IT IS A GOOD POLICY DECISION FOR LIQUIDITY

THE rating giants released their January 2018 pronouncement and the holdout from Moody seemed to have reached its ebb with the change in their economic rating outlook position for Zambia in January 2018.

In November 2017, the Standard & Poor and Moody treated us to competing rating pronouncements. While the Standard & Poor upgraded its economic outlook position for Zambia in November 2017, Moody remained restrained maintaining its April 2016 negative economic outlook forecast until January 2018 when it upgraded its outlook position in line with Standard & Poor’s earlier assessment announced in November 2017 and January 2018.

Moody action is grounded on government's progress with its fiscal consolidation measures together with the favourable commodity price environment which they expect will ease government liquidity pressures. Moody also mentioned the elimination of the electricity supply gap and fuel subsidy reforms as measures that have contributed to reduced pressures for government spending overruns and expenditure arrears. The further expectation from Moody is that fiscal revenues will gradually rise over the medium term, to around 18% of GDP in 2020, from around 16% in 2016, supported by higher copper prices, higher copper production. and structural tax measures.

It is necessary to point out that the outturn in the tax measures as anticipated by Moody will be predicated on how the Zambia Revenue Authority implement some of the fiscal instruments that the 2018 budget has bequeathed on it. One particular area worth mentioning is that although in the interim, there is a higher expectation in tax revenue on account of mandatory fiscal devices that are now required for retailers for instance, the expectations of increased revenue on account of this would appear premature given the low internet infrastructure national wide. To be clear there are other fiscal measures that were introduced in the 2018 budget that can help increase fiscal revenues but this is dependent on implementation.

Against the above rating outlook and commodity price environment, I was keen to see the Bank of Zambia (BOZ) policy action at its February 2018 Monetary Policy Committee (MPC) policy meeting. It did not disappoint. The MPC reduced the monetary policy rate (MPR) by 50 basis points to single digits for the first time since over 4 years ago. This policy rate was reduced from 10.25% to 9.75%, which rate was last indicated at the November 2013 MPC and it goes to show that it has been a tenuous journey. The MPC also reduced the statutory reserve ratio by 300 basis point to 5% from 8% position made at the last MPC in November 2017. While the BOZ has been cautious in their policy action in terms of the reduction in the policy rate, we have seen their return to their bullish position with respect to its reserve policy position to support liquidity in the banking sector.

It is necessary to pause briefly and point out the importance of the MPR rate. The MPR is an interest rate at which Central Bank lends to commercial banks and other of its clients. It also acts as one of the transmission mechanism of the Central Bank’s monetary policy to impact on commercial banks’ lending rates as the MPR acts as a commercial bank’s reference rate for their pricing of credit facilities. It is also used to influence the real exchange rate and therefore ultimately, it impact on the consumer prices.

As noted above, the policy rate has a significant impact on credit pricing and ultimately consumer prices and therefore the background to the decision made to adjust or not adjust the rate are important factors in understanding the economic health position of the country.

In the recent past in 2017, the Central Bank’s policy rate reduction has trended from 150% basis point quarterly reductions at its meeting in February 2017, May 2017 and August 2017, 75% basis point reduction in November 2017 to 50% basis at the recent monetary policy committee.

On the other hand, the Central Bank has increased the fraction of the reduction in the reserve ratio from 150% basis points in November 2017 to 300% basis points, similar to its position in May 2017 signalling the Central Bank expansionary strategy to increase liquidity in the market and in turn influence the availability of credit.

On the other hand, the Central Bank’s assessment of a higher upside risk of inflation pressure on account of higher crude oil prices and lower agricultural output which has constrained them in terms of its quantum reduction in the policy rate may be a bit over cautious.

Currently crude oil prices are coming under pressure given increased expectation of crude oil output as a consequence of increased Oil Rig constructions particularly in the United States. Infact, just last week, the International Energy Agency warned that the global oil market might slip into deeper oversupply on the back of non-OPEC production growth led by the United States. In terms of whether there will be lower agricultural output, it will be of interest to see whether the late surge in rains will contain this feared outcome.

Additionally, Goldman Sachs and others have raised their projections for the price of copper in 2018 from US$7,050 per tonne to $8,000 per tonne amidst a growing supply gap. This should moderate the risk of inflation rising in the medium term.

In any case, whereas it seems the Central Bank is signalling cautious optimism in its monetary policy rate adjustment, it has taken a more optimistic position with the reserve ratio adjustment. Overall, the policy decisions taken together are a departure from the restrained position that was signalled in its monetary policy position in November 2017.

As a yardstick, it also helps to look at what our neighbours are doing given some similar external factor influences.

In Botswana, Perhaps as a consequence of an uptick in monthly inflation in December to 3.2%, the Monetary Policy Committee of the Bank of Botswana maintained its monetary policy rate at 5 percent. The decision to maintain the policy rate position is in part due to their assessment of the upside risks emanating from improving global economic activity as it is a net consumer importer and due to its tax adjustments which have affected its inflation outlook amidst lowered GDP growth. In any case, at 5%, the policy rate is reasonably low comparatively.

In South Africa as in Botswana, the Reserve bank of South Africa maintained its monetary policy rate at 6.75% amidst a mixed economic performance cycle. Inflation outlook over the near term, in particular, has improved due to stronger performance of the Rand and lower electricity price assumption following the 6% tariff increases notwithstanding the downgrade from Moody on account of deteriorating fiscal position and alleged lack of credible growth-enhancing policies. The annual average Inflation was at 5.3% but is expected to drop to 4.9% at the end of 2018, while it is then expected to resume an upward trajectory and measure 5.5% at the end of 2019.

Similarly, in Namibia, its Central Bank has maintained its monetary policy rate at 6.75% from November 2017 mainly to ensure they maintained parity with the South African counterparties and also on account of weak economic performance in 2017 although there are expectations of an economic uptick in 2018. Annual inflation averaged about 6.2% in 2017 similar to Zambia’s position, however, they had constant monthly inflation figures and they forecast much-reduced inflation assessment to an average of 5% in 2018.

In Uganda, the medium-term inflation forecasts remained consistent with those assessed in December 2017, with inflation forecast to increase gradually with the strengthening of the economy to 5 percent by the second half of 2019. To avoid risking their objective of keeping inflation low the Uganda Central Bank made a cautious easing of monetary policy by reducing monetary policy rate by 50 basis points to 9% to boost private sector credit growth and strengthen the economic growth momentum.

In Kenya, their Central Bank decided to maintain its monetary policy rate at 10% on account of increased optimism for growth prospects in the economy estimated at 5.8% and those inflation expectations will remain within their target mid-term range. This follows recoveries from the 2017 droughts that also impacted most of southern Africa and a moderate departure from the highly charged political uncertainty environment that is becoming a constant feature whenever presidential elections are planned. Instructively, the Kenya market with its interest rate cap means that the monetary policy decisions in terms of its impact in the retail credit sector will be anchored mostly on monitoring the interest rate cap impact on their monetary policy transmission.

What is indicated in the 5 regional countries looked at above, is that most of the Central banks in the region have all taken a cautious approach when it comes to making adjustment to their monetary policy rate positions. In most cases, there is a central concentration on not disrupting their medium-term inflation focus. The Bank of Zambia has, however, being the most aggressive at least in terms of its liquidity policy position.

It is worth noting that the Bank of Zambia advised that it intended to use a forward-looking monetary policy framework anchored on the Policy Rate as the key signal for the monetary policy stance, to improve the transmission of price signals and therefore we can infer from this that in line with others in the region it will remain cautious in terms of its price transmission policy framework mechanism. The Bank is however made a huge statement by the reduction in the reserve ratio that it sees an increase in liquidity as central to economic growth in the interim.