MPC at Q3
Economy, Opinion

As we awaited the announcement from the Central Bank, we could not help but wonder how MPC would move with all that was before them. With IMF discussions all but put on ice, an exchange rate that has felt exogenous pressure, a fiscal deficit that remains unabated, Moody’s downgrading the country’s credit rating to Caa1 (rated as poor quality and very high credit risk), could it be that Dr Denny Kalyalya, the man trusted with the Zambian kwacha and his economists could deliver a surprise at their latest MPC?

Sadly no. At its meeting held on 20-21 August 2018, Monetary Policy Committee decided to maintain the Policy Rate at 9.75%. Denny and his team had to contend with a number of factors in deciding not to move the economic chess pieces.

In arriving at their decision, the MPC considered the following factors:

  • Inflation projections suggest it will remain in the 6-8% target range for the rest of the year
  • Economic growth continues to be subdued
  • Lending rates have now started escalating due to appetite for Government securities that are seeing high yield rates
  • Diminished private sector credit growth
  • Rising public debt and sustained fiscal deficit, and
  • Fragile financial sector as reflected by the high rate of non-performing loans

Despite all this, Denny’s kwacha may have depreciated by 1.4% against the US dollar, but it strengthened against the British pound, the Euro and the South African rand. Macro factors in the islands and main land Europe have been omnipresent with a Brexit deal still being negotiated. Furthermore, the change in regime in South Africa continues to have investor’s sceptical leading to a rand that is unstable.

The central bank remains firm on its projection that the global economy will grow by 3.9% in 2018 and 2019 based on the premise that commodity prices will continue to recover, prospects for emerging markets will improve, and resilience in growth in advanced economies notably the United States.

On monetary policy operations, the Governor signaled an increase in market liquidity from K0.8 billion to K1.1 billion. This was made possible due to Government securities maturing, Government spending, Central Bank purchasing foreign currency and maturing of other market instruments.

However, unlike in the previous MPC statement where Denny saw an increase in appetite in Government paper, his announcement this time round saw demand for Treasury bills declining from 98% to 43% and Government bonds subscriptions cooling from 153% to 124%. The total funds raised through Government Securities declined from K7.8 Billion to K6.2 billion. Interestingly, non-resident investors holding Government paper increased to K8.8 billion from 8.5 billion. This phenomenon can partly be explained by the fact that investors looking from the outside in are seeing yield rates rising to 16.96% from 15.87%.

For companies operating in this market, concern will be the increase in the average lending rates from 24.1% to 24.3%. This is not what the progressive lowering of MPC of the glory quarters of 2017 were supposed to achieve. The central bank believes that high yeild rates of Government paper and high non-performing loans (which stood at 12.4%) continue to be the Achilles heel that continue to keep lending rates at elevated levels.

The central bank remains optimistic that real GDP prospects remain positive and will be driven by and large through manufacturing, construction, tourism and mining. Security of electricity supply remains key however as this will support all the aforementioned sectors.

On the whole, MPC judged that the risks to the inflation outlook remain on the upside. They have reaffirmed their positive to be steadfast and ready to change the policy stance should inflation rise above the upper bound of the 6-8% target range. This statement is indicative of a central bank that knows the fragility of the financial times we are going through.

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