Maravi

Low inflation doesn’t mean low prices - BoZ

COMMENT - This is an excellent and frank article. It also shows the fallacy of the existence of 'free markets'. We need state intervention, state owned enterprises, and state owned banks. Ever province should have it's own bank, as should every district. The functions of the FRA should be performed by the districts. Not privatisation, but decentralisation.

Low inflation doesn’t mean low prices - BoZ
By Mutale Kapekele
Mon 29 Nov. 2010, 04:00 CAT

The central bank says the low inflation that Zambia is enjoying does not mean that prices must come down. It has instead expressed concern that the cost of lending has not corresponded with low rates of treasury Bills and government bonds.

Addressing the business community in Kabwe on Friday evening, BoZ economist Mubanga Mushimba, who was giving a talk on the role of the central bank in trade and investment promotion, said low inflation did not mean low prices.

"It's true that inflation hits the poor the most, their purchasing power keeps falling and most pensioner's money value remains the same," Mushimba said.

"But low inflation does not mean that prices must come down, they should increase but at a slower pace. Otherwise, we could go into deflation like Japan did and register negative economic growth. Stabilising inflation is a challenge because Zambia is a small economy."

[Negative economic growth is being masked by growth in GDP, which is all about foreign mining companies stealing our resources and not paying taxes for them, or paying dividends to ZCCM-IH. - MrK]

He said high inflation made non-traditional exports uncompetitive and increased the cost of lending as loan interest rates were variable.

"Lending rates are valuable and borrowers are charged more when inflation increases and also high inflation makes non-traditional exports uncompetitive," he said. "I must say the Bank of Zambia is working hard to stabilise the exchange rate, reduce the cost of credit and deepen the financial sector."

He said despite a downward trend in the cost of debt capital, the central bank was not too happy with the average lending rate of 26.6.

"The financial sector is unfortunately dominated by commercial banks, meaning that the sector is still in its infancy with just 18 banks," Mushimba said.

"We are, however, concerned that lending rates have not responded to the low inflation rate. Treasury bills have also fallen steeply from 19 per cent to five per cent and commercial banks are leaning heavily on treasury bills and government bonds so they have a lot of money to spare and one wonders why high rates?"

He said Zambia had a history of high loan delinquencies, limited competition among banks and high costs of doing business as contributing factors to the high cost of lending rates.

He also described as unfortunate that only five banks controlled the trends in the financial sector.

Labels: BOZ, INFLATION, LENDING RATES, MUBANGA MUSHIMBA, NEOLIBERALISM

posted by MrK @ 10:00 PM