CURRENT LOW INFLATION IS AS A RESULT OF LOW SPENDING AS THERE IS NO MONEY IN CIRCULATION
FOR THOSE WHO WANT TO UNDERSTAND WHAT IS HAPPENING TO ZAMBIAN ECONOMY, READ QUESTION AND ANSWER BELOW
Malcolm Jhala asked the following question:
I’m trying to wrap my head around this contractionary fiscal policy we have embarked on as a country.
With cuts in government spending, slow down in government debt contraction, relatively high interest and tax rates; the visible consequences are the diminishing of purchasing power of households, lower inflation, stable kwacha, and a slowing economy.
How long is Goverment going to sustain such fiscal policy before we go bust?
Is the IMF deal and subsequent debt restructuring going to the the trigger for Government to move into an expansionary fiscal policy?
Something has to give!!!
Those with BA Econ from YUNZA, help us out here…how long to we have to hang on?
Temwani Nyondo answered below:
OMO – open money operations are ideally a short term measure. We have what is called a supply induced inflation problem at the moment I.e production factors are becoming more costly and this is eventually being passed on to the end user (consumer) via higher prices of goods.
One production factor- labour – however is not often addressed well enough, that’s to say, our salaries don’t get increased in line with other production factors (God knows why). Because our salaries aren’t increased, the cost of living becomes unsustainable ultimately and government/central bank has to react one way or another.
By increasing interest rates, the central bank takes liquidity out of the market and reduces the rate at which prices of goods and services rise, because there’s generally less spending happening. This is a short term effect that gives consumers a breather. You’re absolutely correct to say it would contradict governments plan to grow the economy, however economic growth and contraction are slower to react to OMO (open market operations) movements than things like inflation are.
The government, in the time lag (or in the interim) can pursue other measures to encourage economic expansion programs, I.e policies to boost investor confidence and lower the exchange rate ( mining indaba, IMF negotiations, public private corporation, tax incentives for targeted sectors).
These measures described above are part of the supply side policies that address the need for GDP growth in the long run. The MPR (monetary policy rate or interest rate from BOZ) will continue to be a reactionary measure to cross hurdles as the government pursues its ulterior motives or (growth plans).