Bankers Association of Zambia (BAZ) chief executive officer Leonard Mwanza says measures put in place by the Central Bank are necessary to stabilise the kwacha and the inflation rate so as to provide easy planning and forecasting by various sectors.

But Mwanza has expressed concern that among other implications, the upward reserve ratio intervention would lead to an increase in the cost of borrowing from commercial banks.

The Bank of Zambia, Monday, announced an increase in the statutory reserve ratio by four percentage points bringing it to nine percent in a bid to quell the effects of the exchange rate on inflation, the adjustment is set to take effect on 23rd December, 2019.

The Central Bank further announced that effective December 9, 2019, commercial banks would be required to comply with statutory reserve requirements on both local and foreign currency liabilities on a daily basis as opposed to the weekly compliance currently in place.

In an interview, Mwanza has noted that despite the move to raise the statutory reserve ratio having a squeezing effect on the operations of commercial banks, it will not threaten the viability of the sector.

He explained that in the midst of currency depreciation stability was paramount for planning purposes.

“So I think what causes the kwacha to appreciate or depreciate is the levels of demand and supply. It’s not an easy thing to say ‘because these measures have been taken then we will see an automatic reversal or appreciation of the kwacha’. It is one measure to bring in stability because stability is key. Whether it rests or sits at K15 or it rests at K15.50, its better it is more stable. I think we got used to the kwacha at 13 not long ago, so because it was stable, we could plan ahead, it was easy for people to forecast and everything else but when it starts jumping the way it did, it changes everything because the pricing changes automatically; that means everyone will start pricing according to the kwacha levels, inflation hedges upwards. We are an import oriented economy so definitely whatever is imported in the economy will automatically jump up to a certain level. So I think what we need to look at is can we say this is the stable level of inflation, this is the stable level of the kwacha. When you reach that stage, it makes sense for planning and forecasting,” he noted.

“Obviously those are the key variables that these measures are intended to reign in. It was quite inevitable that they had to do this so that probably we could check the depreciation of the kwacha. So these measures obviously will help in stabilising because to say it will automatically transcend into a reduction, it’s a long process of adjustment. The appreciation of the kwacha can only be supported by the supply and demand factors, if we have more supply, less demand, definitely you can look forward to a much lower exchange rate but in the current scenario where we all know there is quite a lot of demand for the green back, the dollar, and you know what is causing that, top of the list is agriculture inputs, we are at our peak season, the usual energy importation for oil and electricity and obviously the issue we are fully aware about, the issue of debt service cost. So when you look at all that, the only way you can say reduce the demand on the dollar is to increase the supply. So the supply chain needs to ensure that they come on the market and give us the pipeline of resources that are required for the demand which is already in the pipeline. So once you match that, definitely you can see the kwacha appreciating.”

However, Mwanza noted that the move to revise upwards the statutory reserve ratio would lead to less liquidity for investment in the securities and other businesses.

“There are three implications if I may put it that way, so the first one is that commercial banks now have to keep more liquidity with the Central Bank because previously we were keeping it at five percent, now that has been increased to nine per cent. So nine percent of the total value of deposits they hold on behalf of customers will have to be kept in the statutory reserve ratio, I think that’s the implication of this. So it’s a mop up exercise, mopping up the liquidity that banks could have ordinarily used to lend or to invest in securities or other issues. Now that incremental aspect will have to be put away with the central bank and it doesn’t earn any interest. So you are looking at getting that liquidity and putting it on the statutory reserve ratio and banks will be denied that opportunity to make money out of those resources,” he said.

“The second point obviously is that because more liquidity now will be kept on the statutory reserve ratios you expect that the market will be short in terms of liquidity so there will be tight liquidity which will end up into raising the cost of funds on the market. As you know, cost of funds are already elevated, not long ago, the Central Bank increased the interbank rate to 28 percent, they have also increased the monetary policy rate to 11.5 percent. So all those have stimulated an upward increase in the cost of funds generally in the market, so when you are on the market looking for liquidity, already, the cost of those funds are elevated. I think now the average cost of funds is about 27 percent. So with this mop up of liquidity from the market, we expect that the cost of funds will at least edge upwards. And linked to that, obviously the unintended consequences will be that eventually we should start expecting lending rates. I mean the cost of funds on the supply side is high so obviously there will be that automatic linkage that own lending I think will edge upwards from the current averages of about 26/ 27percent.”

And Mwanza said that the cost of borrowing would increase as the banks would have reduced capacity to provide liquidity to supporting sectors.

“Not necessarily in terms of threatening the viability of the banking sector but obviously the capacity of the bank to utilise liquidity towards supporting sectors, you know, so the challenges banks will have in the interim as this will be implemented will be, it will be very expensive for them to contract new deposits and then they will be constrained in terms of their ability to find resources to own-lend and that will be a problem. And then eventually, obviously to the consumer, if the consumer is going to borrow, they are not going to borrow cheap, they will have to pay a premium price. We expect that banks will start pricing appropriately to take care of the increased cost of funds and the opportunity cost loss for the funds that they will put away in the statutory reserve ratio and if you are going to borrow on the interbank, the lender on last resort is saying I can only give you the money at 28 percent. So I think you understand the challenges that the industry will definitely go through during this phase,” he said.