A white-knuckle wait it was as the media were assembled in the Bank of Zambia auditorium on Cairo Road ready to listen to the presentation that the Governor Dr. Denny Kaylalya and his council prepared as the first statement on the stance of the Monetary Policy Committee (MPC) for Q1 in 2019.
Last year’s February MPC statement set the trend in the Monetary Policy Rate (MPCR) that materialized despite expectations of an upward adjustment in the policy rate due to most economic tensions that took scene through the increase of fuel, the potential vulnerabilities in the financial sector, the depreciation of the Kwacha against the US dollar, the increase in transport cost due to the upward adjustments in fuel prices and reduced supply of selected food items and not forgetting the global uncertainty amidst the US-China Trade War. Nevertheless, Dr. Kalyalya together with his council of economic ‘gurus’ maintained the rate at 9.5%.
In all hope for greater stability of the economy, BOZ last year predicted that “inflation was projected to remain around the lower bound of the 6-8% target range over the next eight quarters. It further lowered the Policy Rate by 50 basis points to 9.75% from 10.25%.” And for sure, Dr Kalyalya deserves a cushion-warm pat on the back.
Economics Association of Zambia (EAZ) with a keen look at the trend lauds the Bank of Zambia as expressed by the Association’s President, Dr. Lubinda Haabazoka. The Association appreciates the forward looking view of the Central Bank taking into account the macro backdrop and global uncertainty in light of the US- China trade impasses and Brexit effects impacting the base metal and emerging markets (EM) currency markets.
In crystal praise, Dr. Haabazoka acknowledges that most central banks globally, have adopted accommodative, flexible and non – predetermined monetary policy through holding benchmark interest rates at current levels. As such, BOZ’s stance on Zambia’s balance sheet vulnerabilities and downside risks to growth is commendable.
Dr. Haabazoka gives an ardent observation of a skewed pattern in Kwacha asset appetite towards Treasury bills especially in the 9-month and 1-year yielding 23% and 23.5% respectively and that treasury bills auctions are heavily concentrated in the longer end of the T-bill curve.
He notes the fiscal dislocations from monetary policy which reflect in elevated yields of Government security curve especially where the Treasury bill yields are at spreads above the primary bond curve yields. These, he adds, have resulted in investor behavioral tendency to prefer shorter dated higher yielding assets than longer dated fixed income assets.
Dr. Haabazoka emphasizes his association’s alertness to offshore market behavioral tendencies which pose risks of elevated treasury yields as a vicious cycle especially that most corporate lenders reference credit risk spreads above treasury bills yields. Price discovery in the secondary markets has also revealed that offshore players have demonstrated appetite for Kwacha assets at spreads above treasury bills rates in the primary market with non-deliverable forward and swap markets pricing risk at 350-450 basis points which could potentially impact corporate debt issues in kwacha term. In that regard, the Dr. Haabazoka urges the BOZ to be alive to this phenomenon and work towards aligning to so as to mitigate the risk of asset mispricing (over/under-pricing).
On the frantic efforts to levitate the level of foreign exchange reserves to above 3- months import cover, the efforts to boost reserves through strategies such as remission of mineral royalty taxes in dollars directly to the tune of USD$109.6million directly to the central bank by the mines, Dr. Haabazoka wishes to encourage more avenues to boost reserves taking into account that foreign currency purchases (in excess of USD$346million in the period) continue to exceed the velocity of reserve build up. He recognises the Governor’s stance on including gold stocks to the international reserves to help address mismatch between dollar supply versus absorption highlighted.
He adds that with the debt service payments denominated in foreign currency, the Association foresees high Open Market Operations (OMO) activity to manage availability of the local currency.
He also advises the fiscal authorities to expedite its sinking fund strategy in addition to a debt redemption strategy that will absorb the forested pressures that could potentially cause further dislocation in the macros.
In need for stimulus to attain Gross Domestic Product, Dr. Haabazoka urges the Energy Regulation Board to rethink its pricing and fuel procurement strategy to allow for benefits that crude price bears to trickle to the markets to allow for reduction in international crude price to be reflected in fuel pump prices. These methodologies have been effected in jurisdictions such as South Africa and Botswana where on a monthly basis pump prices are reviewed in line with oil price developments. He further urges that risks to growth threaten the nation’s attainment of its GDP target for 2019.
The EAZ through its deliberate efforts identified other key technical vulnerabilities of which include the volatilities in current account and fiscal deficits. This has raised concerns from rating agencies such as Moody’s who feel these factors are weighing in the overall sovereign risk rating of Zambia. The association appeals to authorities to reign in the fiscal deficit which the BOZ suggests reflects a higher preliminary figure than anticipated. The EAZ inclined to use the current account deficit as stressing point for the need for increased manufacturing capabilities to help boost export base to cushion the effects.
Dr. Haabazoka notes that twin deficit scenarios caused imbalances in currency markets whose plague easily extends to the money markets. He bemoaned the 8.5% decline in exports to USD$2,094million on account of weaker copper and non-traditional exports (NTEs). It can not be overemphasized that there is need for diversification efforts to double in the wake of the deficit scenarios.
The fiscal authorities are laud for a more local currency skewed approach in debt mix as it would, with more kwacha denominated debt as local debt, have lesser stress of management due to zero currency or exchange rate risk. There is a real need to encourage issuance of kwacha bonds to fund projects locally that skew towards foreign currency denominated obligations which exert pressure on the feeble foreign exchange reserve stock.
It is worth to note that as the Dr Haabazoka is confident and hopeful that with the right policy stances both monetary and fiscal, Zambia will successfully address the balance sheet vulnerabilities it is exposed to.