Zambia’s Economic recovery, Job creation being ‘undermined’ by Banks.

……It is about time Government acted on the artificial credit crunch………

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Lusaka city

By Kalima Nkonde

This article has been prompted by the two red flags raised by Bank of Zambia Governor, Dr. Denny Kalyalya. The Governor is concerned about commercial banks’ high interest rates despite Central bank intervention and the low level of reserves despite high copper prices. This article addresses the Governor’s first concern. The second concern may be addressed in future articles. As a nation, we need to debate these economic issues as solutions to the country’s problems lie within us and economic issues should concern all across the political divide.

The creation of jobs for its citizens should be one of the top most priorities for any responsible government. This is so because if the government was to laser focus on job creation alone as an objective, it will solve most economic problems as jobs leads to more economic activity(growth), more tax collection, poverty alleviation and other multiply effects. It is because of the importance of jobs for citizens that countries like the USA track jobs numbers on a monthly basis. For example, the USA created 303,000 jobs in February, 2018

Governor decries high interest rates

During the press conference when presenting the monetary policy statement on February 22, 2018, the Governor observed that Bank interest rates remained high and he did not seem to know the reason why commercial banks’ still kept their interest rates high.

“Our view is that they (lending rates) should be coming down because we have consistently reduced the policy rate, we have also consistently reduced the statutory reserve ratio”, he responded to the question why lending rates were high. He further advised the media to ask banks to explain reasons why rates were high despite the convention wisdom that they should be coming down and responding to BOZ measures like it happens in other countries.

It was evident from the Governor’s answer and his referring journalists to commercial banks that the Central Bank is frustrated with Commercial banks not reacting to the reductions in the key drivers of interest rates. The Governor was indirectly crying for help from individual patriots like this writer and other stakeholders including government.

The Governor is not the only one to complain about the high interest rates and commercial banks intransigency to reduce them substantially. In December, 2017, the former finance Minister, Felix Mutati complained about the same.

“We have made interventions to enable banks have sufficient credit lending space to the private sector but the response is very slow, the cost of money is still high and we urge banks to reduce them and profit margins will not be affected,” He said

The understanding by experts is that the major factors that led to the increase in interest rates and a reduction in lending by banks (credit crunch) in 2015/16 were the following risks: the liquidity risk as the Central bank mopped up cash, the interest risk as the Central bank increased the monetary policy rate.

The major drivers of lending rates in Zambia are inflation rates, monetary policy rates and statutory reserves. The inflation rate in Zambia for February, 2018 is 6.1%, the monetary policy rate is 9.75% and statutory reserves are 5%. However, the average bank lending rates, on the other hand, is about 25% which is a premium of 19% above inflation rate as positive interest rate for banks. There are few countries in the world where one would find such kind of bank profiteering. This is even more concerning due to the fact that the majority of banks in Zambia are foreign owned and the profits earned are externalized to foreign shareholders and do not stay in Zambia.

In its editorial of 15 December, 2017, the Zambia Daily Mail observed the following: “Government has expressed frustration at the reluctance by commercial banks to reduce interest rates despite the reduction of the national monetary policy and statutory reserve ratio by BOZ. Lending rates have continued to be scandalously high in Zambia. This is not putting the banks in positive light in the eyes of the public. Capitalist tendencies seem to be at the core of the obstinacy.”

What is so curious is that when inflation shot up to about 23% in 2015 and the Central Bank put in measures to mop up liquidity in the market to reduce inflation, banks were quick to raise their interest rates to as high as 48% which resulted in increased defaults and write offs losses, property repossessions and resulting in a credit crunch (banks reducing lending to businesses and households). The Central bank measures have achieved the desired results and inflation has been reduced to single digits with commercial banks keeping more of their cash ( have more liquidity) but they are not responding by reducing interest rates quickly and substantially. In light of interventions by the Central Bank, Bank interest rate should be in the region of 12%-15% and comparable to the region which is way above inflation and the policy rate.

Bank Charge skyrocketing

Apart from the high interest rates, there has been public outcry about the high fees being charged by Zambian banks. Analysts have argued that the current charges are discouraging Zambians from opening bank account thereby denying the banks the funds for onward lending for investment. It estimated that over 80 percent of Zambians do not have bank accounts. It could easily be inferred that current behavior of Banks of resorting to charging customers all sorts of bank charges including for depositing money is to partly cover for the short fall income from their core source of income which is interest. They want to earn money without assuming any credit risk when the managers’ job is the management of risk.

There are those that argue that although Zambia has 19 commercial banks, 80% are foreign owned and the top 6 control make up 70% of market share which in effect explains the monopoly tendencies we see as the few big banks control the market. The high bank charges are known to the Central Bank but as with interest rates, our Central Bank appears to be toothless to control these foreign banks. The big foreign Commercial Banks appear to call the shots in Zambia.

Delaying economic recovery and killing jobs

The effect of the high interest rates is that businesses are not able to borrow to expand their operations or finance working capital needs and create jobs. Households/consumers on the other hand are also unable to borrow so that they can create demand in the economy for goods and services with positive multiplier effects on economic activity.

There is overwhelming evidence at the Central bank and the Central Statistics that private sector lending has been declining drastically. The only entity the banks are lending to is government at risk free rate but it does not create jobs. This is contributing to the cash shortage in the economy in general and consequently leading to low economic activity and wide spread unemployment.

The reduction in the cost of borrowing is one the key drivers in the creation of private sector jobs in the shortest possible time as it touches all sectors of the economy including agriculture. It is in this respect that the Zambian Banking system can justifiably being accused of killing jobs as well as being greedy and not contributing to the growth of the economy but wanting to earn risk free income from government bonds and bank charges.

Market failure and Government intervention

The current situation that is obtaining in the Zambian financial market is a clear testimony of the failure of the market and therefore other measures such as the intervention in the market by Government ought to be explored for the sake of the country’s economy.

It is important to point out that Government intervention when markets fail are normal, and nobody should not cry wolf in the case of Zambia. For those with short memories, Banks’s corporate greed was responsible for the USA sub prime crisis, the consequential credit crunch, world recession and the 2008 financial crisis which threatened the World economy. President Barack Obama had to take brave and bold steps to intervene through various steps including more regulations for financial institutions.
In neighbouring Zimbabwe, on 23 February2017, the local paper reported an outcry about the super profits made by banks whose profits had increased by 42% year on year because of charging “unacceptable charges” and “extortionist fees”.

“The super profits announcement was immediately followed by an announcement by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya in his 2017 monetary policy statement that he had capped interest rates at 12% per annum from 18% and further reduced bank charges,” The Daily Nation reported.

Political Pressure

In view of the market failure alluded to above, there are various options that Zambians can explore to force banks to reduce interest rates and reduce their profit margins to help grow the economy and create jobs. The actions should include political pressure which is totally absent at the moment. This is an issue the Opposition can also use to gain political mileage if they calibrate the messaging in such way that it appeals to Zambians and show that the current administration has failed to rein in banks to reduce interest rates and create jobs.

On the other hand, it is recommended that the Government should explore strategies that can put maximum pressure on Banks to act through political statements at the highest level possible. The threat of legislation against irresponsible or cartel behaviors by the financial market players should also be looked at. The Government could also consider re-introducing a higher tax rate of about 40-45% for banks as was the case some years back.

Interest rate Cap

Another measure ,as last resort, although not advisable in a market economy, would be for the Bank of Zambia to revisit the re-introduction of capping interest rates because Zambian Banks like those in Zimbabwe have failed to self regulate. This is also a lesson to the Zambian government that multinationals including mines cannot be trusted to act in the best interests of the host country or the World economy as the 2008 financial crisis proved. They serve the interests of managers and shareholders. There is need for monitoring their behavior and if necessary put in place reasonable regulations as a deterrent. These big institutions need constant oversight on various matters including compliance to agreements they signed when they made investment or when obtaining licences.

In order for Zambia to realize our full economic potential, it is time our leaders showed the same zeal and boldness to deal with foreign investors’ transgressions such as banks, Mines, Chinese contractors and others, the same way they demonstrated with matters that affect the ordinary Zambians such as removal of subsidies on electricity and fuel, reduction of subsidies on farmers’ inputs, removal of Venders from the streets to contain cholera and imposition various tariffs and levies.

There is no shadow of doubt that jobs can be created within twelve months if sufficient political will is demonstrated and practical intervention are made. Unfortunately, at the moment, there is no evidence from both the ruling Party and the Opposition to show that there are laser focused on this important issue of creating jobs for Zambians especially the youth. They are rather concerned with their own jobs thus all the talk is about the 2021 election which is three years away instead of the current problem of youth unemployment which is time bomb.

The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator/analyst. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.

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38 COMMENTS

  1. Currently there’s no savings account in Zambia. It’s now costly to keep money in the bank, instead of your money growing it’ll dwindle due to various bank charges. It’s also not safe to keep money at home, so we are not saving. No wonder smaller depositors are keeping their money in mobile phone accounts. How can you run a country like this? Kalyalya is sleeping as banks steal our money

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    • Another excellent, excellent article by Kalima Nkonde, well written. Michael Jordaan former CEO of First Rand Bank (FNB) recently stated that the future of banking in Africa lies with the mobile and ICT sectors. I think the success of platforms such as MTN’s mobile banking and Zoona are a clear testament to this. Zambians are waking up to the unfair treatment they are getting at the hands of established Commercial banks and simply looking at alternatives. The high interest rates are again symptomatic of other ‘high’ charges Zambians suffer for goods and services in comparison to our neighbours- an example being the cost of fuel and though BOZ under pressure from the IMF reduced its burrowing rates to Commercial Banks other players must step in, the Govt must encourage the growth of the…

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    • Ctn… the Govt must encourage the growth of the Mobile Banking sector, for example why can’t govt and private sector workers be allowed to opt to receive their pay through Mobile banking platforms from MTN, Airtel, Zamtel etc, this will allow for more competition in the Banking sector, will create more jobs for our youth as only a handful of staff are employed by the Commercial banks as tellers etc whereas mobile banking tends to recruit more staff. On the subject of raising the Bank tax base rate to 45% I believe would work against depositors as banks would simply pass this on to the customers in form of higher charges and even an increase in the interest rate. Otherwise these Greedy selfish Commercial Banks have for too long taking Zambian depositors for a ride!

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    • The country’s economic recovery is being hampered by poor financial management practices by the PF-Govt especially reckless borrowing/Kaloba for white-elephant projects which don’t generate any income.

      – BoZ is not printing kwacha notes according to international monetary policies.
      – The current value of Kwacha is fake. Nothing is cheap in Zambia: fuel, food, electricity, clothes, groceries etc.
      – Govt is borrowing dollars to buoy up the Kwacha instead of letting market forces dictate. There’s a Kwacha shortage in Zambia caused by the FAKE Kwacha value, that’s why money people don’t have money in their pockets.

      This kind of short-term solution to boost the FAKE Kwacha value has longer term negative consequences: a decrease of liquidity in the economy, i.e. less money in your…

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    • CONT’D… i.e. less money in your pockets. BOZ attempt to protect the FAKE value of the Kwacha is what is killing our economy.

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    • One politician who constantly raised the issue of high interest rates in the past was none other than Guy Scott. However, he and others in his time did nothing. The author mentions Govt borrowing but does not critique the issue enough to highlight the recklessness with which our govt has acted in this matter. Kalyalya himself avoided pointing a finger at GRZ when his own BOZ fortnightly reports clearly show the former is the chief culprit in keeping interest rates high …

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    • Let us form savings groups as Zambians and so take away business from these lazy banks. That way we can borrow to each other and kill defaulters by poisoning or setting ritual killers on them. Banks are not your friends.

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    • Very nice article but misses the crucial point why interest rates are high… go get the loan default rates statistics and you will be shocked… for example FNB entered the Zambian market with a South African altitude thinking default rates are as low as South Africa. Gave out lots of loans and end of the day lost a lot of money.

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    • You wonder who is in charge when the BOZ Governor is crying to journalists or the Minister is crying about local firms not being awarded subcontracts by foreign main contractors on GRZ Project…its a clear sign of failure in leadership.

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    • Strange that the Central Bank Governor would give such excuses. He has the powers to punish these commercial Banks, especially the foreign-owned banks. What justification do they give that their lending Interest rates are around 40% (Sure ni Kaloba?) yet the yield on Fixed Deposits is less than 10%. What nonsense is that?? Our Politicians are also so stupid?? no one Talks on behalf of Zambians because they get Interested free loans from these corrupt Banks.
      Small and Medium Enterprises if supported through financing can contribute to economic Growth. Dr Kalyalya. Should resign if he can’t fix this. Zimbabwe a finished country does better than Zambia?? what a shame.

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  2. These are the policy interventions we would like to hear… and not new taxes and levies every day. surely, you cannot have a situation where even money in fixed deposit accounts starts diminishing due to covert charges.

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  3. well written article and very intelligent contributions from the bloggers who seem to speak the same language for the sake of mother Zambia. How ever all thought out plans without actions are useless. I guess we have to act despite our political affiliation for the sake of our beloved country. Michael sata once said God has stopped creating countries and distributing land so we need to protect our beloved countries from these banking thieves. There is one commercial bank in Zambia which charges 3% when depositing dollar is smaller dominations 1,5,10 and 20 dollar notes and yet when you buy or withdraw these smaller dollar notes they don’t give you extra 3% .so who benefits here? when you bank dollars they charge you $5 (zmw 47.5) .so when you deposit $5 in your account the movement…

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  4. Maybe one of the reasons why interest rates are high is the high rate of default on loans. What should occur is that all those bank charges be stopped, immediately that puts more money in the economy.in theory more money creates greater demand demand creates increased production and then a need for more employment.
    Unfortunately we do not have a large manufacturing industry servicing our own needs. We are essentially importers of goods znd service. Givt borrowings should be directed at employment projects so that the tax base is broadened thst way. Prosperity is not attained thru taxation.

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  5. Very educative article, but I’m disappointed with some comments by cadres ,be patriotic for once .

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  6. The solution is to strike back at the banks through innovation on mobile platforms.
    The level of greed they have is criminal.
    Unfortunately,most opposition parties are asleep in bed with the banks already.
    Damn…..

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  7. Take time to attack your banking system. Take time to include God’s name in your words. You are always free to withdraw all your money and deposit it where you want to. If at all you can build a more efficient bank or financial services company, then what is stopping you from leading the way? Keeping savings in banks is rational and logical. It is safe and it contributes to economic growth. The banking sector is an integral part of the economy. Risk is generally high in developing economies. Without reasonable interest rates, then the banking sector is doomed to failure.

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  8. Zambians we are not serious with job creation. There is too much government intervention in the Private sector.

    Talking of a recent case, we saw how government intervened in the private sector when Zodwa came to Zambia where she was humiliated and deported at the airport even when she said she was coming in as a spectator to a show that would have created a of money.

    I appeal to Mama Wina and Mama Kaseba to come out clearly and support their fellow woman Zodwa as she tries to facilitate job creation in the private sector.

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    • Entering any country just like someone’s home is a privilege and not a right and it is like that world over.

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  9. Great article and encouraging comments. We as clients should demand more for our money. Not only are bank charges high but the services are often pathetic! I was recently asked to resubmit all my documents from scratch to reopen an account for which I had submitted EVERYTHING just a year or so ago..this was after standing in a very unproductive line for close to an hour! Further, I have a business account with one of these tech savvy banks…not one phone call have I received asking what other services we can be offered despite the account having high traffic. We are contemplating closing the account and moving our business elsewhere

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  10. WELL AND BALANCED WRITTEN ARTICLE…………..

    ” This is also a lesson to the Zambian government that multinationals including mines cannot be trusted to act in the best interests of the host country or the World economy as the 2008 financial crisis proved. They serve the interests of managers and shareholders…..”

    PRIVATIZATION HAS NOT BENEFITED US …… IMF/WORLD BANK ARE THE BIGGEST BENEFICIARIES ..

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  11. Good and well articulated artical; the big issue here and let me say the only issue here is that WE Zambians have NO control over any part of our major economy! We have given away our land, mines, water, construction, electricity etc,,,,,,,that’s how foolish we have been!

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  12. ONE OPTION TO FORCE BANKS REDUCE INTEREST RATES
    “In view of the market failure alluded to above, there are various options that Zambians can explore to force banks to reduce interest rates and reduce their profit margins to help grow the economy and create jobs. The actions should include political pressure which is totally absent at the moment. This is an issue the Opposition can also use to gain political mileage if they calibrate the messaging in such way that it appeals to Zambians and show that the current administration has failed to rein in banks to reduce interest rates and create jobs…”
    MY FOOT…THE OPPOSITION WOULD RATHER DEFEND STATUS-QUO , AND PERHAPS EVEN PRAY THAT BANKS INCREASE FURTHER THE LENDING RATES. ..THEY ARE VULTURES , AND THERE FOCUS IS THAT ZAMBIANS SHOULD…

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  13. This is an issue the Opposition can also use to gain political mileage if they calibrate the messaging in such way that it appeals to Zambians and show that the current administration has failed to rein in banks to reduce interest rates and create jobs…”
    MY FOOT…THE OPPOSITION WOULD RATHER DEFEND STATUS-QUO , AND PERHAPS EVEN PRAY THAT BANKS INCREASE FURTHER THE LENDING RATES. ..THEY ARE VULTURES , AND THEIR FOCUS IS THAT ZAMBIANS SHOULD EMPLOY THEM IN 2021… OVER AND ABOVE THAT, SOME OF THESE CHARACTERS IN THE OPPOSITION ARE THE LOYAL BLUE-EYED BOYS OF THESE CAPITALISTS..

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  14. Currently banks are used for paying salaries and not saving. Immediately the salary hits the account everything is withdrawn. We have now opted to CHILIMBA as a saving mode to avoid high bank interests.

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  15. The major problem need to be tackled is government over borrowing especially now that they have restructured to borrow more domestically which results in crowding out the private sector. The government are borrowing at far better rates from these banks which is leading to little for the private sector.All banks are now chasing over the gov securities. An interest rate cap can yield the desirable results, Kenya is a good case of how the interest rate cap has disadvantaged the risk borrowers.

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  16. Kalima Nkonde please, any economist worth his salt will tell you that the only thing undermining economic growth and job creation in Zambia is foolish lack of any coherent economic policy on the part of the government. Seer, even with the mines, Obasanjo observed that as a country we do not seem to know what we want with our mines and you all insulted him. Now, you sold all your mines, you are selling electricity to those mines for peanuts and the Chinese and Indians are externalising all profits. How you think you can benefit from better copper prices when you do not own the mines, aren’t taxing the owners at all and are selling them cheap power vexers me. These things do not work like osmosis, they work in a context and that context is called a well thought after beneficial economic…

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  17. There is something I dont understand. Nkonde Kalima writes very well thought out articles which looks at the problems and tries as much as possible to provide viable solutions but why he is not asked to be part of the economic managers in govt? I feel he has something to offer but the govt just seems not to care. It is time we put our pride aside and involved everyone who has a passion to liberate mother Zambia economically. It is not everyone who wants to take away your political jobs. Stop shutting out people who can contribute something.

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    • Writing nice articles is one thing but being in the driver’s seat is another look at Chibamba Kanyama…mister motivator but can not see out his contract in any job he is awarded. Our govt knows all the issues above but there is no political will and leadership….was in the President who invited all bank managers to State House to explain why he had declared a near state of emergence…was anyone arrested? How can you take such a President seriously?

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  18. Now you have a former banker as Minister Of Finance I don’t see any hard-line approach towards banks they will continue raking in huge profits. I tried opening an account in Zambia and found that keeping account in Zambia is not economical at leave £500 (in Kwacha) untouched for year you find there is nothing …I am better off having an account abroad and sending funds via bank transfers to accounts in Zambia at no extra charge. I mean why should a bank charge you for putting money in their account, imagine if everyone put money at home these banks wouldn’t be in business. We Zambians need to wake up from our docility, all banks should have a basic current account with zero charges plus debit card…surely how can you charge 40+ % interest….its ridiculous no wonder the Chines and…

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  19. All this stems from the fact GRZ is in a very weak position finicially and economically.

    Lungu and PF have squandered Zambias chance of archiving middle income country anytime soon by their spending borrowed money on consumption and long term Niecy Niecy lifey projects without thinking of production….

    $10 billion of that $17 billion borrowed should have been spent on manufacturing. By now employment and exports should have swelled with imports dropping.

    Just to show how pathetic the situation is ……It is a crime to be importing 10s of millions of $s in GRZ uniforms while we have millions unemployed and we grow cotton…..sad , very sad.

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  20. I’m not an economist but had ran a successful business in diaspora thanks for the assistance from the banks’ facilities and their low interest rates. The bank of Zambia should stop pulling wool on the faces of Zambians buy shifting the higher interest charges on commercial banks. The Central Bank defines the interest rate, it regulates bank charges and provides a well defined monetary policy. Talking of 25% interest on loans, we may ask ourselves which company is able to make a net profit of 25% here in Zambia when the kwacha is so volatile. Small people without collateral can hardly borrow. And even if they borrow, there is chance that they could pay back. Hence the money is just locked up in banks because there are few borrowers. Yes I have been in business in RSA and in another…

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  21. This is a brilliant and mind provoking article. I wish our dear leaders could read such articles.They say desperate situations call for desperate measures and i have one desperate suggestion. Why not do a brief protest on these banks in form of huge cash withdraws from their banks and encourage citizens to start keeping money in themselves through savings/cooperatives?. By so doing money will constantly be in circulation and jobs will be created. Otherwise in the current set up, banks are withholding jobs by withholding peoples money and must be charged withholding tax on the deposits at high rates. i also suspect an economic sabotage and banks may need to be investigated for externalizing jobs to their countries of origin.

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  22. Its funny how this country runs. The government borrows money to assist its citizens (well intended) but it gives all the contracts to the foreigners so they can continue to enslave your own citizens, what kind of thinking is that. I hear some funny suggestions that for every contract given to a foreigner Zambians need to get 20% of it, why not let the foreigner get 20% and Zambians get 80%? Is it not logical to give the contract to a Zambian who later employs a foreigner if there are competency issues? If the people we receive claim to be investors, my expectation is that they should come with money but our investors are treated differently. They come as broke investors and go back rich

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  23. The author answers his own question within his article without knowing. He acknowledges that banks are reluctant to lend to the private sector and only lend to the government. This is the proverbial “crowding out” effect of the government being the biggest borrower in a market, which in turn is due to budget deficits run by the government that need to be funded.
    He also says retail rates should be between 15 and 17%, which again makes no sense when the risk free rate the government is borrowing at is 17.5% for one year according to the 365 day Treasury bill yield rate. Add a risk premium and bad credit attitude in the country its easy to justify reluctance to lend to the private sector especially if you can yield 17% with almost no risk by lending to GRZ.
    I appreciate these types of…

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  24. This is true even the loans being given by banks takes weeks and weeks to come out even when there is no risk on their part they still delay the loan. By the time the loan come out you would have lost that tender or business opportunity.

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  25. The Governor observed that Bank interest rates remained high and he did not seem to know the reason why commercial banks’ still kept their interest rates high. ”
    This Governor is a PF bootlicker and liar. He knows the causes. The main cause is the fiscal indiscipline by Lungu. He does not have the guts to say it but he is very quick at blaming the banks because they are the weakest link. Stop blaming the banks because they are just responding to the fiscal indiscipline.

    “The inflation rate in Zambia for February, 2018 is 6.1%,.” This is an another lie which has been consistently peddled since Lungu came to power. Inflation in Zambia is more than 20%, this is consistent with the higher lending rates and a very weak , worst performing currency

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