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