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Sunday, January 19, 2020

Decision by Bank of Zambia to Increase Reserve Ratios for Banks is a Sign of Desperation

Columns Decision by Bank of Zambia to Increase Reserve Ratios for Banks is...

By Fred M’membe

The Bank of Zambia’s decision to increase the Statutory Reserve Ratios (SRR) applicable on commercial banks’ kwacha and foreign currency deposits liabilities to 9 per cent from the current level of 5 per cent is a desperate measure to curb inflation.

We have a brilliant team of very good economists at the Bank of Zambia but they have been stretched to the utmost. They are being pushed to do the impossible, to square a circle.

The measures the Bank of Zambia is taking will help secure financing for government and channels funds into financing the budget deficit.

However, this will lead to contracted lending in the open market due to reduced liquidity. It will also raise the cost of funds, which will further lead to an increase in interest rates and cost of borrowing.

Most banks are likely to reduce lending to meet these increased statutory reserve requirements.

Ultimately, it’s the borrowers who will bear the increased cost of funds.

Clearly, these are desperate measures.

And these desperate measures remind us of Shakespeare’s works. Those who think Shakespeare’s works are useless, outdated and shouldn’t be taught in school should think twice. In our opinion, Shakespeare’s works, particularly ‘Romeo and Juliet’, provide extensive insight into human behaviour.

The story provides a good lesson about the consequences of desperate behaviour, which can help us make the right choices in our governance, in our own lives.

So what does Shakespeare teach us? What is clear from ‘Romeo and Juliet’ is that desperation gives us irrational thought processes which usually have a potential for severe consequences. I’m sure you have heard someone say: “desperate times call for desperate measures”, a phrase which explains the sometimes detrimental result of decision making while in an irrational state.

If we could write a letter to Shakespeare, we would thank him for his timeless insight into the human psyche.

Desperate measures can be destructive. Some leaders become desperate when they are losing, and out of options. Leaders in desperation grasp at anything they think might ‘rescue’ them. We have plenty of examples today.

Desperate measures are born out of fear, fear that they are actually not performing well.

Actions taken out of desperation and hopelessness are unlikely to work: it’s that simple.

Desperate times call for bold measures but not desperate measures.

Decisions made out of hopelessness or despair are likely to turn out bad. It can create much larger problems.

As we have repeatedly advised, what is required is confidence building, addressing the many unresolved issues facing our country today.

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20 COMMENTS

  1. BOZ and MOF have really tried!
    We should not forget that fish starts rotting from the head!
    As long as the head thinks it’s not part of austerity measures, nothing will work!
    PF at the moment is very lucky to have the best teams at BOZ and MOF but unfortunately PF has not subjected itself to the Fiscal discipline required to turnaround the economy! Maybe IMF should be blunt with PF and tell them to cut down on unnecessary expenditure on travels and suspend 80% infrastructure developments and Restructuring the civil service wage bill! Abolish and fuse some ministries to cut costs! The Executive MUST come to the table of Austerity! It’s the head we need to deal with and not BOZ or MOF!

    • The rot started with the election of his hero Michael Sata as president. Sata spent billions moving the Southern province capital from Livingstone to Choma building brand new offices. He also minted a new province called Muchinga and immediately began building provincial admin offices at Chinsali. In both towns, the work is incomplete and the money has ran out. But wht does Chinsali contribute to the national output? Precious little but billions are pouring into it. Don’t forget the new districts where more money has to be spent. Bwalya Ng’andu has a big problem.

  2. Fred, the largest local borrower is GRZ, it mops up all funds through Treasury Bills thereby leaving nothing for SMEs and others. It’s the same GRZ that will get affected by the increased interest rates. If Edgar doesn’t know what he’s doing at least let him behave honestly. Parte after Parte coupled with dishonest has caused us all these problems. We are not getting the real value for our money. The digital migration program has cost us 10 x normal and now ZNBC is threatened. Zesco can’t account for loans contracted in its name and now its position is threatened. If you think critically you can run mad so you opt for the easiest to save yourself, just drink jemasoni and join the parte after parte

  3. My whlte wlfe and I are voting in the United kingdom general election. It feels good to vote in credible elections where you know your vote counts. After that I am taking her for pregnancy test as we have had a pregnancy scare. Wish us luck. I love her

  4. It is called crowding out! Mr Membe is right. An increase in interest rates removes money from private sector and depressing investment that is needed to grow the economy. In the long run, if we don’t do that, exports will decline, with it low dollars and therefore kwacha will loose further more grounds. Surely this can’t be the only plan you have other wise it means we are truly desperate and will crash soon.
    The authorities should be giving out a bit more information on the big picture than channel half measures. Soon ZRA will find it difficult to collect taxes and companies might down size as their own counter measure to survive!

  5. This decision by BOZ will be the primary cause of credit crunch.The borrowers will bear the blunt of higher interest rates by the banks for their ‘ perceived ‘ additional risk on loans.

  6. Fred M’membe is speaking the language of a capitalist and has on his wall the picture frame of a hardcore communist named Fidel Castrol.Does he just pander to the socialist ideologies like his French colleague Domique Strauss-Kahn?

  7. We are now in full fire fighting mode. Why not have that economic indaba that was dismissed with insults a couple of yrs ago ? Austerity is indeed for everyone not just lesser mortals. We Shud learn to listen to others, chipante pante no bwino bwino. Jiliz therapy will not solve this mess…Tym to look hard in the mirror….

  8. What is the Positive and Good thing:

    For the Zambian economy in that Central Bank strategy looking at the Outlook in currencies (USD?Euro?Kwacha),FDIs,Moderate the Rates(to avoid overheating the economy) and Build up the reserves in the short term to re position

  9. The Central Bank is now acting like a PF cadre. They are taking action for the sake of being seen doing something. They can’t advise Lungu to reduce spending especially his incessant travels. The inflation plaguing PF government is not due to excess supply of money (this is the symptom BOZ is trying to treat) but to an increase in production costs which is now very clear even to laymen.

  10. Its wrong to think that GRZ through BOZ can CROWD IN and moderate the economy especially that sometimes the Transmission mechanisms in policy rates might be not yielding intended objectives these days as exercised by global central banks so there must be more policy options The median estimate for the fed funds rate is 1.6% at the end of 2019 and 2020, 1.9% in 2021 and 2.1% in 2022

    You have seen the signal ,recently ,from the FEDS maintaining the policy rates ,the yield inversion curves and the performance of the MSCI and S&P. The yield curve inverts when the yield on the 3-month U.S. Treasury exceeds the yield on the 10-year U.S. Treasury. Many investors focus on this historically negative signal for the overall stock…

    • The point here is that you can’t fix the economic ONLY from the monetary side of things. The transmission mechanism from the fiscal side of things are too weak or in depressed mode to respond positively even in the short term. BOZ has done their part and others should also realign.

      We need to boost direct foreign investment, tourism, improve the confidence levels and boost exports.

      Our ability right now to boost export earnings is very low, so crowding out measures will actually have the negative effect on the factors that is support to assist from the fiscal side.
      Perhaps creating even further incentives for the mines and for those in the export business, putting a freeze on borrowing and fully implement austerity measures are some of the policy prescription we may use.

  11. market, as inversions

    If you will need to enter 2020 and provide stimulus to the economy to avert recessions and others such bold and non-measures are positive to ensure moderation in the short to medium term to manage volatility and stress on the local economy as you see a return to long-term asset performance trends global therefore helping to keep the kwacha in check especially now when more is being used to purchase the USD for corporate and individual subscriptions treasuries and travels including speculations to take advantage of the December January effects The point to support actual manufacturing and improve the local”.
    So with these performance of assets global S&P to MSCI to the 10…

  12. So with these performance of assets global S&P to MSCI to the 10 year yield inversion curve signals the near now recessive stabilizing global economy (purchasing managers index) to local(contagions) to here Financial flows outbound(FDIS reversal /positioning and directions including Subscriptions, travel and treasuries) not well responding and moderated by lagging ineffective traditional policy transmission mechanisms in the usual local policy rates
    How best to stem and redirect to ensure local economy performs in sectors like manufacturing and services When you observe the composite leading indicator for the world economy by OECD is it not showing some concern with G7 (99) indicating that the decision by BOZ is…

  13. the decision by BOZ is wise for now at-least Government will as expected crowd in very well and effectively by providing stimulus to the sectors on the economy by stepping up some government spending to transmit reduction in the cost of money Thus said I support the premise that Availability and cost of credit will be a key to whether economic sectors local will perform through the stemming of those flows and redirecting them to manufacturing and services We have also seen Ethiopia accessing the USD 3 Billion Loan from IMF that is positive also for Zambia and efforts must be directed in that given economics

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