Credit is essential for the economy to function well. It funds new investments and allows people to purchase houses, cars, and other items. Of course excessive lending and borrowing usually ends up in financial crisis however, in principle, credit availability is good for economic development. Domestic banks, by financing investment, play a pivotal role in increasing employment, providing efficiency and productivity and inducing growth in an economy.
Generally, bank credit in Zambia and other countries is defined as the credit extended by banking institutions to the private sector only which includes both firms and households. However, it does not include lending to the government. Credit to the private sector can also be referred to as financial resources to the private sector such as loans and advances, purchases of non-equity securities, trade credits and other accounts receivable, which establish a claim for repayment.
In addition, financial corporations such as monetary authorities have data available on the credit to private sector status and updates of the country. For instance, Bank of Zambia has its Monetary Policy Committee Statements containing the same and are issued four times a year.
According to the September 2021 Monetary Policy Committee statement, credit to the private sector picked up while money supply expanded further. Lending to the private sector picked up by 16.3 percent, year-on-year, in June compared to 0.5 percent in March largely supported by increased disbursements from the Bank of Zambia Targeted Medium Term Refinancing Facility (TMTRF). The expansion in domestic credit to Government slowed down further to 48.3 percent from 69.6 percent as commercial banks scaled down the accumulation of Government securities. During the same period, money supply (M3)2 continued to expand, growing by 48.3 percent from 39.6 percent largely driven by the accumulation of international reserves.
To start with, a disbursement is a form of payment from a public or dedicated fund. It includes expenses incurred by the firm for out of pocket expenses that you would be responsible for paying if you handled the matter for yourself. Therefore, increased disbursements imply a less burden on expenses as such lending increases. Government securities which are government debt issuance used to fund daily operations as well as special infrastructure and military projects accumulated. With this increase in government securities, it becomes hard to borrow hence leading to a slowdown in domestic credit to the government. The increase in money supply was accompanied by accumulation of international reserves (external assets readily available to and controlled by monetary authorities). Also, all else being equal, a larger money supply lowers interest rates.
Coupled with other factors that would also influence the increase in lending to the private sector is lower interest rates, which actually declined according to the September monetary policy committee statement. When interest rates are low, borrowing becomes cheaper. This should increase the demand for bank lending as firms and consumers are more willing to borrow rather than save in normal circumstances, a cut in interest rates probably would increase bank lending.
Moreover, Credit expansion means consumers can borrow and spend more while enterprises can borrow and invest more. A rise in consumption and investments would further create jobs and lead to a growth of both income and profit.
As of the November 2021 Monetary Policy Committee statement, Kwacha denominated credit to the private sector grew by 35.9 percent in September, year-on-year, compared to 33.8 percent in June. This was largely driven by further disbursements from TMTRF and drawdowns on overdraft facilities to meet working capital needs. In contrast foreign currency denominated credit to the private sector contracted further by 30.8 percent due to conversions to Kwacha loans. Over the same period, money supply (M3)2 growth substantially declined, growing by 11.2 percent from 48.3 percent due to the reduction in foreign currency deposits, valuation effects arising from the appreciation of the Kwacha, and the slowdown in domestic credit.
Governor Charles Mvunga stated during the monetary policy announcement and press briefing that the increase in credit is considerable. And there is some growth but this is nominal when you take inflation into account, real growth is much lower than that.
A Foreign currency loan means that you borrow money in a foreign currency and repay in that currency as well. Although with the conversions to kwacha loans, it means that firms would have to collect revenue in local currency. Also, exchange rate changes can affect the borrower’s ability to repay their debt. Hence borrowers face an exchange risk. As such, it was observed that foreign currency dominated credit to the private sector contacted while kwacha currency dominated credit increased. As for money supply effects, an increase in a country’s money supply causes its currency to depreciate. A decrease in a country’s money supply causes its currency to appreciate.
Additionally, monetary authorities analyze credit flow to the private sector because of its strategic importance in creating and generating growth of the economy. Policy makers, for instance, would want to know the response of private sector credit to changes in money supply. Such knowledge would be worthwhile if policy makers hope to formulate monetary policies that ensure maximum contribution of the private sector to economic development. Investors, on the other hand, would find this knowledge to be of interest, since changes in money supply affects the volume and cost of credit available to the private sector. This knowledge would enable them to formulate credit policies that would enhance their overall corporate objectives. Thus, the analysis of money-credit relationship is crucial for conducting appropriate monetary and credit policies.
To conclude, in many developing countries, one of the national development goals is to increase the private sector’s contribution to the economy. However, a prerequisite for achieving that development impact is an economic environment conducive to doing business.
