Tuesday, July 29, 2014

BoZ under political pressure to lower lending rates - IMF
By Chiwoyu Sinyangwe
Tue 14 Jan. 2014, 14:00 CAT

THE Bank of Zambia has been under political pressure to lower lending rates and strengthen the kwacha, says IMF. And the kwacha is expected to maintain its current levels of K5.525 and K5.535 for bid with a slight slant towards strengthening.

The International Monetary Fund (IMF) said BoZ needed to allow more exchange rate flexibility as it continues to build up reserves in line with their medium-term target of four months of imports cover.

"Inflation has in recent months remained at around seven per cent, above the BoZ's end-2013 target of six per cent, reflecting the removal of fuel subsidies, and inflationary pressure is expected to rise due to the large civil servant wage increases and reduction of maize subsidies," the IMF stated in its latest assessment of the Zambian economy.

"Bank liquidity has been highly volatile. The BoZ has been under political pressure to lower lending rates and strengthen the kwacha."

The Bretton Woods Institution stated that although the kwacha had weakened considerably over the last 12 months, the local currency remained broadly in line with fundamentals.

"The BoZ has started building up reserves slowly as the kwacha had appreciated in recent months, after losing reserves rapidly early this year during a brief period of providing foreign exchange to finance oil imports," stated IMF.

"Given the economy's vulnerability to negative shocks and the current low level of reserves (an estimate of 2.3 months of imports for 2013), staff advised the BoZ to allow more exchange rate flexibility and to continue to build up reserves in line with their medium-term target of four months of imports, using reserves to offset temporary exchange rate movements, but not to resist sustained depreciation pressures when they exist."

And the IMF has opposed the capping of lending rates of non-banking financial institutions in Zambia.

"The IMF noted that international experience shows that lending rate ceilings - if they are binding - will distort credit allocation and restrict rather than enhance access to credit, particularly for SMEs," the IMF stated.

"Since the lending rate ceilings were introduced in January 2013, market interest rates as reflected in average Treasury Bill rates have increased more than two percentage points, while the ceilings have been increased only one half percentage point, making them increasingly binding."

In January 2013, BoZ announced its decision to limit interest rates micro-lenders can charge.

The Bank of Zambia capped micro-lenders' interest rates at 42 per cent after President Michael Sata complained that the high cost of borrowing in the country was stifling investment and job creation.

But the IMF stated that: "…to reduce interest rates, efforts should focus on reforms to enhance competition in the banking sector, and help SMEs develop credible business plans. If the authorities are determined to maintain the lending rate ceilings, at the very least, it will be important to adjust them in line with market rate increases. One way to achieve this would be to tie the ceiling to the average Treasury bill rate, rather than to the policy rate."

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