The central bank in Africa’s second largest copper hotspot, Zambia has hiked the benchmark interest rate by 50 basis points to 8.5%. This was contained in a briefing by Governor Christopher Mvunga. This will be Zambia’s first rate hike in 6months. Amidst a ‘currency depreciation’ induced cost push inflationary environment, the Monetary Policy Committee (MPC) decided to raise the interest rate whose quantum was nonetheless hampered by a suppressed business ecosystem fueled by disease pandemic effects. The rate decision was achieved by balancing price and financial sector stability in the face of a COVID19 pandemic situation.
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Zambia faces an array of economic fragilities hinged on a weakening currency occasioned by mismatches in supply and demand fundamentals, thinning external reserves last reported at $1.2billion (Feb21) translating to 2.4months of import cover and waning sentiment from a deteriorated fiscal position. Business pulse as measured by Purchasing Managers Index (PMI) has remained constrained in the doldrums for 23months below 50 weighed by rising input inflation and elevated energy costs. Inflation risks remain on the upside and will be above the 6-8% band for close to 8 quarters, the central bank communique highlighted.
With the short term government security curve underwater, interest rate bears are highly likely as the Kwacha curve seeks to correct to make compensating premiums positive. An underwater curve is one whose yields are below inflation. Kwacha treasury bills tenured 3m-9m are 150-750bps below inflation. To stabilize foreign exchange pressures, the central bank sold $340million of dollars in the last quarter compared to $117million in the previous quarter to help stabilize the currency.
Credit risks remain elevated as Non Performing Loan (NPL) ratio remains above the 10% threshold at 11.6% as transfer and convertibility risks widen. Zambia’s default on dollar bonds totaling $99.3million will continue to weigh credit risks through higher impairments in the industry.
“A successful debt restructure will be key in achieving macroeconomic stability. This should be collectively with the private sector playing a key role,” Governor Mvunga said.
A hike in interest rate increases the repayment burden for lenders by 0.5% which simultaneously increasing advances income for financial institutions. Despite structural challenges, Zambia’s outlook for 2021 will be supported by mining, agricultural and energy outlooks that a signal positivity from bullish copper prices on the London Metal Exchange (LME), exceptional rainfall and additional energy revenue generation this year respectively. Zambia is in the middle of a debt restructure and talks with the International Monetary Fund for bailout support.
The Kwacha Arbitrageur.