By Alexander Nkosi
You are driving to Lusaka from some rural district for an urgent meeting, due to heavy rains, one of the bridges is about to be washed away. The long term solution is to fix the bridge, but you cannot pack on the roadside and wait for it to be fixed as you will miss the meeting. You have an option to use a temporal bad road, that will require you to work on your suspension when you reach, just for a kilometre stretch around the dangerous bridge and get back on the good road. Using this temporal road is a short measure and it is just a short stretch, it does not mean you will drive all your way to your destination on that bad road. It is not even the long term solution to dealing with the bridge that needs to be replaced.
An economy works the same way, there are short, medium and long term measures to meet short, medium and long term objectives. Managing inflation also involves short, medium and long term measures and it is usually a combination of both monetary and fiscal interventions. Government is not using MPR as a long term measure to bring down inflation to single digit, the idea is not to keep interest rates high and economic activities low in the medium and long term using MPR so as to keep inflation low. This is just a temporal measure and it will soon be reviewed. Basically MPC meets several times in a year to review MPR based on prevailing economic conditions and economic forecasts.
We are basically at a time when we expect huge inflationary pressure. We are importing agriculture inputs during the farming season, food and non food items during the festive period, projected rise in fuel and other factors are expected to put upward pressure on inflation. The problem with inflation is that, if it is allowed to go up sharply, it has the tendency to bringing in some ‘built-in inflation’ elements (the idea that people expect current inflation rates to continue in the future) making it rise higher than the initial factors driving it up. This is why BOZ uses short term measures to keep it in check while pursuing long term monetary and fiscal measurs with MoF.
Yes it comes with effects of immediately increasing interest rates which are expected to transion into low investment and economic activity but before the decision to raise MPR is made, experts would have made projections of how long that temporal shock will last and they fully understand the transitioning process of high interest rates into low investment and economic activity, this is why they meet again as MPC after a few months to review it, they will not allow it to fully result into prolonged suppressed economic activity and low job creation. It is just a temporal measure and it is usually the best option given the detailed projections and analysis they do.
Note that BOZ works with fine figures, and depending on the level of impact they want their interventions to have on money supply, sometimes they even use a combination of monetary tools.
Where most analysts are missing the point, including Sean Tembo, is that they are assuming government wants to use MPR as a long term solution to driving inflation down to single digit when this is a short term measure. As a result they are prescribing long term alternative solutions, which unfortunately cannot help because the issue at hand is short term. A good example is Sean Tembo who is proposing that we ask all mining firms to start keeping all their earnings in Zambia so as to boost dollar supply and bring down the exchange rate. Good proposal, but this is a long term measure that involves a lot of delicate international politics and requires careful negotiation and implementation. Your child wants school fees because schools are opening next week and then you tell him that you have acquired a farm and you intend to plant maize next season to help you pay school fees other than borrowing. Yes that’s a good plan but it does not address the urgent school fees needed in a few days time. This is the same approach he used in his alternative budget where he proposed long term measures to raise revenue for next year. The arguments sound intelligent at face value but they do not address the problem which requires an urgent solution. How does the money you will raise after 5 years fund a budget next year?
Thank you and I come in peace!