Alexander Chikwanda misses the mark again. I was struck by this line from this recent Ministry of Finance spending update :
In line with Government’s commitment to ensure the availability of affordable credit to public service workers, a total of K23 million was released to facilitate the operationalization and commencement of disbursements under the Public Service Micro-Finance Company..." (Source : Ministry of Finance)
Chikwanda has gone ahead and created a government owned micro bank that has started lending funds to civil servants at five per cent with a budgeted capital of K70 million. Here is how he justified it :
Our people have suffered a lot, and there have been situations where people are charged 50 per cent interest rate. This is unacceptable because it is exploitation and it should not continue....Microfinance institutions will have to adjust lending rates downwards or sink because the micro bank is lending at five per cent (Source : The Post)
Chikwanda is again guilty of very poor economics and bad management of public funds. This mini-bank won’t trigger rates downward! The reasons for the current rates are structural. We have previously noted the large risk premium (lending rates minus savings rate) currently standing at 12.8% gap. Clearly the reason for high lending rates is partly due to lack of collateral and credit history.
The other part is the cocktail of factors afflicting our financial system. It remains my view that in Zambia inflation expectations have not been sufficiently tamed by BOZ. Even though the policy rate is helping with signalling. it remains the case that lending rate are sensitive to variability of inflation and not just the level. Its a fact that inflation in Zambia has not yet been stabilised sufficiently.
Then there's the issue of collusion among banks which Alexander Chikwanda has previously mentioned. Though one does wonders why Chikwanda is so contradictory. One minute he accuses Banks of collusion the next minute he is giving them large corporate tax breaks in the name of helping reduce rates. He needs to realise that only increased competition among Banks will ultimately lower lending rates not SUBSIDISED borrowing for civil servants.
And of course Chikwanda is not helping by failing to consolidate the hold on the value of the external value of the Kwacha (exchange rate ) which introduces more risks in the system. Again he needs to realise that there's a direct relationship between macroeconomic management and the risk premium.
More importantly, there are many ways of getting loans to civil servants without this "mini bank". Capping it at 5% creates a large gap to current high market rates. What is to prevent a civil servant borrowing the money and then lending it to someone else at a profit? It is also wrong priorities. Why only civil servants? Surely we should be trying to widen credit access to everyone?
Why should poor hard working poor Zambians subsidies borrowing by civil servants? The same people who have just got large salary rises!
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Chola Mukanga | Economist
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