Tag: monetary policy

Reflections on the economy

Reflections on the economy Featured

The Bank of Zambia has failed to meet the required K2.6 billion per bond auction as only K854 million was raised during the latest auction results published on February 17 this year.

The subscription rates are an economic barometer of the economy, as an over subscription is generally seen as mark of economic confidence by investors, while an under subscription is seen as a score for low investor confidence.

The Bank of Zambia, trying to raise funds on behalf of the government by issuing government bonds, only managed to raise K854 million out of the targeted K2.6 billion, an under subscription or low uptake of 32 per cent. Investors are on the fence due to uncertainty with regards to national debt restructuring.

We will not be surprised if the bankers of economic evils eventually start printing money.

These are the effects of removing liquidity from the markets. We strongly suspect financial institution participation in government securities has dwindled resulting in low subscriptions, meaning the funding of government operations will be negatively impacted.

And we don’t think this is caused by debt restructuring uncertainty as is being suggested. This should be seen as a direct consequence of low liquidity levels primarily, and the possible pull out of non-resident investors upon maturity of their securities. The rise in interest rates in the United States and Europe is also incentivising non-resident investors to pull out of emerging markets bond investments and redirecting back to the United States and Europe which carry less country risk than emerging markets, in other words in more secure economic environments.

The maturity risk is now materialising whereby offshore investors in government securities are now cashing out on maturity of their investments instead of rolling over. So we will now end in a net payout position for government securities with the following consequences:

(i) Depletion of international reserves as investors externalise their investment. The question is: what are the international reserves cover for offshore investment holding in government securities?

(ii) Pressure on the Kwacha with a medium-term outlook of continued depreciation, which will result in higher, imported inflation impact.
The question is: how will the increase in statutory reserve ratio, which has reduced liquidity in the market, mitigate this? Ultimately it appears this policy measure is impotent – for lack of a better word. Worse still, it slows down economic growth.

(iii) Under subscription in government securities, which is one of the main sources of funds for government operations, will significantly affect funding of government operations, including civil servants’ payroll.

Based on February 17 under subscription of only K845 million out of a total offer of K2.6 billion means the government has to look elsewhere to raise funds for the shortfall. The question is: given the already underperforming economy, what alternatives does government have? External loans. But who will be ready to give us loans? The commercial loans window is closed given the debt default and limited bilateral funding.

Where to as a country?

• Reverse the generous tax holidays given to the mining sector.
• Engage China on a bilateral basis to give us a three-year moratorium on its debt while we grapple with the never-ending IMF-G20 common framework.
• Introduce austerity measures, including government-wide international travels at all levels, including for the Head of State.

Lastly, reverse wrong monetary policy decisions taken by the Bank of Zambia to increase the statutory reserve ratio. The under subscription in government securities, stated above, is partially due to reduced participation of the banks in subscribing to government securities. It is also clear that this policy direction will not impact the exchange rate depreciation as it is now evident that the forex demand side is significantly driven by non-resident/offshore investors cashing out and not rolling over their government securities. This is a highly misdirected policy decision. As if this is not enough, the MPC was further increased by 0.25 per cent, making it unbearable for those with commercial loans and those intending to borrow. We hope your new 4×4, which was funded using vehicle and asset finance, will not be taken away if you default due to the high cost of credit.

Austerity measures should also include Mr Hakainde Hichilema moving to Nkwazi House to defray his daily transportation costs to and from his not so Community House and route lining costs. The country is bleeding and we can’t keep up with the same excuse of Nkwazi House being uninhabitable when ordinary citizens are going without food.

A leader should lead by example from the front and demonstrate that he, too, is sacrificing.

Fred M’membe

More money problems!

More money problems! Featured

The Bank of Zambia has issued an instruction to commercial banks in Zambia to reduce money circulation further by increasing the statutory reserve ratio it holds.

The statutory reserve ratios, “will be increased by 2.5 percentage points to 11.5 per cent from the current 9.0 per cent. The revised statutory ratio of 11.5 per cent will be based on the weekly return of selected assets and liabilities from next Wednesday, February 8 2023.

The decision by the Bank of Zambia to increase the bank reserve ratio means more money problems for Zambians.

In a word, the Bank of Zambia move has effectively squeezed money out of circulation which will force commercial banks to only deal or lend money to pristine clients like mines or big business.

The ordinary already poor Zambian shall suffer even more as money is squeezed out of the market and suppliers are not paid, its going to be tough for many poor Zambians.

What Zambians need is more money and not less money – more, and not less, money in circulation.

Say increases minimum balance on your savings account from K500 to K600. Which means whilst previously you could access K500 of your money if your account balance is K1,000, now you can only access K400. To put this into perspective, it means all commercial banks balances held by the Bank of Zambia, the commercial banks will have 2.5 per cent reduction on the funds they can access for onward lending to their clients. Nationally it means commercial now have less funds to lend when SMEs that are crying for access to credit.

Clearly, there’s a lot of pressure on the Bank of Zambia to keep the exchange rate low in line with the promise made by Mr Hakainde Hichilema to keep athe Kwacha appreciating.

This will mean more money because increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.

Reserve requirements are one of the monetary policy tools the Bank of Zambia uses to implement monetary policy. However, an over employment of changes in reserve requirements to enact monetary policy can be very detrimental. Open market operations are a much more precise tool.

A change in the reserve requirement ratio affects bank credit and the money stock. Reserve requirements are the percentage of deposits that depository institutions must hold in reserve and not lend out.

There are several reasons why reserve requirements are not frequently changed, the most important of which is that open market operations provide a much more precise tool for implementing monetary policy.

The impact of changes in reserve requirements is difficult to estimate; each change has the potential to affect depository institutions in different ways, depending on each institution’s deposit base. Changes in reserve requirements also my lead to changes in pricing schedules for some bank services, because some bank fees and credits are set based on reserve requirements.

Fred M’membe
President of the Socialist Party

Statement of the Socialist Party on the fast deteriorating economic situation

Statement of the Socialist Party on the fast deteriorating economic situation

Things seem to be changing very quickly and ceaselessly.

It’s just over a week ago since we shared our concerns, fears, meditations and reflections on the state of our country’s economy and warned that things will get worse by the end of this year. We are now witnessing the increase of the overnight lending rate to a record high of 28 per cent, the monetary policy rate by 125 basis points to 11.50 per cent and the steep depreciation of the kwacha.

In simple terms, this means that nearly all items our people purchase – food, fuel, medicines, agricultural inputs, and so on and so forth will become more expensive. And if they have a loan from a bank or lending institution, their income will decrease.

It means that businesses that have borrowed from banks will have to pay back more than they anticipated.

In short, it means, it will be even harder for money to come by.

The Bank of Zambia has admitted that the increase in both the overnight lending rate and the monetary policy rate are measures “aimed at instilling stability in the market” and “to counter inflationary pressures that include exchange rate”.

And as we advised, the Bank of Zambia has also admitted, that “it recognises that to address the prevailing economic challenges, monetary policy actions alone are not sufficient. They need to be complemented by the implementation of corrective measures”.

It is clear that the Bank of Zambia also recognises that we are in an economic crisis! And it is imperative that our government recognises this and not only takes responsibility for it but quickly implements remedial action.

As we have said before, it takes a little intelligence – if that is all one has – to recognise that continued debt contraction and reckless government spending will make the lives of our people tougher and tougher and more and more unbearable.

Our people, who are already struggling to afford the basics – food, electricity, water, medicines, school fees and so on and so forth deserve a government that governs in their interest. A government that ensures that the basic necessities to live a dignified life are available for all.

Issued by Fred M’membe on behalf of the Central Committee of the Socialist Party

Garden Compound, Lusaka

November 21, 2019

Zambia’s catastrophic economic outlook

Zambia’s catastrophic economic outlook

Good morning ladies and gentlemen from the press. Welcome to today’s Press Briefing. The focus of this briefing is on the catastrophic economic outlook for our country and its consequences.

A. A reminder of what the Socialist Party previously stated

As you may still remember, last year (on the 15th October) the Socialist Party had called for a Press briefing in this venue. That Press Briefing looked at the downgrading of the Zambian economy by Fitch Ratings and the accompanying ramifications.

In that briefing we had come to a conclusion that the prospects for economic growth in Zambia were diminishing and that the chances of stopping the country’s economic downfall were becoming minimal each year. Public debt was singled out as the most important impediment to attaining macro-economic stability. Debt servicing alone was going to consume about 24% of government revenue during 2019 to 2022 and that the increase in external borrowing during 2019 would make Zambia’s debt stock more vulnerable to foreign exchange volatility given the globally increasing interest rate levels. We pointed out a number of related concerns:

1. Lack of transparency and timely debt accounting information by the Ministry of Finance that could be interpreted as a purposeful and highly dangerous attempt to conceal the real situation and levels of external debt contraction.

2. Poorly informed and implemented tax reform measures introduced through the 2019 Budget that were meant to increase revenue. These could at the most marginally increase government revenue, but not significantly reduce fiscal deficit.

3. Deteriorating governance indicators. High levels of corruption, lack of accountability and misallocation of resources and poor priority setting are contributing to the dilemma.

We also elaborated and outlined the economic consequences. Some of which were;

1. “The current account deficit will continue to widen. This will continue to increase the demand for foreign currency and put pressure on the Kwacha. The stability of the kwacha cannot therefore be guaranteed. “

2. “Some short-term liquidity injection will be needed merely to stabilize the Kwacha. Without a deal with the IMF, it is hard to imagine how this cash can quickly be secured without further exacerbating the debt situation and deterioration of the Kwacha. A deal with the IMF and an austerity programme would however make a PF government that is increasingly losing popular support and internally divided more vulnerable. The possibility of losing the 2021 elections would be high. As things stand, the PF government would rather sacrifice the Zambian economy than lose political power.”

3. “The Socialist Party projects that gross international reserves will continue to deteriorate. Three months of import cover will be difficult to sustain. At these low levels of international reserves, any negative changes affecting the country’s ability to earn foreign exchange would entail a disaster for the economy. It is a precarious situation.”

4. “The chances of outstretching monetary policy and instruments to leverage macro-economic stability are unlikely. In the absence of robust fiscal reforms, the Zambian economy is in free downfall.”

B. What is the current economic status?

Ladies and gentlemen, a lot has happened over the past 6 months. Unfortunately, the developments validate our earlier – rather negative and pessimistic – analysis of the economic trajectory.

The dire situation we find ourselves in may not yet be apparent to all. There are several analyses from multilateral organisations, financial institutions, research and consulting groups as well as from Zambian government departments that are helping us to sketch the magnitude and depth of the crisis.

The current picture of the Zambian economy is characterised by the following:

1) A highly volatile domestic currency, especially over the past 2 weeks. The kwacha is continuing to depreciate – at K14 to a dollar it is at its lowest since November 2015.

2) High international and domestic debt and servicing levels – with the ratio of debt to GDP estimated to reach 90% given a depreciating Kwacha.

3) Reductions in export earnings, foreign direct investments (FDI), portfolio investments, development assistance and other external sources during 2017 and 2018 as well as the first quarter of 2019. During the same period imports have not significantly reduced and balance of payments have continue to remain wide – above 4.5%.

4) To finance the current account, the authorities resorted largely to drawing down on foreign currency reserves. The move brought down reserves to USD1.6 billion – just sufficient for 2 months import cover! This development contributed to exerting huge pressure on the Kwacha.

5) An overstretched monetary policy toolkit applied over the years in the absence of significant fiscal consolidation.

6) Elevated financial sector vulnerabilities.

7) Poorly handled and negotiated mining tax regime changes.

8) Revenue disruptions due to the re-introduction of sales tax and abolishing of VAT.

9) Relatively poor agricultural performance due to insufficient rainfall in the southern half of the country; and much more disastrous

10) A government that seems clueless, detached and quite often unwilling to take remedial action that is perceived to hurt its re-election prospects.

This is an extremely precarious situation. At this point we may quickly look at developments in the global economy and explore if developments in the global economy could help to moderate the situation.

C. Does the global scenario offer much hope for Zambia?

At the global level, China that has been the locomotive of growth for three decades. The projections for 2019 are that China will register the lowest growth rate (of about 5.4%) since 1990.

The USA trade war against China, a chaotic British exit from the European Union, the fluctuations in the global oil prices, and threats of military confrontations in several parts of the world and a number of other factors are all adding up to lower down global economic growth prospects.

Consequently, the global demand for commodities, including copper will not be that high. These developments have a negative domino effect on developing countries, Zambia inclusive.

During of the financial crisis in 2008, the major world economies quickly engaged in a coordinated fiscal stimulus to counter the crisis. For now, we do not see any urgency in this direction. The global economic slowdown will have to worsen before coordinated action is realised. A sudden change in the fortunes at global level should therefore not be expected. For developing countries with weak fundamentals like Zambia, this is the worst-case scenario.

D. What are the consequences for the Zambian economy?

1. Zambia’s projected growth for 2019 was initially pegged at 4.2%, but with the world economy slowing down more than initially expected, the projections were revised downwards to 3.1%. However, weight of current domestic developments may start threatening even this low GDP growth projection. A growth rate below 3% is becoming a possibility.

2. For a small, landlocked and mono-cultural export economy like ours, currency reserves to cover 4 months of imports make economic sense and help to flatten risk levels. The current low level of import cover (at 2 months) erodes economic confidence and activates currency speculation. Without decisive fiscal and monetary intervention, the reserves will continue to dwindle.

3. During 2018, this depreciation of the Kwacha did not immediately push up inflation. Inflation remained within the anticipated 6-8% range. As a result, the Bank of Zambia (BOZ) maintained what could be termed as a neutral policy stance – maintaining its policy rate constantly at 9.75% – which was the lowest since 2014. As we entered 2019, the expectations were that monetary policy, through the Bank of Zambia (BOZ), was likely going to continue with inflation targeting with fewer changes in the interest policy rate. This would have allowed for a continued correction from 2018. Under this scenario, the exchange rate will as well have remained stable at 11 to 12 Kwacha to a dollar. However, the first quarter of 2019 was not encouraging: Exports continued to decline in January and February, external debt servicing payments were rising, private sector activities experienced contractions, and the international reserves continued to fall. The space for controlling inflation has therefore disappeared. The Socialist Party therefore sees inflation rising beyond the range for 2018. Double-digit inflation rates will be most likely.

4. The cumulative impact of increasing debt servicing, declining exports, low currency reserves and climbing price pressures is toxic. Overall private consumption will be negatively impacted, macro economic stability will be hard to sustain and economic growth prospects for 2019 and beyond will be compromised.

5. For the Zambian working masses, the poor, unemployed, students and all Zambians already facing economic hardships, their situation will continue to worsen. Prices of essential commodities will escalate, earned income in kwacha will lose its purchasing power, taxation levels and user charges will increase and poverty levels will not reduce.

6. Zambia’s global economic ratings will definitely fall below those for 2018. Future borrowing will therefore be more costly for the country. In some quarters, there have been suggestions of a) printing money, b) auctioning the country’s assets, and c) refinancing of old debt through new debt contraction from China. All these “options” point to a naïve and misplaced understanding of what it takes to instil confidence and stabilise a fragile small economy. There is no substitute for policy consistence and predictability. None of these “options” come anywhere nearer. They would actually trigger the opposite and condemn future generations of Zambians to economic malaise that would take decades to overcome.

E. What should the government do?

1. In our last Press Briefing, we advised the government that the first thing is to own up that the economy is in great danger and the livelihoods of millions of Zambians are at stake. We described the economic crisis as a national disaster of high magnitude. This description remains true today.

2. We further stated that the PF Government must also acknowledge their policies and actions to-date have greatly contributed to the difficult situation the economy finds itself in. In trying to find solutions a non-partisan approach was urgently needed. All Zambian stakeholders, including workers’ representatives, peasant associations, academia, political parties and movements representing the masses of our people have to be engaged in building consensus on the options for saving the economy from total collapse.

3. About 7 months down the road, this advice has been ignored with severe consequences for the entire economy and the Zambian people. Time is running out.

4. What Zambia is going through is part of a globalized capitalist crisis. The typical menu of capitalist solutions will not deliver. They are in effect a contributing factor. We realize that the opposition political parties in Zambia are largely advocating for more austerity and more external assistance. They are equally misdirected. The sheer incompetence and desire to maintain political power at all costs by the PF administration is worsening the situation in Zambia.

5. We still reiterate the need to win back the trust of the Zambians and international finance markets that the PF government can still be entrusted on the helm of the economy for another 2 years. The actions for gaining this trust would still include: (i) maintaining a lean cabinet. The recommendation of the NDF to reintroduce deputy cabinet ministers is heading in the wrong direction; (ii) drastically cutting the allowances of the top leadership by 50%; (iii) Reducing the costs of international travel by 60%; (iv) reversing the increases in salaries of all constitutional position holders; (iv) cutting the cost of running the government fleet by at least 40%; (v) cutting the bill for workshops and conferencing by 70%; (vi) Undertaking concrete governance measures that would point to a zero tolerance approach towards corruption.

6. The socialist party still recommends that external debt contraction and sustainability be a constitutional responsibility under close parliamentary scrutiny. There is need to embark on developing a legal framework that would constrain a sitting government from incurring unsustainable debt levels that have potential to destroys the entire economy.