The Bank of Zambia (BoZ) has increased the statutory reserve ratios for commercial banks to 14% from 8% from March 10 in a bid to reduce liquidity and help prop up the free falling Kwacha (Source: Cavmont). What this means is that the Bank will have keep more money on its books and will not be able to lend as much.
When PF came to power it reduced the reserve ratio to 5% because it argued that it wanted to boost lending in the economy. Then it decided to increase it to 8 percent. And now it has made a huge increase to 14%. This is at a time when it has controversially capped commercial bank loan rates.
The other reason PF is worried of course it the rapid rising inflationary pressures primarily stem from rising food prices. Now then you add in the rapidly falling Kwacha. The inflationary pressures have been exacerbated by the sharp decline in the Kwacha which has lost over 4.3 percent since the beginning of this year.
Last week, Finance Alexander Chikwanda ruled out the possibility of BoZ intervening in the market by off- loading dollars in order to stabilize the Kwacha. He says the government will allow "forces of demand and supply to determine the currency's performance".
That is clearly not politically credible, a rate worse than K5.8 per $1 would be difficult to justify to even the most hard core of PF cadres. A recent Daily Mail editorial captures much of the PF cadre mood, "we are looking forward to have a stronger local currency so that the economy remains buoyant and life does not become too costly for the local people". [PF language translation: strong currency = good economy].
The increase in reserve ratios come off the back of yesterday's increase in threshold of domestic borrowing payable over a period of ten years from K200m (US$35m) to K13 billion (US$2.3bn). Domestic threshold for loans repayable over one year has risen from K10m(US$5.8m) to K20bn (US$3.8bn). Chikwanda says the increase in the domestic borrowing threshold is meant to help the Patriotic Front (PF) government implement various economic projects given the burgeoning budget deficit and limited room for external borrowing.
Chola Mukanga | Economist
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