestically.

Secondly, in addition to domestic activity in the real economy, inflation can be pulled by external factors such as import and export – which still represents the real economy – and foreign debt repayments.

The debt component depends on where the debt was contracted, whether open market or partner government(s). the import and export function creates the connection between inflation and the exchange rate.

The exchange rate communicates how much our exports cost to foreign buyers and simultaneously how much imports cost for the country. Some export led countries devalue their currency as a strategy to keep their exports competitive.

But what happens when there is debt cancellation or a freeze in debt service, but inflation is still rising and the currency continues depreciating? Part of the answer lies in the accurate assessment of how the real sectors are performing. Currency devaluation also speaks to the level of economic activity in an open economy.

For instance, between 1971 and 1990, Zambia was a closed centralised economy with debt exceeding USD7 billion and inflation peaking at 176 percent in 1989. The primary sectors – agriculture and mining – made minimal gains largely because of restrictive policies of a closed economy.

For the same reasons, the secondary sectors – electricity and energy; and financial sectors – largely recorded negative growth under the command and closed economy of then. In that respect, the rate of inflation was primarily a product of policy inefficiency which included, not the least, currency exchange controls and the absence of private commerce.

When the economy was liberalised after 1991, it meant that the de-regulated sectors needed to compete with both local and foreign private players with greater efficiency. The unpopular Structural Adjustment Programme (SAP) partly aided to create market efficiency which included reopening borders for trade and currency floatation. and establish public private partnerships.

During those early stages, inflation reached 200 percent in 1993 as a reflection of (inherited) unproductivity in the real economy. On the other hand, trade in services was promoted to modernise the economy and create greater sources of income for government. By 2001, inflation was 15 percent owing to economic liberalisation.

Part of the reason Zambia’s inflation withdrew into the single digit boundary is because of China’s global growth and demand for copper around 2005-06. By 2010 inflation was around 6.5 percent, Zambia was the leading exporter of copper, agriculture was beginning to realise its diversification potential envisaged in the 1970s.

Fisheries, as an extension of broader agriculture was poised to become an export-led sector. Overall, China had become the off-taker of copper to an extent, greater than the London Metal Exchange (LME). The result was a low inflation and the exchange rate of well below 11 Kwacha to One United States Dollar on average.

A major factor in this stability and economic ascendancy that began in 2010 was because the SAPs led to economic restructuring and debt cancellation negotiations. Zambia proposed in 1999 -2001, after years of discussions, that the Heavily Indebted Poor Countries (HIPC) programme would serve best to take each nation’s debt situation as unique to that country.

The eventual debt cancellation which was meant for 2001 happened in 2005. The significance is that it eliminated the dictations of foreign-based debt service from being among core drivers of currency fluctuations and inflation.

These twin pillars should be driven, at best, by transactions in the real economy.

The precedence, therefore, is that when there is a debt freeze and the real economy is at its optimal pace, currency should not devalue unabated. If it does, it is either the real economy is not at its optimal best; or that foreign debt still has an overhang on the economy.

The same precedence shows that tough decisions have longer-term benefits. In other words, and without equivalence, the hard decisions made between 1991-2001 created the mixed economy of mass potential we have today.


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