Fiscal consolidation measures effects taking long due to raising public debt – BOZ

By Staff Reporter

THE Bank of Zambia says while Zambia’s public debt is rising, fiscal consolidation measures are taking long to take effect.

And the central bank’s Monetary Policy Committee (MPC) has decided to maintain the policy rate at 9.75 per cent.

In a presentation to journalists to announce the MPC statement for first quarter of 2018 in Lusaka yesterday, Bank of Zambia (BoZ) governor Dr Denny Kalyalya said one of the factors taken into account to maintain the policy rate at 9.75 per cent is the fact that: “fiscal deficits have been much larger than programmed.”

“And we note, and I think it’s in the public domain, that public debt is also rising. We have also, in that context, observed that fiscal consolidation measures are taking time to take effect. Finally, we looked at the growth of the economy [and] we see that that growth is still quite sluggish. So, when we put all these together, we determined that it was best to leave the policy rate at the current level of 9.75 per cent,” Dr Kalyalya said.

“At our meeting, we decided that we should maintain the policy rate at 9.75 per cent. You will recall that since February last year, we had been reducing the policy rate. So, this is the first time after that trend of reducing the policy rate. So, you might wonder why we had to do that.”
He added that when the MPC looked at the policy rate and a variety of factors which were affecting the country’s economy, it assessed that 9.75 per cent was the appropriate policy rate.

“We also looked more specifically into what has been happening to inflation itself and what projections we have for inflation going forward. We look around [and] we see that until February, inflation had been trending downwards but in March and April edged up – we had 7.1 per cent in March and 7.4 more recently in April. Shouldn’t that worry us? Yes, we have we have taken account of that and our assessment is that the rate at which the policy rate is appropriate,” he noted.

“Taking into account what I have said, when we project over the eight weeks, which is our forecast horizon, we see that inflation is rising during this quarter and the next quarter. But after that, we see it trending downwards.”

And Dr Kalyalya indicated that the central bank has noted that “credit has been quite subdued.”
“I’m sure you are aware as reporters many complaints that players in our market have brought out in terms of credit being quite tight. We see that the lending rates or interest rates generally have been coming down but the level at which the lending rates are is still quite problematic for many players in the economy to access credit. We also looked at the way the financial markets are set, in particular the banking system, the non-banks, we see that they are still having some difficulties as reflected in high or rising non-performing loans,” Dr Kalyalya highlighted.
He further said real Gross Domestic Product (GDP) was projected to continue on the upward trajectory over the medium-term.

“Growth is projected to rise to five per cent in 2018 and 5.4 per cent in 2019. Mining, agriculture, manufacturing, construction and tourism sectors are expected to be key drivers of growth,” Dr Kalyalya disclosed.

On the Statutory Reserve Ratio, Dr Kalyalya said it would remain at five per cent.

The preliminary fiscal deficit of 6.1 per cent of GDP for 2017, Dr Kalyalya said, was now likely to be revised upwards following the recent Debt Sustainability Analysis (DSA) exercise.

Asked about the current reserves for the country, Dr Kalyalya said: “It’s equivalent of two months import cover – US$1.8 billion.”