Bank of Zambia has so far mis-diagnosed the key causes of our runaway inflation

By Sean Tembo

1. As Patriots for Economic Progress (PeP), we have noted the decision by the Central Bank to increase the Monetary Policy Rate by 50 basis points from 8 percent to 8.5 percent. According to the Bank of Zambia (BOZ), this was done in an effort to arrest the runaway inflation that has inundated our country for the past couple of months. Our considered view is that this decision by BOZ is shallow, misdirected and unlikely to achieve its intended purpose.

2. As Patriots for Economic Progress, our position is that the Bank of Zambia has so far mis-diagnosed the key causes of our runaway inflation, hence the wrong intervention of increasing the MPR in an effort to arrest the inflation. The measure of increasing the MPR, and by consequence the general lending rates in the economy, as a way of fighting inflation is premised on the assumption that the inflation is being caused by an over-supply of liquidity in the economy, so that a general increase in lending rates will have the effect of discouraging economic players from borrowing thereby reducing the general liquidity in the economy and thereby arresting inflation. However, the fundamental flaw in the BOZ’s decision to increase interest rates as a way of curbing inflation is that current inflationary pressures are not caused by an over-supply of liquidity in the economy, but rather it is caused by the continued depreciation of the Kwacha against major convertible currencies. In other words, it is imported inflation.

3. As Patriots for Economic Progress, it is our considered view that in as much as we appreciate the desire by the Bank of Zambia to arrest inflation, which averaged 21.5 percent in January 2021, we have no doubt that BOZ is applying the wrong medicine to the disease. As a matter of fact, our economy has always had a liquidity deficit for several decades now, largely due to extremely high borrowing rates. Therefore, current efforts by BOZ to wipe out imaginary excess liquidity by increasing the Monetary Policy Rate, and by consequence the borrowing rates, will only serve to further diminish existing liquidity levels in the economy and consequently lead to further economic stagnation. Therefore in this particular instance, the perceived medicine is not only wrong but also worse than the disease.

4. As Patriots for Economic Progress, our view is that if the Central Bank truly wants to control inflation in this country, the starting point is to stop the rapid depreciation of the Kwacha. Given that the foreign exchange rate is largely a variable of supply and demand of forex, and also given the fact that there is little that the Central Bank can do to control the demand for forex without damaging the economy, our view is that BOZ should work on increasing the supply of forex into our economy. The most sure way of achieving this is by introducing regulations that will compel exporters, especially in the mining sector to remit the gross forex proceeds of their exports back into the country. Currently the majority of mining houses do not remit most of the forex that they earn from exporting our minerals, back into the country except to the extent necessary to meet their operating expenses. This means that our forex earnings are largely theoretical and only exist on paper. On the other hand our demand for forex is real as the country needs to import various materials including fuel, that are necessary for the smooth running of the economy.

The end result is that the demand for forex far outweighs the supply, hence the perpetual decline in the exchange rate which is only occasionally halted by the Central Bank’s interventions in open market operations, which in itself is not sustainable and only depletes our gross foreign reserves. Until such a time that exporters especially in the mining sector are compelled by regulations to remit the gross forex proceeds of their exports back to the country, the Kwacha will continue depreciating at a very fast pace against major currencies, thereby bringing inflation with it. This explains why, despite copper prices being at a ten-year high on the world market, now trading at about $8,400 per metric tonne, the Kwacha is still struggling to find its footing. One would have expected the Kwacha to strongly appreciate because higher copper prices would mean more forex being remitted into the country. But this is not the case. Instead, the Kwacha is in a free fall.

5. As Patriots for Economic Progress, we wish to appeal to the Bank of Zambia to consider engaging properly qualified and experienced personnel to advise the Governor in particular and the Monetary Policy Committee in general. Otherwise the quality of decisions and analysis that have been spewing out of the Central Bank of late, are not technically sound and are generally lopsided and leave much to be desired. This situation is untenable in the medium to long-term because, given our inherently poor management of fiscal policy, our economy has generally been surviving on prudent monetary policy management. However, our monetary policy management now appears to be following the same direction. Unless this is urgently reversed, our economy might be headed for a total collapse. It is high time that competence is restored in the management of the affairs of the Central Bank at the earliest possible time. Otherwise the consequence shall be grave.