If austerity measures were working well, we wouldn’t have the kind of challenges we are having, says Bank of Zambia (BoZ) governor Dr Denny Kalyalya.

And Dr Kalyalya says Zambia’s economic activity has remained subdued, with growth prospects considerably weakening on account of heightened load-shedding, among others.

Dr Kalyalya was speaking during a media briefing to announce the Monetary Policy Rate (MPR) in Lusaka, Wednesday.

Asked how well government’s austerity measures had positively impacted the country’s economic growth, Dr Kalyalya said the measures still lacked effective implementation to rejuvenate the country’s economy, hence continued deterioration.

“I think the verdict is still out there, isn’t it? If they were working well, we wouldn’t have the kind of challenges we are having,” Dr Kalyalya said.

“So, there is an issue of effective implementation, which has to be done. That’s why we keep coming back to this. So, effective implementation still remains an issue.”

He said if austerity measures were properly implemented, they would shorten the deterioration of the economy.

“There may be hardships, but it will shorten the deterioration of that (economy) if we did that because it’s like, if you are sick, and they give you an injection, you dread it! But soon, the pain from the injection will disappear and you will get well so that’s what we need to take; that bitter medicine so that we can get well,” he said.

“So, the short answer to your question is that they haven’t, that’s why we want them (austerity measures) to be fully implemented.”

And Dr Kalyalya said economic activity had remained subdued during the second quarter of this year on account of persisting liquidity challenges, a severe drought, which threatened to keep inflation at elevated levels and heightened load-shedding.

In explaining why the central bank decided to maintain the MPR at 10.25 per cent, he pointed out that there was need to stimulate economic growth, which remained subdued.

“Then, we also noticed that growth in the near-term has also weakened considerably. Part of the factors are with the production of electricity, as you know, there is quite some load-shedding going on; that is having an impact on productive units. We also noted in the (second) quarter that we are reviewing, liquidity has been quite tight; we see that these put together are causing a threat to the financial stability in the market. So, when we put all this together, credit to the private sector is slowed down, made us come to the decision. Part of our reasoning in maintaining the MPR is to try and sort all this out,” Dr Kalyalya told journalists at the central bank.

“Inflation over the forecast period, which is eight quarters, showed that inflation will remain outside our target range of six to eight per cent. But towards the end of that, it will come into the target range, although still on the upper-side of that bound. So, this underscores the point that inflationary pressures are persisting. Indicators of economic activity point to reduced growth. In addition, liquidity challenges and constrained aggregate demand continued to weigh on economic activity. Real GDP growth is projected to decline in 2019, largely reflecting the effects of drought on agriculture production and constrained electricity generation as well as lower than anticipated mining output.”

He explained that the central bank’s Monetary Policy Committee (MPC) decided to leave the MPR unchanged to contain rising inflationary pressures, which had been exacerbated by rising food prices following a severe drought in some parts of the country.

“This time around, there are new factors, which have come into play, in particular: the issue of food prices following the drought that we had in parts of the country during the last rainy season. So, that is impacting adversely on prices of food, which have gone up,” said Dr Kalyalya.

Meanwhile, newly-appointed BoZ director of economics Dr Jonathan Chipili revealed that money supply in the second quarter, which contracted to 15.4 per cent from 17.6 per cent in the first, had been triggered by dwindling foreign currency deposits brought about by declining foreign exchange earnings.

“The fall in foreign currency deposits, broadly, these are linked to the source of foreign exchange. If you look at the balance of payments, you will note that over time, the earnings from exports have come down, even from your traditional sources, including Non-Traditional Exports (NTEs). Copper exports were as high as US $1.6 billion at some point, now we are talking about US $1.3 billion. So, essentially, it’s the performance of the external sector because this is where foreign exchange comes from,” said Dr Chipili.

The MPR is the benchmark lending rate the central bank sets on commercial banks to either increase or decrease interest rates on credit facilities.

The Statutory Reserve Ratio (SRR), which is the proportion of deposits a commercial bank, by law, must keep in cash or place with the central bank, was equally left unchanged at five per cent.