Why the ERB should pick a leaf from the BOZ MP Com­mit­tee...

Zambian Business Times - - FRONT PAGE -

The Bank of Zam­bia Mon­e­tary Pol­icy Com­mit­tee con­vene ev­ery quar­ter to de­lib­er­ate and re­view what the rul­ing bench­mark lend­ing rate must be for the pur­pose of reg­u­lat­ing cost of credit. Af­ter two days of ro­bust de­lib­er­a­tions, the Gov­er­nor al­ways announces the in­ter­est rate de­cided on ir­re­spec­tive of whether it has to change or note.

The Bank of Zam­bia Mon­e­tary Pol­icy Com­mit­tee con­vene ev­ery quar­ter to de­lib­er­ate and re­view what the rul­ing bench­mark lend­ing rate must be for the pur­pose of reg­u­lat­ing cost of credit. Af­ter two days of ro­bust de­lib­er­a­tions, the Gov­er­nor al­ways announces the in­ter­est rate de­cided on ir­re­spec­tive of whether it has to change or note. One ex­cel­lent fea­ture about this process is that it ex­plains the ra­tio­nale be­hind the de­ci­sion af­ter wide con­sul­ta­tion with stake­hold­ers and anal­y­sis of the rul­ing macroe­co­nomic fun­da­men­tals. The last MPC con­vened de­cided to keep rates on hold at 9.75% with the BOZ be­ing alive to in­fla­tion­ary pres­sures on the hori­zon from po­ten­tial threats such as crude prices that have edged higher lately. We will not dwell much on the me­chan­ics of the de­ci­sion taken by the MPC but rather ap­pre­ci­ate the trans­parency, autonomy and con­sis­tence in de­ter­min­ing what the bench­mark price of money should be for the quar­ter. This is best prac­tice and is ap­plied across the world’s fi­nan­cial mar­kets. On the other hand, we have an en­ergy reg­u­la­tor, the ERB. The En­ergy Reg­u­la­tion Board did com­mit to demon­strat­ing open­ness in de­ter­min­ing the price of fuel ev­ery two months with which it would sim­i­larly to the MPC con­duct a re­view of pump prices. This would take into ac­count the price move­ments in crude on the global mar­ket and the as­so­ci­ated cost through ex­change rate lev­els be­cause oil is paid for in dol­lars. To that ef­fect the en­ergy reg­u­la­tor owes all cit­i­zens a duty of trans­parency, autonomy and con­sis­tency in these re­views even if it means the im­pact of the crude prices ver­sus the USD/ZMW ex­change rate does not so­licit a pump price ad­just­ment. This how­ever has not been the case. An­nounce­ments ev­ery time the price of fuel has to edge higher or ease lower have been abrupt with no dates given as to when the re­views should be ex­pected etc. a learn­ing the ERB can pick from the BOZ that has these dates on their web­site. To­day crude is trad­ing for USD76.79 a bar­rel which trans­lates to 21.8% higher than the last time ERB ever con­ducted a re­view. The Kwacha has shaved over 8% against the Dol­lar at ZMW10.4/USD. Ac­cord­ing to the ERB, if the ef­fects of crude price moves and the cur­rency volatil­ity ef­fects on cost ex­ceed 2.5%, an ad­just­ment ei­ther way has to be made. The cur­rent sit­u­a­tion al­ready breaches that trig­ger and suf­fice to say the ERB should have al­ready ad­justed the crude price by now but clearly that has not hap­pened yet. Last week the Min­is­ter of En­ergy was on a tele­vi­sion in­ter­view say­ing gov­ern­ment has no in­ten­tions of in­creas­ing the pump prices of fuel as al­leged by the me­dia. Firstly, we would ap­pre­ci­ate the Min­is­ters ef­forts in keep­ing prices as low but ob­jec­tively speak­ing, the gov­ern­ment in a ‘sub­sidy free’ en­vi­ron­ment does not con­trol pump prices and let alone it will be in­cor­rect of the Min­is­ter to echo such state­ments to the pub­lic be­cause for econ­o­mists, the in­ter­pre­ta­tion of such a state­ment is that some­one some­where is cush­ion­ing or sub­si­dis­ing the fuel price. If crude is up 21.8% and the lo­cal cur­rency has given up 7% in value against the dol­lar, then what is keep­ing the cur­rent fuel prices un­ad­justed? Some­thing has to give. Is gov­ern­ment still sub­si­dis­ing fuel? Is the gov­ern­ment cush­ion­ing fuel us­ing re­serves? Per­haps that’s why for­eign ex­change re­serves have de­pleted to USD1.8bil­lion ( less than 3 months im­port cover). The crude price tra­jec­tory has been up­ward as OPEC mem­bers are de­ter­mined to sup­port the oil price through cut­ting sup­ply. Saudi Ara­bia’s join­ing the cause has re­ally yielded strong re­sults for OPEC na­tions that are de­ter­mined to push crude to USD100 a bar­rel. The Kwacha tra­jec­tory has been one way with de­pre­ci­a­tion of over 8% to date as the lo­cal unit trades for ZMW10.4/USD. The Kwacha has grap­pled with sen­ti­ment that has priced into the cur­rency mar­ket from debt con­cerns that have re­sulted in as­set sell – off ’ s ex­ert­ing un­due pres­sure on Africa’s sec­ond largest cop­per pro­ducer’s cur­rency. With this said we would like to chal­lenge the en­ergy reg­u­la­tor to ex­er­cise ut­most trans­parency and con­sis­tency in con­duct­ing re­views ev­ery two months. This should be cir­cu­lated to all in the me­dia with ra­tio­nale for the pric­ing de­ci­sions they make on pump prices of fuel. The ERB should on its web­site share an an­nual cal­en­dar for dates when these re­views will be con­ducted so as man­age cit­i­zens ex­pec­ta­tions. ERB can also pick a leaf from South Africa that con­ducts its re­views monthly and on the last day of the month announces the fuel price ad­just­ments ef­fected by its reg­u­la­tor. Lack of trans­parency and ad­her­ence to ba­sis stan­dards could be mis­con­strued for still hav­ing sub­si­dies in place of mis­chanelling of for­eign ex­change re­serves to ab­sorb cost fluc­tu­a­tions and hence ar­ti­fi­cially keep­ing the fuel price low but a high cost. We are not point­ing fin­gers or in­sin­u­at­ing the worst nei­ther do we want to pay higher prices in fuel costs but are merely ask­ing the reg­u­la­tor to step up to the chal­lenge and reg­u­late the en­ergy mar­ket to the high­est stan­dard. With Zam­bia in the mid­dle of an IMF USD1.3bil­lion bailout pack­age ne­go­ti­a­tion, open­ness and trans­parency by the ERB is one lit­mus test for whether sub­si­dies have re­ally been scrapped. The ERB should also not al­low po­lit­i­cal in­ter­ven­tions, if any, in­ter­fere with their reg­u­la­tory role. It is eas­ier to ap­pease the elec­torate through orac­u­lar pro­nounce­ments of no hikes in fuel but harder to cor­rect when we adopt costly ways of ab­sorb­ing the crude price pain from a bullish crude mar­ket. This is ex­actly what causes in­fla­tion blow outs that are hard to jus­tify to cit­i­zens. The reg­u­la­tor has to re­think its strat­egy in man­ag­ing the process bet­ter oth­er­wise the pres­sure of crude prices can­not be sup­pressed for long.

Dr. Denny Kalyalya BOZ Gov­er­nor (right) and Deputy Gov­er­nor Ad­min­is­tra­tion – Dr. Tukiya Kankasa Mab­ula (left) at an MPC rate an­nounce­ment meet­ing in Lusaka.

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