Between February 13th-14th the Monetary Policy Committee of the Bank of Zambia met to set the direction for Monetary Policy in the near term. Here, it was decided to raise the Monetary Policy Rate by 25 basis points from 9% to 9.25%. This marks the first alteration to the MPR by the UNPD government. Let me begin by defining monetary policy. The term refers to tools the Central Bank uses to control money supply in an economy. These tools refer primarily to the interest rate, the Monetary Policy Rate (MPR), and the reserve ratio (SRR). The MPR is the rate at which the Central Bank loans money to commercial banks, whereas the reserve ratio is the mandated percentage of deposits which banks are to keep at the Central Bank.
The stance by the Bank of Zambia in the recent meeting reflects a largely contractionary monetary policy. What this signifies is simply an attempt to reduce money supply. This approach is most often adopted during times of increased inflationary pressure. I must note the BOZ is late to the party of Central Banks raising benchmark rates. In 2023 most, Central Banks are unwinding their hawkish (contractionary) stance. I however, did expect only a moderate upward adjustment by BOZ, given 9% was in itself relatively high. Taken in view of the recent upward adjustment in the reserve ratio from 9%-11.5%, it seems the Bank of Zambia is rolling up its sleeves as it combats projected inflationary pressure. When commercial banks set their interest rates, they take the MPR as a base component and add their premium which was about 16%.
Microfinance companies do the same, and given they borrow from banks, add further onto the MPR and Bank premium. The effect of all this will be a rise in the cost of credit and its eventual growth slow down. You are less likely to take out a loan when the rate goes up.
According to the MPC statement, inflation is forecast to remain elevated over the forecast horizon. This is owing largely to the continued depreciation of the Zambian Kwacha. This slide is being caused by delays in debt restructuring, particularly, uncertainty over the treatment of Non-Resident Holders of Government Debt (NRHoGD). Zambia’s debt talks have been protracted, the source of which has been China questioning the non-inclusion of the above debt and that held by multilateral agencies in debt restructuring talks. This has led to capital flight, i.e. US dollars leaving the country. Successive treasury bond auctions have been undersubscribed. Investors feed on sentiment, as they try to predict markets and unfortunately the present sentiment of the economy, particularly debt talks, is worrying. These slowed talks are delaying disbursements under the country’s IMF extended credit facility.
Additionally, the Capital account surplus has reduced. The capital account is the major component of the Balance of Payments, which basically compares imports and exports. The Capital account surplus shrank to $18.3 million in the 4th quarter of 2022 from $245million at end of the 3rd quarter 2022. This has been as a result of increased imports whilst export earnings have reduced. Much of the country’s exports come from the copper mines, who registered reduced output at the end of 2022. Imports for fertilizer, medicines and intermediate goods are a further factor. The Ministry of Agriculture recently revealed plans to begin the input purchase program early. Also, the Ministry of Health is in the process of improving the supply of drugs in health facilities.
Thirdly, money supply has increased in the review period. Domestic credit growth almost doubled between the two final quarters of last year. This is largely because of increased activity, resulting from positive sentiment amongst private sector players. The Stanbic Purchasing Manager Index recently crossed the 50 mark, indicating an improvement in conditions over the previous month (December).
What is happening is that this credit is what is fuelling the reduction in the Current account surplus.
I think the Central Bank has taken the right step. However, the effect may only be in mitigation. The root problem is the delayed debt restructuring. Until that is expedited, inflationary pressure will continue to be a risk factor. However, raising the MPR and SRR (Statutory Reserve Ratio) will cool demand in the economy, which though unconnected to the debt quagmire, will at least prevent the situation from worsening. The last thing you need in such an uncertain environment is imports surging. In the short term, very little can be done about diversifying our export mix or increasing copper exports. What can be done, however, is reducing demand for imports.