The month of February is the shortest month even in a leap year when an additional day is added, but this February is proving to be among the longest as far as the economics is involved. The kwacha started the year amok. It was not listening to anyone in the economy; even strong ministerial statements that would otherwise send a currency in some sort of spin. It was only matching forward losing an average of 15 basis points every day and striking a blow to a young nation dependent on imports. Inflation responded in kind and was also soaring. Bank of Zambia was panicking but it stepped in to remedy the situation; it did so in a big way.
The Bank of Zambia would announce what many analysts termed as an astronomical increase in statutory reserve ratio by 900 basis points. The SRR was increased from 17% to 26% signalling a new era for everyone, a second highest rate since liberal economics came into play after a high of 30% in 1994. This move caught the market unaware after the conservatism the central bank has shown in monetary policy adjustments in recent years. But it was evident BOZ was panicking and it had every reason to sweat a little (maybe a lot), the divergence between the onshore and offshore kwacha rate was becoming a serious concern hitting an all-time high of K2 end of January. The offshore kwacha peaked at K29.10-29.27 slowly matching to K30 and pulling the onshore rate along which was range bound K27.1-27.30. This scenario is a fertile ground for speculators and a serious headache for any central banker. Such a disparity is too huge as there is too much money at stake fuelling the fire. A case study of Nigeria which had such a divergence between the official rate and the black market rate is there to see and now bearing bitter fruits. Nigeria has paid a big price for ignoring such a divergence with devaluations of as much as 35% the last 6 months. The Bank of Zambia obviously took note of this.
The fiscal authorities at Ministry of Finance also had major announcements of their own to help consolidate the efforts of the Bank of Zambia. The Ministry of Finance has mandated the transfer of government deposits estimated at K14 billion to the central bank. The response in the onshore and offshore rates was immediate last week with the divergence narrowing down to roughly zero. This double shot policy initiative was delivering the goodies and economic analysts predicted for a kwacha pullback to as much as K24.00-24.50. But the Ministry of Finance has since softened on its stance by granting an extension to commercial banks to complete the transfer of deposits. This was obviously after a major outcry from banking executives on the ‘out of this world’ liquidity squeeze they would face if such a double shot took effect at the same time. The Ministry of Finance listened to the bankers, the bankers got some breathing space and won for a while but the divergence has started rising again. As at Friday, 9th February, the divergence had widened to K0.95 after touching roughly zero on Tuesday, the same week.
The move by Ministry of Finance to give ‘some time’ to bankers has been likened to a Maguire-like own goal by some economic analysts. It is obvious that the currency crisis has now reached a stage where the Bank of Zambia cannot manoeuvre alone; it needs a partner to be in sync with. Dean Onyambu, an acclaimed financial economist, was highly critical of the move noting that the extension would only serve the profitability considerations of the 16 member banking sector over national economic health.
Looking ahead, more news is set to trickle through on Valentine’s Day as the Bank of Zambia will announce the outcome of its policy deliberations. The policy rate is currently at 11% and given all the stops that the BOZ is pulling, the author of this article is predicting an upward adjustment. However, it’s a conservative adjustment range bound 100-150 basis points (1-1.5%). February has indeed being a very long month of fireworks in the Zambian economic space and more are still coming. Fireworks of tension and not celebration; everyone is hoping for celebration later by having a major pullback in the kwacha and some form of stability thereafter.