ABOUT THE INCREASE IN MONETARY POLICY RATE
By Sean Tembo – PeP President
1. The central bank’s monetary policy committee (MPC) this morning increased the monetary policy rate (MPR) by 50 basis points from 8.5% to 9%, ostensibly in the quest to quell inflation by increasing the cost of borrowing.
2. I have argued before and l will argue again that the idea of increasing the cost of borrowing as a tool to arrest inflation is archaic and ineffective, for a number of reasons. Firstly, Zambia’s inflation is not demand-pull, but rather it is cost-push. The idea of increasing the cost of borrowing as a tool for addressing inflation is premised on the assumption that when the cost of borrowing is high, fewer economic players will borrow and therefore there will be reduced purchasing power which will reduce demand and therefore the prices.
3. Apart from assuming that the inflation that you have is demand-pull, there is also an assumption that credit constitutes a significant portion of the purchasing power of economic players, such that when you increase borrowing, the purchasing power of a significant number of economic players will be curtailed thereby reducing overall demand. However, the demand in Zambia’s economy is not driven by credit because total credit constitutes less than 13% of GDP.
4. So even if our inflation was demand-pull, the idea of increasing the Monetary Policy Rate and by extension increasing the cost of borrowing would simply not work. In other words, the decision by BOZ to arrest inflation by increasing the MPR is double wrong. Firstly it is wrong because Zambia’s inflation is cost-push and not demand-pull. And secondly it is wrong because credit constitutes an insignificant portion of overall purchasing power in Zambia.
5. But BOZ’s decision to increase the MPR today is not only wrong, it is also retrogressive to the overall welfare of the economy as it hinders economic growth and also increases the cost of living at domestic level. Businesses will need to spend more money to service their loans with lending institutions; money which could have been used for expansion activities and hence which could have contributed to overall economic growth. At household level, Zambians would have to spend more money to service their personal loans, unless they extend the tenure of their loans. This increases the cost of living of our people. So in essence, instead of fighting inflation, the new dawn administration is actually propelling inflation upwards. They are fighting fire using petrol.
6. Given the fact that we are coming from an era of economic contraction that was largely caused by the pandemic, one would expect the new dawn administration not to do anything that would hinder economic growth. Especially given the fact that job creation was one of their key promises to the Zambian people, and you need economic growth for you to create jobs. Also, given the really high cost of living that Zambians have been subjected to in the recent past, one would expect policymakers not to increase the cost of debt and by consequence the cost of living.
7. Overall the decision by the BOZ MPC to increase the MPR as a way of trying to fight inflation is ill-advised and based on a textbook theoretical concept that was developed in a near-perfect economic setting such as Europe or America where there is a near-perfect correlation between various key economic fundamentals. Unfortunately for a developing country like Zambia, those textbook concepts do not apply. A good policymaker would need to put down their textbook and look at the reality on the ground.
8. The most unfortunate thing about the Bank of Zambia is that it is the only Central Bank that l know in the whole wide world which does not have a Research Department. So they have no way of undertaking an impact assessment to determine the impact of their policy decisions, such as the inflation that they are trying to arrest vis-a-vis economic growth and the cost of living. Indeed, this country is being led by blind pilots who do not know where they are flying us to, and the aero plane is moving at full speed. They are just hoping that somehow they’ll land us in paradise.
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SET 24.11.2021