9.5 C
Alba Iulia
Tuesday, February 23, 2021

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

Columns Bank of Zambia has so far mis-diagnosed the key causes of our...

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.

19 COMMENTS

  1. Sean Tembos analysis makes sense. Gratifying also to note that this time HH is not in his article, he has stuck to objectivity, well done Sean

    16
    1
  2. Sean Tembo the answer is obvious. They are printing money like confetti and thru rampant corruption they are stealing Taxpayer’s Money. Can’t Sean Tembo see Twusaka Twandalama all over. They are printing money to buy votes for 2021 Elections and wasting foreign Currency.

  3. There is high liquidity generated by printing of Kwacha to give to PF politicians for dishing out to poverty stricken citizens in search of 2021 votes!

    14
    1
  4. Yes…Lungu said he had NO plan for Zambia….and now we know exactly what he meant….Lungu is a Dunderhead and useless pompwe surrounded by pompwes…Lungu is also a thief…he stole money from a widow

    12
    2
  5. This is a measure intended to deceive Zambians that they have a solution to bring down runaway inflation. Just watch the huge amounts of money that will be flashed by the PF as we go in campaign time. There are going to be huge handouts and community based projects to be embarked on. What we saw during 2011 general elections where the MMD under RB dresSed chitengi materials on road side from Chavuma to Lundazi, Nakonde to Senenga will look like a child hide and seek. The PF is geared for a big show and they will spend BIG TIME to retain power and inflation will sky rocket. Already great damage has been done to the education sector, where on earth all pupils who wrote grade VII examination passing or making it to grade VIII. How did PF create enough learning space and staffing levels to…

  6. The real problem to the current increasing inflation is due PF & BoZ printing more Kwacha for “economic empowerment” bribes to secure votes hence diluting our salaries & devaluing it further soon Hyperinflation to set in…

    9
    2
  7. For once I agree with PEP. Zambians have no money so I do not know where this inflation rate increase comes from. I have often said that in Zambia, inflation MUST be ignored because it is based on factors that have no direct influence on the ordinary Zambian. Zambians do not live on bank loans and mortgages, so how does the Central Bank interest rates affect them? In fact interest rates are already too high because of a small pool of borrowers. Zambian bankers must come up with innovative ways of banking and not rely on the tired and failed western methods.

  8. “…..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…..”

    Why would they want to bring back dollars into zambia ? To use as what ?, when their share holders are abroad ???

    Someone pleas help me understand what he is saying ……?

  9. SPOT ON SEAN TEMB !!!
    BANK OF ZAMBIIA IS CLUELESS
    THIS IS WHAT I HAVE BEEN SAYING FOR A LONG TIME
    THE MINES SHOULD BE MADE TO SELL THEIR FOREX TO BOZ AT SAY 14 KWACHA PER USD WITH THE HOPE THAT THE DOLLAR MAY STABILISE AT AROIND 16-17 KWCHA PER USD
    IN THE LONG RUN ANY INVESTOR WISHING TO OPEN A SHOPPING MALL MUST COMMISSION A FACTORY
    MEANWHILE CLOSE ALL THE CHINA MALLS UNTIL THE KWACHA FALLS BELOW 17 KWACHA PER USD

    3
    1
  10. There’s no manufacturing industry in Zambia. Mining companies need to purchase supplies from other countries due to the lack of local supplies. Zambia’s debt payments are in forex, creating additional pressure on the Kwacha. You don’t need to be a rocket scientist to figure out the debt situation needs to improve and the diversification of the manufacturing base are key to economic stability. The bank needs to act in the short term.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisement -
Loading...

Latest News

Do we need the intelligence services? Our intelligence officers – ba shushushu, ba OP – are hated and feared

By Fred M'membe From time immemorial, nations, governments and communities have relied on intelligence as an essential guide to...

More Articles In This Category

- Advertisement -