This Week: Which way is Central Bank taking us?

Kelvin ESIASA

By Kelvin Esiasa

In Zambia it’s popular among the commuters to ask the driver which way they are being driven to especially if the passengers are not clear with the direction. In some cases the passengers may even ask the driver to stop the bus so that they could drop off.

This is the same question Zambians were asking the central bank in Zambia. Zambians are now wondering what is happening with the ever increasing interest rates and the unstable foreign exchange rate.

Early this year His Excellency President Mr.Micheal Chilufya Sata instructed Bank of Zambia (BoZ) Governor to explain what was happening on the foreign exchange rate. The recent increase in interest rates has also puzzled a number of Zambians and they are asking government to intervene.

The current prevailing circumstance in the money market is very worrying. In simple terms, interest rate is the cost of borrowing money. It is the compensation for the service and risk of lending money.

An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and central bank policies.

Higher interest rates have various economic effects. Firstly, high interest rates increase the cost of borrowing. Therefore, this discourages people from borrowing and saving. People who already have loans will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall.

High interest rates affect businesses because they make it hard for businesses to borrow money. A small business will typically need to borrow money to get started up or to expand. If interest rates are high, then they will have to pay a higher price for borrowing the money. If they can’t afford to pay the higher prices, they can’t start up or expand. So higher interest rates means fewer small businesses and they mean that the ones that do exist can’t expand as easily. Customers have to pay interest on their personal loans, home loans and car loans. The higher the interest, the less money in peoples’ pockets. This can reduce their ability to buy products and services, so businesses may suffer from a decrease in sales. When interest rates rise, banks charge more for business loans. This means businesses must use more of their earnings to pay interest on their loans. That decreases profits. Some business owners may decide not to start new projects or expansions during periods of high interest rates. This hampers the growth of the company and economy.

In 2012, BoZ announced the introduction of a BOZ Policy Rate. The Policy Rate is utilized to influence monetary and credit conditions in an economy. Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the central bank to achieve macroeconomic objectives like inflation, consumption, growth and liquidity. To this effect we saw the central bank dropping the interest rates up to 9% from 40%. This also saw the country having a stable foreign exchange rate.

The drop in interest rate enabled many Zambians to access bank loans. This enabled many Zambians to purchase and build houses and cars as well as other essential commodities. This also made many Zambians start businesses.

So, the increase in interest rates will deter many Zambians from accessing loans from banks. It may also contribute to high bad debts among commercial banks.

Therefore, I wish to appear to bank of Zambia to clearly explain which direction are they taking money market in Zambia. The monetary policy statement to be issued on 07^th August, 2014 should clearly explain why the interest rates have gone up rather than dropping.

The August 2014 monetary policy should be a millstone statement in which a number of monetary issues should be explained. It should be different from the March 2014 statement.

The last statement issued on 09^th March, 2014 by Bank of Zambia did not substantially explain why the Bank of Zambia had increased the monetary policy rate rather than reducing. As a result this statement did not give Zambians confidence in the monetary policies managed by Bank of Zambia.