Why BOZ should re -introduce Interest Rate Capping
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.