Exactly 7 days after effecting a record upward adjustment to its cash reserve ratio, Zambia’s central bank will on 12 February, commence monetary policy deliberations for the first rate decision meeting of the year. The black swan statutory reserve hike to 26% a 900 basis point scaling caught the market by surprise. Africa’s copper hotspots highest reserve ratio was in 1994 period where the Bank of Zambia raised the level to 30%.
A homogenous theme about the monetary policy stance is that the Southern African nation was under an International Monetary Fund (IMF) structural adjustment program. Thirty years later, the red metal producer is 28 months into an IMF extended credit facility for balance of payment support to help with economic stabilization and restoration of fiscal fitness.
CURRENCY REMAINS ANCHOR RISK
The copper currency has been on losing streak shaving over 58% from July 2023 and flirts with lows of 26.95 for a unit of dollar. As an anchor risk, a sliding kwacha has exacarcabated inflationary pressurethrough transmitting unusually high petroleum prodct costs which inturn has ripple effected business pulse through higher input feeds keeping selling prices high. Business activity plummted for a second month running to 49.2 in Jnauary 2024 from 49.6 in December 2023 as currency induced input inflation persists. Lack of liquidity, currency weakness and higher fuel costs have been consistent hurdles for manufacturers in the Southern African nation.
January consumer price index headlined 13.2% as food and non food prices rose. The energy regulation board effected the first petroleum price hike in 5 months adjusting costs 14% higher and Kwacha deprecation weighed significantly. More recently the Jesuit Centre for Theological Reflection (JCTR) rose to K9,550 ad cost of living widens.
The 900 bps raising of the statutory reserves in February, is an extension of a hiking streak that commenced in February 2023 to November that saw the BOZ pull the cash level 800 bps to 17% both for local anf foreign currency. To address the excess liquidity quagmire, the financial markets regulator extended the hike to vostro accounts and government depoits for idel balances which was forewarned in an IMF Country Report released after the Article IV Mission team completed its review on Zambia in 4Q23. The report did cite the additional latitude that the central bank has to tighten monetary policy to keep tame the currency.
RISING FUNDING COSTS AND DEPOSIT WARS
The rate hike is expected to fuel a market wide deposit mobilisation campaign with multiple banks marketing attractive rates for liabilities. In the labyrinth of a debt restructure whose compeletion is earmarked for 1H24 as signaled by the MinFin, the kwacha yield curve has protracted its climb down and kept interest rates elevated. This analogy has been forecast by market analysts as one that will fuel higher funding costs and delay the era of affordable rates which could stiffle growth prospects in the medium term as the authorities address the evils of inflation. Zambia in 2023 posted resilient growth at an an avergae of 4.4% but in an inflationary environment supported by inflated asset prices valued by a weak currency.
MONETARY TIGHTENING AND THE IMF
This first rate decision meeting of the year will be a week before the IMF Article mission team’s third review visit as they seek to review Zambia’s performance on the extended credit facility program. Monetary tightening through the recent actions by the monetary and fiscal authorities are part of the technical memorandum of understanding agreed with the Washington based lender. Adherence to the MOU remains critical to unlocking access to the next $187 million of which the Southern African nation has drawn $561 million (SDR 419.64 million) to date.
MINING BOOM BUT WITH A PRODUCTION LAG
Despite healthy red metal prices on the London Metal Exchange reverberating between $8,100 and $8,700 a metric ton, mining production for Zambia could remain muted in the medium term as huge investment outlays patiently transition to actualization of increased production. Zambia has made significant strides such as resolving the Vedanta and ZCCM – IH impasse, signing of an equity partner for Mopani in addition to some remarkable exploration developments. The lead time between these development and actual production could take more than a year and as such, in the interim extend the foreign exchange supply hurdle themed in 2023 as demand for dollars widens with rising growth prospects. Zambia’s non traditional export position for 2023 was nonetheless strong at $4 billion taking a positive cue from currency weakness as cane sugar, tobacco, Nickel exports led the curve.
Kwacha markets see a potential rate hike this week of 100 – 150 bps from the current 11.0% levels last hiked 100 bps in the November 2023 sitting. Much as the BOZ has further latitude to pull the cash lever higher than 26.0% inferring from peer nations like Mozambique and Nigeria whose reserves are at 39.5% and 32% respectively as they battle with similar vulnerabilities, there is a lower likelihood of any adjustment to the cash reserves. The hike has left the market short with most banks borrowing while the Kwacha has marginally moved suggesting that dynamics are still at play as compliance to government idle balance mop up is yet to be fully complied with.
The monetary policy committee chair Dr. Denny Kalyalya is expected to announce results of the deliberations on Wednesday 14 February in the BOZ auditorium.
The Kwacha Arbitrageur
