An Impotent Monetary Policy Statement from the Bank of Zambia
By Hjoe Moono
On 29th May, 2014, amidst pressure to soothe the nation on the rapidly depreciating exchange rate, the Bank of Zambia(BOZ) issued a statement warning the public to desist from taking any speculative positions against the kwacha as this may result in heavy financial loses once the kwacha reverts to an equilibrium condition consistent with the economic fundamentals. Funny enough, it is not known who issued this statement as there is only a signature without a name, and we wonder how authentic this is, or whether it was done under duress against the author’s will so they opted not to have their name.
The statement says the BOZ remains committed to implementing appropriate monetary policy aimed at maintaining inflation low, as can be seen from its previous policies of increasing the bank reserve ratios from 8% to 14% and the BOZ policy rate from 10.25% to 12% in April 2014. What the statement doesn’t say, however, is that these policies have not yielded the desired results, and thus the BOZ monetary policy is effectively impotent in this regard.
What is clear is that BOZ’s monetary policy has been heavily flawed, and has not been able to reduce the volatility of the kwacha nor its rapid depreciation. This has clearly hurt our economy, and it is disappointing that BOZ would issue such a shallow and hollow statement.
It is strange that the central bank can base its strength to run the economy on borrowed funds from the Eurobond. The admission that the disbursement of the euro bonds proceeds will put the bank of Zambia ‘in an even stronger position to allow the economy to absorb any real economic shocks’ implies that BOZ seems to have run out of international reserves to effectively conduct prudential monetary policy, and like the central government too, its operations now have to be debt dependent.
Clearly, the disbursement of $178 million to help ‘strengthen the kwacha’ as announced last month was a waste of foreign reserves, a waste of national resources that could have channelled to development concerns facing our population. The $178 million BOZ pumped into the economy has been lost, never to be recovered, and the kwacha has continued to depreciate, even further and faster than before. And now the BOZ is taking pride in more borrowed funds to enable it perform its functions?
Clearly there has been a deliberate attempt all along to conceal the fact that these poor developments in the economy are reflecting the poor governance concerns in the country, as well as the disjointed and inconsistent polices of government, as well impotent monetary policy by the Bank of Zambia. The so-called anticipated improvements in the exchange rate do not reflect an improvement in the fundamentals of the economy but the impact of massive inflow of foreign exchange made possible by begging and borrowing and that it is not a sustainable situation in the long run.
It seems the only thing BOZ has been doing lately can be likened to that of the Energy Regulation Board: Announcing increase in fuel prices and claim that ‘external forces are at play’. BOZ on the other hand is monthly announcing the BOZ Policy Rate, always adjusting it upwards on the pretext that ‘the low copper prices on the international market are putting pressure on the kwacha’. That all these policies have failed to curtail the volatility of the kwacha signals one thing: That monetary policy is not an ordinary public policy issue that can be handled by non-professionals!
One is made to conclude that the BOZ itself has begun to equate monetary policy with the policy rate in its monetary policy statements forgetting that the policy rate is one of the many instruments of monetary policy and not monetary policy in itself—the policy rate by the way is the rate at which banks can borrow from BOZ. The policy rate affects the cost of credit and thereby it affects private sector demand and is effective only if private sector credit is the main borrower from the banking system. If government borrowing is the main determinant of money supply, then changes in policy rate will neither affect government borrowing nor regulate money supply.
This is what has been happening: Government has increased borrowing from the banks thus making the policy rate impotent! With the 6400% increase in government borrowing from the local banking sector, clearly we expect such an impotent outcomes from the monetary policy, and perhaps that could explain such weak and speculative statements from the Bank of Zambia.
But then, what would we expected when there is a disjoint on policies among all government departments? We have said it before that the government is looking at each problem in isolation from others – without fully grasping the interlinks in economic policies, and without taking into account the side effects on other areas and objectives of a particular policy prescription to tackle a given problem. This is partly due to the fact that most of the economic policy advice is taken from nonprofessional bureaucrats, administrators, accountants, lawyers running the central bank and vested interest groups from the private sector who have no grasp of, or interest in, macroeconomic links.