More money problems!

More money problems!

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

Article by Socialist Party Zambia
The Socialist Party is a political formation whose primary mandate is to promote and entrench socialist values in the Zambian society. Anchored on the principles of Justice, Equity and Peace (JEP), the Socialist Party shall transform the Zambian society from capitalism to socialism, building socialism in three key sectors: Education, Agriculture and Health.

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