Key takeaways from Denny’s Presentation on MPC
Economy, Opinion

This week, Dr. Denny Kalyalya, Governor of Zambia’s central bank, announced his MPC’s decision to hold rates. The Financial Insight team has been closely watching the decisions that have been coming out of the committee and often have predictions of their own in terms of how they believe the MPC will act. This time round, as expected, they did not disappoint. The southward trajectory was one day going to come to a halt. And it did. With economic indicators such as inflation still being within the central banks acceptable range, the policy decisions are producing part of the effect they were meant to produce.

However, Denny admitted that the decision was arrived at because of the recent surge in inflation to around the mid-point of 6-8%, with anticipation of a further surge in quarter 2 and 3 and subdued economic growth on the part of private sector.

For all intents and purposes, the southward trajectory was meant to inspire private sector. However, the hangover of the previous depression still lingers on. This is seen through the elevated lending rates which continue to hinder access to credit for businesses and have casused fragility of the financial sector as reflected in the high non-performing loans. Fiscal deficit levels and rising public debt with slow fiscal consolidation are also a concern for the Governor as his team has seen these as ingredients to sluggish growth.

Although an oxymoron, lending to Government continues to dominate domestic credit growth. No doubt the budget deficit and IMF’s continued protracted engagement has influenced this. However, Denny and his team will have their eyes locked on the reduction in net foreign assets that has been fueled by the servicing of external debt. Furthermore, he admits that “the contraction in money supply is a challenge as strong growth is required to support economic activity on a more sustainable basis”.

Who has the largest appetite for TBills?

Non-resident investors’ holdings rose by 2.4% to K8.7 bln dominated by Government bonds. With attractive yield rates, foreign investors (i.e. those hedge funds) continue to have confidence in long term paper. However, resident investors continued to be the major holders of Government securities.

Although the Governor does not disclose the composition of resident investors, assessing the financial statements (balance sheet and cash flow statement) of financial institutions reveals their increased appetite for short term paper under income from financing activities and cash from investments. Subscription rates for TBills far surpassed that of Government bonds recording an increase from 92.9% to 144.2%.

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