To decode the Monetary Policy Statement, let’s start with a recap of the global and local economy performance to date. From a global front, the world economy projects negative growth at -3% in 2020, with circa 6% recovery growth in 2021. This performance is highly attributed to the Covid-19 pandemic which has had a negative toll on the world at large.
Most countries have opted to ‘lock down’, along with other measures such as social distancing and masking up to curb the spread of the virus. These measures may seem to work effectively for humanity but have since disturbed normal supply chain operations in terms of local and cross-border trade thus affecting economic activities globally.
Locally, the Zambian economy projects negative growth of 2.6% by December 2020 from 1.9% in December 2019. This performance is highly attributed to a further reduction in core economic sectors being tourism & hospitality, trade, construction, and manufacturing due to Covid-19. Inflation continues to rise above the 8% target to due to continued increase in electricity, fuel, and food prices, with a dependency on imported goods, largely affected by the depreciation of the Zambian kwacha versus the US dollar. Main export goods, copper and crude oil prices have reduced while selected agriculture goods prices such as wheat, maize, and soya beans increased due to increased local production due to closed borders.
In general, interest rates have been on the rise, specifically, the bank lending rate from 28% in December 2019 to 28.8% as at March 2020 affecting borrowing and repayments by debtors. The appetite for investments in government securities such as TBills and Fixed Income Bonds has been fairly low due to strained liquidity hindering purchase.
As at March 2020, the kwacha largely depreciated against US dollar with high supply of the dollar by the mines and foreign entities and high demand by the public; trade industries. As at May 2020, the kwacha has started to stabilize but the earlier depreciation was due to the Covid-19 pandemic harming already existing headwinds weakening the kwacha i.e., external debt, reduced foreign exchange reserves from 1.45billion in December 2019 to 1.4billion in March 2020 and major country downgrades by credit rating firms Moody’s, S&P and Fitch.
The urgent need to stabilize the economy, manage inflation and improve the livelihood of the Zambian people led the Monetary Policy Committee to reduce the policy rate by 225 basis points (2.25%) from 11.5% to 9.25%. What exactly does this mean? The policy rate is a liquidity tool which determines the rate at which our banks borrow from Bank of Zambia and acts a benchmark for the banks to lend to the public. This reduction will hence manage economic activity in terms of increased borrowing by individuals and businesses to drive investments and spending, ultimately managing rising inflation. The trickle-down effect for a loan holder and indebted business is that respective banks will reduce interest rates (earlier mentioned) on loans held thus reducing repayment amounts and duration of loans with a goal of generating liquidity.
In this Covid-19 era, this is without a doubt good news for business owners servicing their businesses from loans as a source of income and loan holders who have salary deductions due to active loans.