THE decision by the Bank of Zambia (BoZ) to reduce the monetary policy rate from 14 percent to 12.5 percent is not only commendable but gives further hope to citizens and micro businesses in the country of increased access to finance.
A policy rate is utilised to influence monetary and credit conditions in an economy. Through the policy rate, the BoZ signals an increase or a decrease in the price of credit in the financial market.
BoZ governor Denny Kalyalya, who announced the reduction, said the monetary policy committee at its meeting held this week, decided to reduce the monetary policy rate to 12.5 percent from 14 percent and the statutory reserve ratio (the amount of money commercial banks are required to deposit with the central bank) to 12.5 from 15.5 percent.
Dr Kalyalya acknowledged that the prevailing high interest rates are an obstacle to private sector lending.
“During the first quarter of this year, economic activity remained subdued, while credit to the private sector contracted further despite an increase in money supply.”
While some three to four years ago we saw an increase in the number of people accessing loan facilities from both banks and microfinance entities, the trend has since gone downwards due to escalated interest rates.
The current average commercial bank lending rate is about 44 percent but reports indicate that there are banks that have been charging even higher than this.
The situation was exacerbated by the volatile economic conditions the country experienced the past two years due to unstable copper prices on the international market.
As the foreign exchange dwindled and the Kwacha weakened, inflation also skyrocketed reaching 22.9 percent in February 2016.
The high inflation rate and other factors, such as the monetary policy rate, statutory reserve ratio and the government treasury bill rates and the high risk of lending, pushed the cost of borrowing up.
As a result, the Zambian private sector and households have had to bear the brunt of the high interest rates in the last couple of years.
This resulted in repossessions of farms, vehicles, houses, reduction in disposable income of households as loans and mortgage repayments have more than doubled.
There have also been numerous closures of businesses resulting in loss of jobs and low economic activity.
It is, however, good to note that due to stability of the kwacha and other measures put in place by Government, inflation has been falling consistently and stands at 6.7 percent as of April.
And now that the BoZ has reduced the monetary policy rate by 1.5 percent, it means interest rates will also reduce.
What is even more assuring is that this comes barely two months after BoZ effected another reduction of the monetary policy rate from 15.5 to 14 percent.
We are encouraged and optimistic that Government is working to reduce the cost of borrowing.
This will no doubt help alleviate poverty and improve the status of households through access to finance for shelter and business, among other things.
With reduced interest rates, we also expect the private sector to be empowered with capital to venture into economic activities that will help Zambia realise its vision of diversification and industrialisation in particular.
It is also true that with affordable loans, banks will reduce on risk of bad loans.
It is therefore our hope that while the central bank has acted to signal a reduction in interest rates, the commercial banks in Zambia will also act accordingly.