Thursday, March 28, 2024

An Impotent Monetary Policy Statement from the Bank of Zambia

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By Hjoe Moono

On 29th May, 2014, amidst pressure to soothe the nation on the rapidly depreciating exchange rate, the Bank of Zambia(BOZ) issued a statement warning the public to desist from taking any speculative positions against the kwacha as this may result in heavy financial loses once the kwacha reverts to an equilibrium condition consistent with the economic fundamentals. Funny enough, it is not known who issued this statement as there is only a signature without a name, and we wonder how authentic this is, or whether it was done under duress against the author’s will so they opted not to have their name.

The statement says the BOZ remains committed to implementing appropriate monetary policy aimed at maintaining inflation low, as can be seen from its previous policies of increasing the bank reserve ratios from 8% to 14% and the BOZ policy rate from 10.25% to 12% in April 2014. What the statement doesn’t say, however, is that these policies have not yielded the desired results, and thus the BOZ monetary policy is effectively impotent in this regard.

What is clear is that BOZ’s monetary policy has been heavily flawed, and has not been able to reduce the volatility of the kwacha nor its rapid depreciation. This has clearly hurt our economy, and it is disappointing that BOZ would issue such a shallow and hollow statement.

It is strange that the central bank can base its strength to run the economy on borrowed funds from the Eurobond. The admission that the disbursement of the euro bonds proceeds will put the bank of Zambia ‘in an even stronger position to allow the economy to absorb any real economic shocks’ implies that BOZ seems to have run out of international reserves to effectively conduct prudential monetary policy, and like the central government too, its operations now have to be debt dependent.

Clearly, the disbursement of $178 million to help ‘strengthen the kwacha’ as announced last month was a waste of foreign reserves, a waste of national resources that could have channelled to development concerns facing our population. The $178 million BOZ pumped into the economy has been lost, never to be recovered, and the kwacha has continued to depreciate, even further and faster than before. And now the BOZ is taking pride in more borrowed funds to enable it perform its functions?

Clearly there has been a deliberate attempt all along to conceal the fact that these poor developments in the economy are reflecting the poor governance concerns in the country, as well as the disjointed and inconsistent polices of government, as well impotent monetary policy by the Bank of Zambia. The so-called anticipated improvements in the exchange rate do not reflect an improvement in the fundamentals of the economy but the impact of massive inflow of foreign exchange made possible by begging and borrowing and that it is not a sustainable situation in the long run.

It seems the only thing BOZ has been doing lately can be likened to that of the Energy Regulation Board: Announcing increase in fuel prices and claim that ‘external forces are at play’. BOZ on the other hand is monthly announcing the BOZ Policy Rate, always adjusting it upwards on the pretext that ‘the low copper prices on the international market are putting pressure on the kwacha’. That all these policies have failed to curtail the volatility of the kwacha signals one thing: That monetary policy is not an ordinary public policy issue that can be handled by non-professionals!

One is made to conclude that the BOZ itself has begun to equate monetary policy with the policy rate in its monetary policy statements forgetting that the policy rate is one of the many instruments of monetary policy and not monetary policy in itself—the policy rate by the way is the rate at which banks can borrow from BOZ. The policy rate affects the cost of credit and thereby it affects private sector demand and is effective only if private sector credit is the main borrower from the banking system. If government borrowing is the main determinant of money supply, then changes in policy rate will neither affect government borrowing nor regulate money supply.

This is what has been happening: Government has increased borrowing from the banks thus making the policy rate impotent! With the 6400% increase in government borrowing from the local banking sector, clearly we expect such an impotent outcomes from the monetary policy, and perhaps that could explain such weak and speculative statements from the Bank of Zambia.

But then, what would we expected when there is a disjoint on policies among all government departments? We have said it before that the government is looking at each problem in isolation from others – without fully grasping the interlinks in economic policies, and without taking into account the side effects on other areas and objectives of a particular policy prescription to tackle a given problem. This is partly due to the fact that most of the economic policy advice is taken from nonprofessional bureaucrats, administrators, accountants, lawyers running the central bank and vested interest groups from the private sector who have no grasp of, or interest in, macroeconomic links. 

24 COMMENTS

  1. Good analysis but equally impotent on alternative solution. Armchair criticism is well matured in this country, but Hjoe provide public policy alternatives

    • The solution??? You must be thick my friend, hasnt the author mentioned the incompetent people running boz? Think for yourself you maggot. Boz is going to inject more eurobond into the economy, that didnt work the first time, how is going to work now. I think the criticism leveled at boz contains the solutions. Dont jump on the bandwagon of people saying don’t criticise without solutions. If we have people who don’t know were to make after being criticized then we are wasting valuable time giving solutions and am afraid you are such a person

    • It is shocking that the PF govt still went ahead with quantity easing approach on the kwacha, yet they knew all too well that the reserves are not anything to talk about. PF listen, an economy should be run based on consistent policies with clear direction where you want to take the nation. At the moment it seems you believe that you can borrow your way into development.

    • These ID!OTS must account for this mess they have made of our economy. It is CRIMINAL that in two years the Kwacha has fallen from 3.8 to the US$ to 7.1!

      How can they still be receiving salaries for causing this disaster?

      Resign you F00LS, make way for others that know what they are doing. Otherwise you will be prosecuted for willful sabotage of the Zambian economy when the time comes!

    • Folks

      Lets stop deluding our selves that some economic levers appropriately applied can solve the Kwacha depreciation in the absence of a conducive political atmosphere, rule of law and fair justice. Any economic levers to be applied to solve this PF Kwacha crisis will only take effect if and only if the toxic political atmosphere created by PF is corrected.

      Now it has become purely a game of speculative perception which requires concerted effort to correct the way our prospective investors and established businesses view the PF’s capacity to govern. Without a shadow of a doubt nearly every one in Zambia including the PF members know for a fact PF’s recklessness in implementing draconian POA amongst other useless policies is solely responsible for the massive fall of the Kwacha.

    • We do not even need to look far for some clear examples of how a toxic political atmosphere can decimate the economy.

      Take the case of Zimbabwe; its economy was vibrant up until Mugabes’s ZANU-PF started victimising any one not supporting it, that its economy started tumbling even if it was still run by capable people who ran the economy during the boom years. This is classic case of how an economy can be affected by a toxic political atmosphere despite the capabilities minister of finance and central bank governors because speculative perception is a very difficult factor deal with.

      So to suggest that removing central bank Governor and minister of finance without overhauling the whole PF political establishement can solve the Kwacha ‘s fall is like building castles in the air.

  2. The public policy alternative, which am sure all mposa mabwes cum Panga family now realise, is that Alexandronicus the dinosaur, really has no clue to what he is doing, espescially that his yama has held his fimo fimo so tight, he can’t think beyond how he will escape his tight clutch!
    The answer is, Vote anything else apart from Pabwato when we do have the “Bye-election”, becoz I smell 2016 to be too far!! This has to be THE MOTHER OF ALL DONCHI KUBEBA’S!!!!

  3. They setup SI33 & SI55 and then canceled the two: what is their policy?
    A LONG TIME AGO I said: Gondwe and Chikwanda have FAILED LAMENTABLY! THEY MUST GO!

  4. Why dont we have an economic think tank,we have lots of Phd holders in economics who seem to be sleeping all the time while the country is drowning!!

    • Do you really expect those with PhDs to invite themselves when they also have their families to feed under these challenging times? GRZ must invite them, provide for their time compensation and they will jump on it.

  5. Look at the faces of our economical engineers. Clueless. pamenso kwati mafi ayasangwa mutunshila during rain season. Investers are probably scared to look you in the face like though somebody walking in the bush path during rain season and finds faeses on the path and jumps scared of stepping on the faeses.

  6. What is even worse is that BoZ can`t admit that they have no idea on what to do. The truth is, the factors affecting the Zambian Kwacha are sophisticated. They are 21st Century factors, and I don`t think the guys at BoZ match to the task. I think most of the guys at BoZ are still marinated in the 20th Century mind-set.

    • Not only that the problems we are facing are new to them,Even more they are failing to handle them because someone on the top is busy asking for money everyday.He is busy dishing out money like trash Kabili a lipena.No one can advice him/her.Yu cant put a Monkey in a maize field and expect it to look after the haverst.So Zambia should wait for more drama in 2015.Yu will be shocked with shocking revalations after PF is removed.IT is total Economic sabotage,a sub a graduate at st huose.

  7. ….discussing any thing to do with Zambian economy at the moment is a waste of valuable time as long as the above economic ‘mis-managers’ are still at the helm…..
    Each day I wake up, I expect to be greeted with a sigh of relief headlines that the above two have been FIRED or better… retire in national interest……or just resign on moral grounds.
    We are trying to water a garden using a bucket with a small hole on its base and the only source of water is 100mtrs away……

  8. It is important to see beyond your nose. Anlyse in relation to what is happening in the global economy. Zambia is not an island and as such it is affected by external factors also.

  9. Will need correct people in these vital ministries and at Bank of Zambia. My suggestion is to appoint the following to key roles in our country.

    Minister of finance: NKANDU LUO.

    Bank of Zambia governor: WILLIE NSANDA.

    Countrymen and women the two mentioned have the required skills and knowledge to turn this economy around. Their commitment to duty is unquestionable. May his exellence consider this suggestion for the good of the country.

    • I must hasten to agree with you on this matter. Willie Nsanda has the Midas touch. I bet he will turn things around for the better after appointment in less than a month, tops.

  10. I just hope the BoZ Governor will read this very educative and important analysis. It seems the Central Bank, for a time in history, is now being headed by Dr Gondwe who has no clue whatsoever in economics. He is as confused as the common man on the street. The only reason he got that top job at BOZ is because his wife and Dr Kaseba are very good buddies. Dr Gondwe has discredited the image of the central bank with his incompetence because there are technocrats within the bank who know what must be done and could have run the bank better but they were side lined because they are not Sata’s relatives. The stupi.d decisions Sata keeps on making are costing our country dearly and in the end all Zambians will be made to suffer. The mad man must be removed immediately to save Zambia.

  11. Economic theory is rife with unproven assumptions, and dogmatic (neoliberal) positions.

    The fact is that is someone is honest, if they apply common sense, it is not that difficult to run economic policy in a sensible way.

    Making the currency recirculate within the economy is a good thing. It is good for the value of the currency, for employment because money is available to entrepreneurs. So throwing away currency controls while on top of that the mines are in foreign hands is a bad thing.

    Maybe this isn’t a screwup, maybe it is a bear raid, because someone is making money of the defacto devaluation of the Kwacha.

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