a) For each of the following, identify in which part of Zambia’s balance-of-payments account it appears...

a) For each of the following, identify in which part of Zambia’s balance-of-payments
account it appears (current account, capital account, or method of financing) and
whether it is a receipt or a payment.
i) A foreigner purchases shares from ZCCM-IH.
ii) A Zambian purchases an airline ticket from Kenyan Airways.
iii) The Malawian government’s purchase of Zambian Treasury bills.
iv) A South African purchase of Zambian Tea.
v) K50 million of donation to Zimbabwe.
b) A central bank sale of a foreign asset is no different from an open market sale of a
government bond. Is this statement true, false or uncertain? Briefly explain.
c) If the Bank of Zambia buys dollars in the foreign exchange market but does not sterilize
the intervention, what will be the impact on international reserves, the money supply,
and the exchange rate?

Solutions

Expert Solution

Current account of a country records trade of goods and services whereas capital account records movement of capital in the economy.

( I ) When a foreigner purchases shares from ZCCM-IH, it is called foreign portfolio investment. Any sort of foreign direct investment or foreign portfolio investment is considered as an investment in capital. Also, when the foreigner purchases share, he or she has to pay money to ZCCM-IH. Therefore, it is a receipt and this transaction would appear in capital account of Zambia.

( II ) When a Zambian purchases an airline ticket from Kenyan Airways it is also a form of trade where exchange of service in the form of airline travel takes place. As the Zambian pays money to the Kenyan Airways it is a payment and it would appear in current account of Zambia.

( III ) The Malawian government’s purchase of Zambian Treasury bills is a form of investment in Zambia's financial instrument therefore it is a receipt and it would appear in Zambia's capital account.

( iv) A South African purchase of Zambian Tea is a merchandise trade where South Africa pays in exchange of tea. Therefore it is a receipt and and it would appear in current account.

( V ) K50 million of donation to Zimbabwe is simply a payment made to Zimbabwe therefore it is a payment which would appear in current account of Zambia.

( b ) This statement is true.

When the central bank sells a foreign asset in an open market there are large number of buyers who can buy these assets after paying certain price determined according to demand and supply of such assets. Similarly sale of a government bond in an open market where there are large number of buyers is simply sale of an asset where demand for such an asset will determine its price.

( c ) When the Bank of Zambia buys dollars in the foreign exchange market but does not sterilize the intervention,
it would increase the reserves of Zambia of foreign exchange, money supply in the country will not be impacted and also the exchange will remain the same as it has been used yet ( sterilized ).

Rahul Sunny answered 1 year ago

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