By Daily Revelation Editor
Economics Association of Zambia (EAZ) vice-president Mbanji Milambo says the recent decision by the Bank of Zambia (BoZ) to raise the Monetary Policy Rate by 50 basis points to 14 percent may not be enough to curb inflation and stabilise the economy.
Milambo expressed concern that relying solely on monetary policy measures, such as higher interest rates, could stifle economic growth by limiting access to credit for businesses and households, suggesting that to achieve the intended inflation target sustainably, monetary policy adjustments should be supported by fiscal policies that strengthen the productive capacity.
The BoZ could have taken the decision to adjust monetary policy upwards to try to address the continued weakening of Kwacha, now trading at over K28 from the recent K27.5 to US$1 in just a few days, and by so doing also try to address the inflation which has been steadily climbing and now sitting at 15.4 percent.
When the Kwacha is weakening against other major international convertible currencies such as the United States Dollar, the implication is that the local currency is losing value. Meaning that you will need to spend more Kwacha to purchase any imported item you buy in the shop, such as crisps or even spare parts, than you used to spend just over a few days ago. This is because the Dollar which is used to bring in those goods has appreciated against the weakening Kwacha. And as the Kwacha weakens, the prices of the goods you buy will also correspondingly go up. That is actually the meaning of inflation in layman’s language.
Therefore, to try to address that, the BoZ uses policy instruments such as the Monetary Policy Rate, to either increase the supply of Kwacha in the economy or reduce the amount of Kwacha (liquidity) from the market. Usually, when the BoZ reduces the rate, it means that they want to increase supply of the Kwacha liquidity in the economy and vice-versa when they increase the rate, such as what they have done now. When BoZ increases the rate, it also follows that the banks and other financial institutions will follow suit and increase their own interest rates, thereby making the cost of borrowing expensive, and for those who have loans with financial institutions, usually loan premiums also go up.
The idea is to reduce the Kwacha flow so that many don’t easily have access to it. In short, the idea is to make the Kwacha expensive, in the hope that that will reduce the rate of inflation so that prices don’t go up.
However, such BoZ moves have had little effect as can already be shown that this is the third rate increment within the shortest possible time, but the Kwacha keeps weakening, while the prices of goods in the economy keep going up, leading to the worsening cost of living in the country. With this continued weakening of the Kwacha, the implications are that the nation is likely to see another upward adjustment in essential necessities such fuel prices at the month end, since the Dollar we exchange the Kwacha to, to import the petroleum products from outside the country has strengthened against the local currency.
Therefore, the EAZ vice-president is saying that the Monetary Policy instruments controlled by BoZ are inadequate if not mixed with the fiscal side controlled by the government, in form of taxes, increased productivity in agriculture, mining, manufacturing and other sectors.
Nowonder, many have been questioning the government on why they have not been proactive enough to get more revenue from the mining industry, especially that the copper prices are enjoying some of the best prices in history, going at over US$9000 per metric tonne on the London Metal Exchange as of yesterday. What the nation has noticed is that while the copper prices have been going up, the government has in return been progressively reducing the mineral royalties from the mines, in what can be described as possibly pandering to the special interests in that sector going to a few individuals in government.
The EAZ is right. Trying to address inflation by using BoZ policy instruments alone, in a weak economy such as the one we are experiencing in Zambia, will definitely achieve nothing. It’s like using the same wrong formula to try to address the same mathematical question one has been constantly getting wrong.
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By Daily Revelation Editor
Economics Association of Zambia (EAZ) vice-president Mbanji Milambo says the recent decision by the Bank of Zambia (BoZ) to raise the Monetary Policy Rate by 50 basis points to 14 percent may not be enough to curb inflation and stabilise the economy.
Milambo expressed concern that relying solely on monetary policy measures, such as higher interest rates, could stifle economic growth by limiting access to credit for businesses and households, suggesting that to achieve the intended inflation target sustainably, monetary policy adjustments should be supported by fiscal policies that strengthen the productive capacity.
The BoZ could have taken the decision to adjust monetary policy upwards to try to address the continued weakening of Kwacha, now trading at over K28 from the recent K27.5 to US$1 in just a few days, and by so doing also try to address the inflation which has been steadily climbing and now sitting at 15.4 percent.
When the Kwacha is weakening against other major international convertible currencies such as the United States Dollar, the implication is that the local currency is losing value. Meaning that you will need to spend more Kwacha to purchase any imported item you buy in the shop, such as crisps or even spare parts, than you used to spend just over a few days ago. This is because the Dollar which is used to bring in those goods has appreciated against the weakening Kwacha. And as the Kwacha weakens, the prices of the goods you buy will also correspondingly go up. That is actually the meaning of inflation in layman’s language.
Therefore, to try to address that, the BoZ uses policy instruments such as the Monetary Policy Rate, to either increase the supply of Kwacha in the economy or reduce the amount of Kwacha (liquidity) from the market. Usually, when the BoZ reduces the rate, it means that they want to increase supply of the Kwacha liquidity in the economy and vice-versa when they increase the rate, such as what they have done now. When BoZ increases the rate, it also follows that the banks and other financial institutions will follow suit and increase their own interest rates, thereby making the cost of borrowing expensive, and for those who have loans with financial institutions, usually loan premiums also go up.
The idea is to reduce the Kwacha flow so that many don’t easily have access to it. In short, the idea is to make the Kwacha expensive, in the hope that that will reduce the rate of inflation so that prices don’t go up.
However, such BoZ moves have had little effect as can already be shown that this is the third rate increment within the shortest possible time, but the Kwacha keeps weakening, while the prices of goods in the economy keep going up, leading to the worsening cost of living in the country. With this continued weakening of the Kwacha, the implications are that the nation is likely to see another upward adjustment in essential necessities such fuel prices at the month end, since the Dollar we exchange the Kwacha to, to import the petroleum products from outside the country has strengthened against the local currency.
Therefore, the EAZ vice-president is saying that the Monetary Policy instruments controlled by BoZ are inadequate if not mixed with the fiscal side controlled by the government, in form of taxes, increased productivity in agriculture, mining, manufacturing and other sectors.
Nowonder, many have been questioning the government on why they have not been proactive enough to get more revenue from the mining industry, especially that the copper prices are enjoying some of the best prices in history, going at over US$9000 per metric tonne on the London Metal Exchange as of yesterday. What the nation has noticed is that while the copper prices have been going up, the government has in return been progressively reducing the mineral royalties from the mines, in what can be described as possibly pandering to the special interests in that sector going to a few individuals in government.
The EAZ is right. Trying to address inflation by using BoZ policy instruments alone, in a weak economy such as the one we are experiencing in Zambia, will definitely achieve nothing. It’s like using the same wrong formula to try to address the same mathematical question one has been constantly getting wrong.
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