Why BOZ should re -in­tro­duce In­ter­est Rate Cap­ping

Zambian Business Times - - FRONT PAGE - By Busi­ness Times Lead An­a­lyst

THE year 2017 was char­ac­ter­ized by mone­tary eas­ing which saw the bench­mark lend­ing rate low­ered by a quan­tum of 525 ba­sis points (5.25%) to 10.75% from highs of 15.25%. This fol­lowed the need to al­low for pri­vate sec­tor growth which had been pe­nal­ized in the 2016 fis­cal year in re­sponse to tight­ened mone­tary pol­icy which was im­ple­mented to curb a cur­rency slide at a time when Zam­bia ex­pe­ri­enced en­ergy poverty due to El Nino weather that caused low rain­fall low­er­ing dam lev­els such as the Kariba.

THE year 2017 was char­ac­ter­ized by mone­tary eas­ing which saw the bench­mark lend­ing rate low­ered by a quan­tum of 525 ba­sis points (5.25%) to 10.75% from highs of 15.25%. This fol­lowed the need to al­low for pri­vate sec­tor growth which had been pe­nal­ized in the 2016 fis­cal year in re­sponse to tight­ened mone­tary pol­icy which was im­ple­mented to curb a cur­rency slide at a time when Zam­bia ex­pe­ri­enced en­ergy poverty due to El Nino weather that caused low rain­fall low­er­ing dam lev­els such as the Kariba. Zam­bia un­der­went a liq­uid­ity cri­sis where com­mer­cial banks had their statu­tory re­serve ra­tio hiked to 18% and ac­cess to the overnight lend­ing fa­cil­ity (OLF) tight­ened to once (1) a week which made it dif­fi­cult for banks to have cash on hand. Tight liq­uid­ity pushes the cost of money higher hence the rise in av­er­age in­ter­est rates which ex­plains why lend­ing rates rose to 29%-35% in the years

2015-2016. See graph be­low for liq­uid­ity trend anal­y­sis.

The steep spikes up­wards rep­re­sent the mone­tary pol­icy ses­sions where more liq­uid­ity was in­jected inti cir­cu­la­tion fol­low­ing re­lax­ation of Statu­tory Re­serve Ra­tio – SRR. The SRR refers to the amount of cash bal­ances com­mer­cial banks hold with the Bank of Zam­bia. Re­lax­ation of SRR frees liq­uid­ity al­low­ing bank lend­ing to Small to Medium Sized En­ter­prises -SME’s and cor­po­rates to al­low for the econ­omy to grow. The graph be­low shows the ef­fects of a 850bps re­lax­ation in statu­tory re­serve ra­tion from 18% to 9.5% in (4) sig­nif­i­cantly sized com­mer­cial banks namely Stan­bic, Bar­clays, Zam­bia Na­tional Com­mer­cial Bank and Stan­dard Char­tered Banks. Of the (4) in 2016 Zanaco held the largest de­posits at ZMW 2.2 bil­lion with BOZ which is not sur­pris­ing as the lo­cal bank holds most gov­ern­ment ac­counts hence the need to be highly liq­uid. Stan­bic was sec­ond with bal­ances just un­der ZMW 2 bil­lion fol­lowed by Stan­dard Char­tered and Bar­clays al­most at par un­der ZMW 1.5 bil­lion. These bal­ances how­ever have sig­nif­i­cantly de­clined as at 31 De­cem­ber 2017 to Zanaco – ZMW 1.2 bil­lion, Stan­bic – ZMW 0.95 bil­lion, Stan­chart – ZMW0 .75 bil­lion and Bar­clays – ZMW 0.6 bil­lion.

See his­togram be­low.

Bank of Zam­bia Gover­nor Dr. Denny Kalyalya (left) with Deputy BOZ Gover­nor Ad­min­is­tra­tion Dr. Mab­ula Kankasa (left). The BOZ cut rates by 525bps to 10.25% in 2017 but the spread be­tween av­er­age lend­ing rates and the MPR has widened 925bps to 29.45%....

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