Monetary, fiscal measures need address if…

THERE is need for Zambia to quickly put in place both monetary and fiscal measures that can help the country successfully address the balance sheet vulnerabilities it is currently exposed to.
The dwindling of Zambia’s gross foreign reserves to US$1.57 billion as at December 2018, the lowest in 10 years, is a source of concern for stakeholders such as the Zambia Chamber of Commerce and Industry (ZACCI), and Economics Association of Zambia (EAZ).
Last week, the Bank of Zambia (BoZ) maintained the monetary policy rate at 9.75 percent for four consecutive quarters while foreign reserves plunged to 1.8 months of import cover as at December 2018 compared to 1.9 months recorded in September the same year.
In 2016, foreign reserves were at a record over US$2.9 billion (three months import cover) despite Government providing US$763 million in 2015 to support the stabilisation of the Kwacha, which experienced volatility to reach an all-time high of K14.90 against the United States (US) dollar.
BoZ governor Denny Kalyalya said at a Monetary Policy Committee (MPC) press briefing that Zambia’s international reserves fell to US$1.57 billion in December from US$1.63 billion recorded in September 2018.
Dr Kalyalya cited external debt service payments as being among the primary drivers of the drawdown in foreign reserves while the decision to maintain the MPC rate was due to predictable inflation rate, which has remained within trajectory levels of between six and eight percent, although moving towards the upper bound.
He, however, said the central bank has partially mitigated the rundown of reserves through forex buying and mineral royalty receipts amounting to US$109.6 million in the fourth quarter of 2018.
“Net foreign exchange purchases from the market for 2018 amounted to US$346 million compared to US$402.6 million in 2017.
“Money supply growth slowed down to 0.9 percentage point from 13 percent in the preceding quarter of 2018, reflecting declining international reserves,” he said.
Dr Kalyalya explained that preliminary data for 2018 indicates that the fiscal deficit on cash basis is likely to be slightly lower than the 2017 budget outturn of 7.8 percent of the gross domestic product.
He said during the quarter under review, economic progress remained subdued with heightened downside risks such as weak credit growth, delayed implementation of fiscal adjustment and dismantling domestic arrears.
Therefore, there is no doubt that prompt and effective implementation of fiscal adjustment measures to support sustainable macro-economic stability for Zambia to achieve higher economic growth remains critical.
ZACCI president Michael Nyirenda feels that it is risky to let a country’s reserves drop to as low as US$1.57 billion as there is a possibility that this might lead to Government failing to meet its financial obligations, especially when there is an urgent economic or socio-economic demand.
Mr Nyirenda believes that the decline in reserves is as a result of Zambia being a net importer for a longtime.
He says this is one factor that has contributed to the country’s trade deficit persistence.
“Basically, reserves are meant to be used when a country has an emergency or is passing through hard economic times, however, not for the use of day-to-day running of a country’s requirements. That is why we talk of a minimum of two to three month’s import cover,” he said.
Mr Nyirenda feels that there is urgent need for Government to consider introducing multiple international trading currencies like the South African rand and the Chinese yuan, as the two are among Zambia’s major trading partners apart from the US dollar.
“Currently, we have to pay all our bills in US dollars, but we could pay imports from South Africa in rands and from China in Yuan. This could remove pressure on our reserves,” Mr Nyirenda noted.
He called on Government to anchor the Kwacha on copper reserves as one of the innovative solutions to address debt.
Mr Nyirenda said some of the strategies that Government can implement include the establishment of a metal exchange bureau, where copper can trade as a derivative and backed copper securities issued as a sustainable debt management.
It is indeed a fact that debt obligation has had a negative effect on the balance sheet, thereby making foreign reserves to dwindle to just 1.8 months of import cover a situation that EAZ feels that, if not speedily controlled, will increase the country’s vulnerabilities to shocks.
However, ZACCI national secretary Mutisunge Zulu is confident that with the right fiscal policies, Zambia will successfully address the balance sheet liabilities it is exposed to.
Mr Zulu explained that with the debt service payments denominated in foreign currency, the association foresees high open market operations activity that will manage the availability of the local currency.
He has, therefore, called on Government to expedite the sinking fund strategy in addition to a debt redemption plan to absorb the pressure that can permanently cause further dislocation in the macro-economic fundamentals.
“EAZ recognises efforts to boost reserves through strategies such as remission of mineral royalty taxes in dollars directly to the tune of US$109.6 million directly, to the central bank by the mines, the figure being from inception,” Mr Zulu added.
This year, global growth is projected to decline to 3.5 percent in 2020 as a result of the trade war between the United States and China.
And looking at how Zambia’s foreign reserves have plunged, there is urgent need to encourage the issuance of Kwacha bonds to fund projects locally that skew towards foreign currency denominated obligations, which exert pressure on the feeble foreign exchange reserve stock.
Therefore, it is true that in the short term, far-reaching and serious fiscal expenditure, business environment and public sector institutional reforms are needed for Zambia to sail high again.

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