With two rate decision meetings to the end of the year in Africa’s copper producer Zambia, monetary policy is shifting from inflation to pandemic based as the committee weighs social impacts of disease on the economy in light of the need to stimulate growth. COVID19 and its adverse impact on the economy and business ecosystem will be a key agenda item and scenario in central bank board rooms, over and above the notorious spiralling inflationary pressures. Inflation continues to climb to highs as global food prices soar persistently, logistics and freight price upticks as backlogs widen in light of economies reopening, currency weakness pressures, a rise in soya bean and other soft commodity prices and above all autopsy effects of El Nino droughts over the last few years affecting cattle ranching.
The Bank of Zambia – BOZ will target to reign in on inflation over the next 8 quarters to realign it within the 6%-8% band, a mammoth task which could be a mirage should global inflationary pressures persist. While fire fighting inflation caused by both endogenous and exogenous factors another quagmire the BOZ faces is the third wave delta or Indian variant which has sent positivity rates to 28.0% amidst a very anaemic vaccination pace which continues to strain Zambia’s healthcare facility with bed space, oxygen and facility bottlenecks.
Most of Zambia’s peers have either held or cut rates in the pandemic period. Nigeria recently held rates to support economic recovery at 11.5% while South Africa maintained its repo rate at 3.5% as COVID risks persist. Egypt left its overnight, deposit and benchmark interest rate flat at 8.25%, 9.25% and 8.75% respectively to stimulate growth while Ghana did cut its June rates 100 basis points to 13.5%. A third wave is overturning the expectation that the rate hike cycle for emerging and frontier markets was commencing as observed earlier when 5 EM central banks of 37 hike rates in May.
The aftermath of the COVID year 2020, saw inflation climb to peaks across the globe, the continent inclusive off course from aggressive stimulus interventions that saw excess liquidity as central banks sought to cushion potential disease induced credit risks. Underlying drivers also include currency depreciation as asset sell off pressures heightened as more investors preferred holding dollar denominated assets. Traditionally, cost push inflationary pressures from currency slides are curbed with benchmark interest or statutory reserve ratio hikes, some form of liquidity tightening but this strategy may not be very feasible in a pandemic period as doing so, could exacerbate credit risk pressures through increasing repayment burden on already ailing counterparties that could accelerate default risk.
COVID19 brings a different scenario shift to monetary policy as it infuses the social aspect into the committees decision even against all odds. The COVID year 2020 saw the benchmark interest rate lowered to record lows of 8.0%, the lowest since the BPR was introduced in 2012 at 9.0% to cushion the economy against recession pressure brought about by economic sector disease impact that saw massive disruptions across the mining, hospitality, airline, construction, small to medium scale entrepreneur faculties. Even in instances where the Bank of Zambia has hiked rates i.e. in the first debut rate decisions meeting on February 17, the quantum of hike has been constrained by social effects of the pandemic. Business pulse as measured by the Purchasing Managers Index – PMI was at its lowest in march 2020 at 34.3 while currency depreciation persisted to fuel inflation higher and ultimately cripple growth to the FY20 -2.6% (World Bank).
INFLATION, GROWTH AND PANDEMIC RISKS
Inflation has been the major driver in rate decision criteria and methodology for a very long time across the world and for the BOZ it has been about clutching variables to contain the consumer price index within a 6%-8% target band but pandemic times have proved that these traditional correlations are disrupted and weakened especially when social factors pointing to the need for stronger growth do override. Central banks are faced with options such as grow the economy and let inflation run away? tame prices but at the expense of growth? cloth variables gently to achieve both infinitesimal growth and price stability? Usually the need for growth does override everything else because it hinges more on creating a conducive environment for households to thrive and dust off devastating effects of the pandemic. Zambia remains at a critical point of the growth recovery cycle with an underlying array of hurdles ranging from waning sentiment through debt repayment burdens, coupon defaults on dollar bonds, spiralling inflation as global food prices soar and general suppressed tax revenues which have lately levitated supported by rising metal prices that have revised Zambia’s inflation and exchange rate view.
DISLOCATION BETWEEN FISCAL AND MONETARY POLICY PERSISTS
The dislocation between fiscal and monetary policy is nothing new to the Bank of Zambia and is evident in the monetary policy communiques pre pandemic remaining a persistent concern going forward. This is because the pandemic has amplified fiscal vulnerabilities which existed way before COVID19 worsened the situation, due to a reallocation of public resources to the healthcare sector leaving productive sectors of the economy underfunded. Macroeconomic stability remains key should the economy benefit from Bank of Zambia actions to achieve price stability in the interim. At a time that inflation continues to spiral sending treasury bill yields underwater, ideally a ferocious correction would be expected but that is yet to happen. A correction would lead to bearish interest rate trajectory which could make term funding and the general price of credit expensive. The cost of living remains elevated as the economy struggles to regain its momentum in growth yet disease impact on human capital as factor of production continues to weigh. According to the Zambia Statistics Agency – ZSA, the copper producer grew by 0.7% in 1Q21 whose gains are at threat of erosion as the third wave deepens.
THE REMAINING RATE DECISION MEETINGS OF THE YEAR WILL LIKELY KEEP RATES UNCHANGED
It is highly unlikely that the next two rate decision meeting sessions in August and November would point to rate hikes higher than the current 8.5% for the benchmark interest rate as the central bank will be constrained by the need to grow the economy in line with macroeconomic targets. Currency pressures are likely to be addressed by a higher stock of mining tax revenue proceeds which will spur shoring up of current depleted foreign exchange reserves to allow for the central bank more ammunition to sell dollars on the open market to achieve its mandate of price stability. Other permutations at play include a potential injection of $1.3 billion from the Washington based lender the International Monetary Fund as part of the increased Special Drawing Rights – SDRs to be approved at the end of August. Should this actualise, Zambia’s reserves will significantly increase well ahead of an IMF deal likely after the August polls. Any improvements in the currency situation (depreciation and scarcity) will likely ease inflation. With all these factors at play it is unlikely to hike rates in the remainder of 2021 as pandemic risks remain elevated from the third wave.
It is vivid that Africa still remains at the receiving end of a hard vaccine bargain. With vaccines rates of less than 2.0% and 0.6% of the continents population have received the second dose, Africa is ill prepared for the third wave and as such remains at threat of slow growth this year too. The G7 commitments towards donating a billion vaccine doses towards poorer nations, World Bank financing pledges towards vaccine manufacture by 2022 are yet to actualise because until then the continent will grapple with healthcare bottlenecks, Zambia inclusive. These remain harsh realities that central banks will factor in all monetary policy decisions this year.
The Kwacha Arbitrageur
