LUSAKA (The Business Telegraph): The central bank in Africa’s second largest copper hotspot exceptionally cut its benchmark interest rate 125 basis points to 8.0%, the second consecutive rate cut in the year in account of weakening consumer demand as COVID risks deepen. this brings the rate cut quantum to 350bps year to date. Zambia’s COVID cases have exponentially spiked to just shy of 10,000 and have impacted the business ecosystem sending the copper producer below 50 as measured as by Purchasing Managers Index – PMI. The red metal producer has been in contraction for 17 straight months and is currently below the 48.3 series average.

Read also: Lackluster consumer demand could force the BOZ to exceptionally cut rates this week

Rising risks to growth. Governor Denny Kalyalya acknowledged rising risks to growth and Zambia’s recession forecast of -5% given amplified fiscal vulnerabilities given disease pandemic effects. Inflation for the copper producer remains elevated at 15.8% as food prices nudge lower on the back of a bumper harvest for 2020, currency risks have started to widen as an autopsy of the arrears dismantling program.

Expansionary policy but with some inertia. The central bank has been on an expansionary path increasing its balance sheet to support quantitative easing programs that has seen it absorb COVID related liquidity and credit risks. The Medium Term Refinance Facility – MTRF announced in April in response to easing capital adequacy and provisioning rules has not transmitted lower funding cost benefits to the banking sector as such interest rates have not ebbed as fast as anticipated. Average Lending Rates – ALR fell 211bps to 25.4% while Non Performing Loans – NPLs are in breach of the 10% prudential limit at 12.5% accounting for K4.8billion in bad loans. Despite falling treasury bill yields easing funding costs lower, bond yields remain elevated between 25%-33% keeping repricing risks on term facilities high.

From fiscal related to rising COVID credit risks. COVID related credit risks remain high as credit quality of most books under threat from debt service given rising cases. Disease pandemic has continued to impact key sectors whose revenue and cash flow generation has leaned. Most banks despite fully pricing in Zambia’s downgrade will have to factor stress coming from depressed business pulse and margin squeeze from the expansionary rate cuts. Debt repayment reprieve by the Paris Club nodded by G20 to end of the year will not ease fiscal pressure which Zambia looks to the IMF for a Rapid Credit Facility – RCF and progress on Lazards restructure which may be too soon to expect. Period 2H20 remains a very tough patch for Zambia which the BOZ is expected to support the fiscal side through an increase in government security offerings by 36.7% to fund in part the supplementary budget too.

Prioritization quagmire. Kalyalya’s priorities in addressing consumer demand are growth driven which surpasses inflation and currency depreciation. Ebbing the policy rate lower will ease the repayment burden of consumers with credit facilities that BPR linked while stimulating demand for aggregate demand to influence growth.

Margin squeeze as commercial banks bite their tongues. The rate cut however margin squeezes commercial banks on interest income lines however this is least the central banks worries as falling yields have given FI’s a lead in interest rate trading income.

The Bank of Zambia MPC committee left the statutory reserves unchanged at 9%.

The Kwacha Arbitrageur


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