WHAT MONETARY POLICY POSITION CAN WE EXPECT?
THIS month, the Bank of Zambia (BOZ) monetary policy committee will be sitting down to announce the August 2018 monetary policy statement against the recent backdrop of conflicting credit ratings with Moody’s rating downgrade because of perceived government fiscal consolidation, challenges and increasing debt burden, whilst Fitch reaffirmed our credit rating position albeit with a negative outlook.
Moody’s rationale is that their estimates of the fiscal deficit for 2018 is around 7.8 percent of GDP, well above the government’s 6.1 percent target together with rising spending pressures from capital expenditure and interest payments.
They indicate that this will be an increasing challenge for the government to meet its fiscal con- solidation objective against the rising interest payments absorbing almost a quarter of revenue which they assess will likely result in much slower fiscal consolidation in the next few years.
It should be noted that Moody’s is being consistent here. In January 2018 when Fitch decided not to upgrade our credit rating, Moody’s did and this was grounded on government's fiscal consolidation measures together with the favourable commodity price environment which they had expected would ease government liquidity pressures.
Moody’s had also noted in its January 2018 report that the elimination of the electricity supply gap and fuel subsidy reforms were positive measures that would reduce pressure for government spending overruns and expenditure arrears. Additionally, Moody’s has a long view expectations that fiscal revenues will gradually rise over the medium term, to around 18 percent of GDP in 2020, supported by higher copper prices, higher copper production and structural tax measures.
Fitch has however affirmed its February 2018 B rating, but maintains a negative outlook rat- ing to reflect the current low level of foreign exchange reserves, and high public debt burden of around 60 percent of GDP, high commodity dependence, as well as slower progress on the government’s planned fiscal consolidation efforts. Fitch has estimated that there will be a deficit of around 7 percent of GDP against a budget target of 6.1 percent. Fitch’s main concern with the debt is that the foreign-currency debt makes up around 55 percent of total government debt with the share of non-concessional debt taking about 60 percent of that. The Bank of Zambia is also up against a current tide that shows a low two-month foreign reserve position, a heightened risk of inflation from the expected increase in international oil price.
It is likely that the central bank policy action at its August 2018 Monetary Policy Committee (MPC) policy meeting will be to stay the course if not slightly tightening its monetary policy position.
Since the Bank of Zambia introduced a Policy Rate in 2012 to replace the money supply targeting framework which was in place in the previous government administration, the 9.75 percent policy rate has seemed like a psychological barrier against which we target to reach, and below which it almost seem unlikely to go. This framework is very much a synonym of inflation targeting.
In a previous article, I had briefly described the central bank’s monetary policy framework, which sets out to achieve price stability objective implied by low and stable inflation using the monetary policy framework in which the Policy Rate is the key interest rate in signalling their monetary policy stance.
In this case, it is possible to assess the central banks’ likely position by looking at the main drivers of the monetary framework.
The way to see the likely direction that the committee will take is to understand that the monetary policy framework assumes a direct correlation between the oil price movement and the level of our Consumer Price Index (CPI) and a direct correlation of the price of copper and our foreign exchange rates and in turn on our CPI. Based on this, we can independently look at the variables that are driving inflation and guess the likely ultimate policy action by the central bank.
In this vein, currently there is a heightened risk of rising international oil prices going up, which is expected to exert modest pressure on inflation in the medium term. Added to this, the low foreign currency reserve levels and the adverse current account position will continue to put pressure on the foreign currency exchange rate and in turn our consumer price index.
If we look at the recent history, we see an assertive central Bank that is willing to do what is necessary to maintain relative price stability in the economy. In 2017 and early 2018, we saw the most aggressive expansionary policy actions from the BOZ, reducing the policy rate from 15 percent to 9.75 percent successively until the final reduction at its February 2018 monetary policy committee and the reserve ratio was reduced successively from 18 percent to 5 percent, the lowest it has been in decades.
This signalled the BOZ decision to aggressively support domestic credit growth in the economy as a way to strengthen the growth of economic activities in the country.
In May 2018 policy decision, the Bank of Zambia decided to maintain the monetary policy rate at 9.75 percent in the face of rising inflation pressure. This is likely to be the decision it will make yet again.
Why you may ask? It is a sort of Catch 22 for the central bank. they would like to bring that down, whilst the pressure from Inflation is forcing their hand.
Unlike the Kenyan counterparts, they have stayed away from introducing an interest rate cap, but they do however seem to be succumbing to being involved with the recent statement to begin to regulate excessive bank charges that commercial banks are charging their customers. It will be interesting to see how the micro fin institutions particularly respond to this.
How are the region setting their monetary position and since the regional banks do have regular interactions, we could get a view of how the bank is likely to react.
In Kenya, their Central Bank decided to lower its monetary policy rate from 9.5 percent to 9 percent on account of increased optimism for growth prospects against a backdrop of improvement in economic fundamentals, favourable weather conditions and continued strengthening of the global economy.
The Kenya Central Bank expectation is that overall inflation will remain within the target range bound due to lower food prices expectations from the favourable weather conditions currently obtaining.
In Namibia, their Central Bank maintained its monetary policy rate at 6.75 percent and this has been unchanged from November 2017. It is important to note that Namibia’s policy is to also maintain parity with the South African counterparties.
The Namibia’s policy position was taken to safeguard their foreign currency reserve position and support the growth of economic activities, expected to grow by 3.9 percent of GDP in 2018.
In South Africa the Reserve Bank of South Africa last policy statement was in March 2018 when the committee voted to cut its benchmark lending rate to 6.5 percent, a two-year low, from its last monetary policy rate of 6.75 percent amidst a mixed economic performance cycle.
This was as a consequence of reduced inflation to their lower of their target range of 3 percent to 6 percent due to stronger performance of the Rand. The annual average Inflation was previously at 5.3 percent and is expected to drop to 4.9 percent at the end of 2018.
In Uganda, Uganda Central Bank decided to maintain the policy rate at 9 percent since its last reduction in February 2018, when it made a cautious easing of monetary policy by 50 basis points to 9 percent to boost private sector credit growth and strengthen the economic growth momentum. The outturn in terms of GDP growth at the estimated 6 percent growth is positive and is the highest in the region.
The last Botswana policy statement is as of February 2018 and in that statement, the Monetary Policy Committee maintained its monetary policy rate at 5 percent given their assessment of an upside risks of inflation arising from improving global economic activity as it is a net consumer importer.
The Bank of Zambia has a difficult balancing position in the face in the face of high fiscal deficit, negative current account performance and low international reserves. But if it is anything to take home, their performance in 2016 was outstanding in balance the various negatives and it is likely that we can sleep ease.
For now, a rate hike is unlikely, given the current expectation of growth prospects and the Bank would not want to jeopardise that. We will soon see.