BANK Of ZAMBIA’S TIGHTER MONEY POLICIES THREATEN PRIVATE SECTOR EXPANSION, WARNS CTPD’s ELIJAH MUMBA

STATEMENT
Date: Thursday 8/02/2024
CENTRAL BANK’S TIGHTER MONEY POLICIES THREATEN PRIVATE SECTOR EXPANSION, WARNS CTPD

Elijah Mumba, Public Finance and Economic Policy Researcher Centre for Trade Policy and Development (CTPD)

The Centre for Trade Policy and Development (CTPD) is concerned over the Bank of Zambia’s recent policy action which significantly raises the statutory reserve ratio (SRR) for commercial banks. Announced through a circular dated February 2nd, 2024, the SRR has been increased by 9 percentage points to 26.0 percent from the previous 17.0 percent.

This adjustment affects both local and foreign currency deposits, including government and nostro account deposits.

This move comes in response to rising inflationary pressures, with the annual inflation rate escalating to 13.2 percent in January 2024, marking the highest rate since February 2022.

Additionally, the Zambian Kwacha has seen a notable depreciation, starting the year at K19.05 against the US dollar and falling to K25.70 by December 2023, as per the Bank of Zambia’s reports. As of February 2024, the currency continues to weaken, showing no immediate signs of recovery.

While the Bank of Zambia aims to combat inflation and shore up the Kwacha, the reduction in loanable funds from commercial banks implies a constriction in financial resources which could, otherwise, be channelled into the economy- particularly affecting the private sector.

This may result in a slowdown of investment and economic activities critical for sustained economic growth.

CTPD is concerned that these measures targeted at ensuring price stability, may inadvertently lead to a decline in productivity as difficulties to access capital by businesses becomes a reality.

To address these concerns, CTPD recommends the following measures.
1. Fiscal Expenditure Control: There is need to control expenditure from the fiscal side which has seen a significant increase over the past three years. Rationalizing spending could help alleviate pressure on the budget and complement monetary efforts to stabilize the economy. Such coordination is vital for achieving price stability and creating a conducive environment for private sector growth.

2. Diversification of Export Base: To mitigate the impact of external shocks, particularly in traditional export sectors like copper, the government should focus on diversifying the export base.

Increasing the production of a wider range of export goods and expanding the scope of goods produced for domestic consumption can reduce import dependency and enhance economic resilience.

While these recommendations are not exhaustive, they can help steer the economy towards greater stability and growth, ensuring a more favourable environment for private sector development and long-term economic resilience.

Issued by:
Elijah Mumba
Public Finance and Economic Policy Researcher
Centre for Trade Policy and Development (CTPD)

Editor’s Note
The Centre for Trade Policy and Development (CTPD) is a not- for –profit, membership based trade policy and development think tank. The organization was established in 1999 and existed as the civil society trade network (CSTNZ), until 2009 when it was rebranded as the Centre for Trade Policy and Development (CTPD).
The mandate of CTPD is to influence pro-poor trade and investment reforms at national, regional and multilateral levels as well as facilitate the participation of various stakeholders including member organizations in ensuring that trade is used as a tool for poverty eradication.
For more information you can Email:info@ctpd.org.zm. or Visit our website [www.ctpd.org.zm] You can also follow our TWITTER Account -@CTPDZambia