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BOZ building.

BoZ takes steps to reduce interest rates

ZAMBIA’S private sector and households still continue to grapple with high interest rates, which undermine Government’s efforts of reducing the cost of doing business.
The current interest rates in the country are high and have negatively affected the country’s private sector and households, who have had to bear the burden.

For example, average commercial bank lending rates are around 25 percent and 38 percent but reports indicate that there are banks that have been charging even higher than this as the customer facilities vary depending on their credit profile.

In addressing this scenario, the Bank of Zambia (BoZ) has on three occasions reduced the monetary policy
 rate (MPR) and statutory reserve ratio (SRR), with the current dropping from 12.5 percent to 11 percent and from 12.5 percent to 9.5 percent respectively.
Monetary policy refers to the measures taken by the monetary authority of a country (in this case the Central Bank) to alter the quantity of liquidity and cost of credit in the economy while statutory reserves refers to minimum amounts certain institutions, such as financial institutions and insurers, must maintain as liquid funds to avoid insolvency and are used by the Central Bank to influence liquidity and interest rates.
MPR would be the base rate from which banks are expected to use to calculate interest rates.
Stakeholders feel two variables are expected to impact positively on interest rates, as the reduced monetary policy rate would help reduce interest rates while lower reserve ratio requirements mean more liquidity for banks to lend out.
The gesture by BoZ gives further hope to citizens and micro businesses to have increased access to finance in the country.
In view of reduced interest rates, the private sector is expected to be empowered with capital to venture into economic activities that will help Zambia realise its vision of diversification and industrialisation in particular.
As observed by BoZ governor Denny Kalyalya, the move has been necessitated by the continued decline in inflation rate in the last seven months coupled with the appreciation of the Kwacha against major convertible currencies.
Currently, inflation is at 6.6 percent and the Kwacha is trading around K9.00 and K9.10.
During the quarterly briefing, Dr Kalyalya also added that the decision to reduce the two valuables is owing to credit remaining expensive in the country especially, for productive sectors of the economy.
BoZ has observed that economic growth has been sluggish and credit to the private sector has been slow.
“Overall inflation ended the second quarter at 6.8 percent, up from 6.7 percent at the end of the first quarter, but well within the medium-term target of six to eight percent.
“The inflation forecast indicate that it will remain at current levels for the remainder of the year and trend towards the lower bound of the target range of the medium term,” he noted.
Furthermore, the non-performing loans have been on the rise hence the measures taken may help mitigate the trend.
But the question remains, will the reduction translate into reduced interest rates and inturn benefit the consumers?
With some banks already responding to the reduction with an average of 1.5 percent drop on interest rates, will this translate to improved economic activities in the country as more people will have access to finance?
The public expects cheaper credit with improved liquidity on the market following the reduction in the SRR.
The intervention by BoZ is anticipated to have an impact on the loans and the market rates for risk-free interest rates on government securities.
In light of the reduction in the MPR by the central bank, Bankers Association of Zambia public relations officer Miriam Zimba says it expects commercial banks to reduce interest rates by about 1.5 percent on all loans.
Ms Zimba, however, notes that banks have different balance sheets, cost structures and risk appetites which ultimately, determine their acceptable interest rate margins.
“With these reductions, all loans in the banking sector which linked to the monetary policy rate shall see interest rates scale down by 150 basis points [1.5 percent],” she said.
Similarly, Zambia Institute for Policy Analysis (ZIPAR) senior research fellow Ceaser Cheelo notes that the recent policy decision to further relax monetary policy through various revisions is positive.
Mr Cheelo says the currency appreciation and single-digit inflation are also likely to inspire the private sector and foreign investors to gain confidence and increase their participation in the economy at predictable and more affordable prices.
“Of course, the authorities must remain cautious and vigilant in monitoring the macroeconomic health of Zambia. In the recent past, Government expenditure and public debt accumulation have been very high,” he observes.
The recent policy decision to further relax monetary policy through various reviews is positive, with general improvements in the economy, particularly, in mining and construction, more affordable liquidity or credit to the private sector can be expected.
But is the 1.5 percent reduction in interest rates enough or is there a need for further drop so that the private sector can grow their businesses while households can have deposable income?