Africa’s copper producer Zambia on 22 August had a sudden monetary policy shift after it was announced that Dr. Denny Kalyalya was replaced with former Deputy Finance Minister and then Deputy Secretary to the Cabinet Christopher Mvunga. This move came 3 days after the third rate decision announcement for the year. Mvunga, an ex-commercial banker and certified accountant by profession comes at a time the economy faces a homogenous global threat, disease pandemic that has eroded growth with far-fetching effects as currency weakness and amplified fiscal pressure. His ascension to head monetary policy in the red metal producer is at a critical time as when his predecessor was named in 2015. Then Zambia faced rising inflation, energy poverty and an aggressive currency rout.
Homogenous global monetary policy stance. With the advent of COVD19, jurisdictions are using monetary policy tools to cushion economic effects of disease pandemic. Key central banks such as the US Fed, Bank of England, European Central Bank, Bank of Japan, Peoples Bank of China to mention but a few have been on bond buying programs, balance sheet expansion for quantitative easing and constant liquidity injections to absorb disease pandemic credit related risks.
Read more: BOZ exceptionally cuts rates 125bps on COVID related shriveling consumer demand
Monetary policy pre-COVID19. Globally the world was rattled by an confluence of risks ranging from trade war impasse to geopolitical tension. Fiscal imbalances were mostly as a result of political decisions taken by governments. For Africa, the state of the fiscals have mainly driven by infrastructure spend as nations geared up for trade and economic growth booms, to support intraregional trade, given the deficit the continent faces. Zambia’s fiscal posture for the last 2-3 years has been a reflection of the debt finance to fund roads, bridges, airports, schools and hospital. However the mismatch between the infrastructure generating economic benefits and debt service caused manifestation in the financial markets through fiscal deficits, currency weakness from sanguine dollar demand for debt repayment and rising interest rates from an overcrowding effect in the domestic money markets. In addition to infrastructure related risks, Zambia faced a severe drought which not only threatened food security which the country was somehow hedged against but but caused energy poverty through power generation bottlenecks causing massive power rationing that affects the business ecosystem sending business pulse to lows. Zambia’s external debt grew from $6.97bln (2015) to $11.23bln (2019) to $11.7bln (*2020) raising debt to GDP concerns with the Washington based lender and has been the reason any bailout package has not materialized but for recently when the Ministry of Finance was given a mandate to commence talks with the IMF. Zambia seeks a Rapid Credit Facility – RCF to help cushion COVID related shocks. With the sudden monetary policy shift, uncertainty around approval of an RCF could be in the balance and stability in policy is a key ingredient for a successful talks with the lender.
IMF reaction to the sudden shift in monetary policy. Reacting to a press query on the change in leadership
“The macroeconomic stability that most developing countries have enjoyed in recent years has greatly relied on the much-improved effectiveness and increased independence of central banks. It is imperative that central banks’ operational independence and credibility is maintained, particularly at this critical time when economic stability is threatened by the COVID-19 pandemic. Without credible institutions and sound policies, sustained economic growth and much needed improvements in living standards will not be possible.” The IMF carried on its website.
Read more: IMF bail out package discussions with Zambia commence
Read more: Zambia’s Central Bank fiscal weariness in monetary policy – Post MPC Analysis
The global monetary quagmire. US Fed Chair Jerome Powell and Bank of England Governor Mark Carney at Jackson Hole meeting of central bankers and fiscal heads highlighted the state of the global economy as due to political decisions and mistakes that world leaders expect to be corrected using monetary policy. It is a misconception to assume fiscal dislocations can be fixed using monetary policy. Trump has always differed with US Feds Powell on interest rate stance when the US economy was overheating while BOEs Carney wrestled with the British parliament over Brexit uncertainty implications as the two exuded independence in monetary policy management prioritizing financial stability. The rift between the monetary and the fiscal side is evidently a homogenous problem world over. Zambia is not spared from this tug of war.
Zambia in the last 6 years. The copper producers economic landscape has been characterized by drought causing food scarcity and energy poverty from receding lake levels. These factors have been key drivers of cost push and not demand pull inflation. Accumulation of debt through project finance and dollar bond raising with the 2017 $1.25bln issued at a time when yields were widening. Debt service has been a key driver of currency slides as Zambia has struggled with stock of reserves which have been a depleting trajectory currently at $1.4bln – 2.3months of import cover – from levels of $3.4bln –3months of cover in 2014. Zambia’s growth in the period has softened on the back of increasing external shocks such as plummeting commodity prices as global demand generally wanes. The copper producer has seen shifts in mining tax regimes waning mining sentiments and other changes in policy that have impacted ease of doing business. One thing that stands out for Zambia is political stability making it a good investment destination compared to most of its peers. Monetary policy on Kalyalya’s clock was by many analysts viewed as fairly objective despite the widening fiscal gaps was able to shift levers to slow economic deterioration albeit to a limited extent. The last four Monetary Policy Committee communiques signaled a weariness in central bank policy with the need for fiscal consolidation to allow the monetary actions to bear fruit. Suffice to say independence was exhibited as expected of a central bank head.
Then came COVID19. The disease pandemic era amplified the fiscals making the fiscal stress more complex. Never in the history of the country has public health gobbled more funds as in this era with rising cases signaling a greater need for funding. As part of an emerging market currency rout, as the global environment fretted uncertainty and chased after safer haven assets, sell-off pressure brewed with EM currencies sliding significantly.
Jurisdictions with adequate reserves used their ammunition to sell dollars on the open market to cushion sell-off effects but for those like Zambia will decade lows of foreign exchange buffers, the luxury was not available. The copper currency slid infact started in October 2019 triggering a 150bps rate hike to 11.5% which only curbed the currency slide after statutory reserves were hiked 400bps to 9% sucking about K1.6bln liquidity from the system. Some stability was experienced in the first half of the year occasioned by muted activity in COVID era in addition to market discipline through a revised foreign exchange framework changes ranging from a 15 pips crawling peg in stress times to personal trader liability for massive volatility swings.
The Kwacha in the last three weeks has been on a losing streak fueled by an uptick in dollar demand exacerbated by agriculture input and petroleum demand off course at a time when monetary policy was expansionary and reserves feeble. The third MPC prioritized growth given weak consumer demand as the currency weakened and inflation remained elevated.
Central bank independence? Scholars have argued that central banks need immense degrees of independence to function whose strength seems to be stronger with a very complex and collective appointing framework structure. The US remain key proponents in the central banks independence models leveraging off the maturity level of their corporate governance structures. As such the US Fed enjoy immense independence that will not influence their FOMC meetings irrespective of what the fiscals demand. Ideally the two policy sides (monetary versus fiscal) should complement each other. Most African central banks have their heads appointed by country leaders ratified by parliament. The appreciation remains that frameworks vary from country to country. However the strength of independence is stronger, the thicker the appointment powers and composition for accountability purposesi.e. US Fed Chairs accountability is to congress and no where else.
In an Spring24TV special following controversial tweets by South African Finance Minister Tito Mboweni that breached diplomatic protocol cross jurisdiction which President Ramaphosa has reprimanded him for, Mboweni said he is speaking to the committee of central bank governors in SADC and that he would reaching out to the Committee of African central bankers to speak out for central bank governors for independence. He cited the need for corporate governance. Mboweni was the eighth Reserve Bank governor for South Africa.
Looking ahead. The appointment of ex – Deputy Finance Minister that led the team that were on raid shows towards Zambia’s dollar bonds an ex-commercial banker and certified accountant, Christopher Mvunga comes at a time when disease pandemic has dislocated correlation with the macroeconomic space with currency sliding, inflation threatened by cost push pressures and growth shriveling as consumer demand remains anaemic. Asides these factors the copper producer seeks a Rapid Credit Facility – RCF with the IMF hopefully to graduate into a fully funded program after 2021 as Zambia is exactly a year to the polls. The Southern African nation looks to the new central bank head for direction in these critical times, a mammoth task ahead of him. Having experience from the fiscal side he will be expected to guide monetary policy with a fiscal lens.
As at 3.04pm yields on bonds maturing 2022, 2024 and 2027 widened290bps, 175bps and 120bps to 36.49%, 27.90% and 21.91% respectively as asset sell-off pressure mounted as bondholders reacted to the sudden change in monetary policy. The Kwacha still continues to trade bearishly having closed 24 August trading at 19.3 for a unit of dollar.
The Kwacha Arbitrageur
