THE Ministry of Finance must rise to the occasion and compliment the Bank of Zambia’s (BoZ) efforts in trying to stabilise and revive the economy because the central bank’s Monetary Policy tools have short-term effects, says economist Professor Oliver Saasa.
In an interview, Prof Saasa said while the central bank had worked to respond to the challenging local economy, there was still need for government’s fiscal policy to play a greater role in ensuring that the dire macroeconomic fundamentals were addressed through prudent public spending and debt management.
He was commenting on the BoZ’s decision to raise the Monetary Policy Rate (MPR) by 50 basis points last Wednesday, which triggered a corresponding increment in all commercial banks’ loans linked to the MPR.
“So, while people, especially the corporates might complain, that this will be pushing the cost of business too high, one has to realise that without actually stabilising the economy at the moment, very little will happen. So, essentially, it means that, especially when it’s only 0.5 per cent, it’s not one per cent, I think the central bank must be commended because they are merely responding to the signals that are coming from the market. The larger solution is not really what the central bank governor (Christopher Mvunga) was tinkering with. Definitely, the Monetary Policy instruments can be used to stabilise the exchange rate, stabilise even inflation,” Prof Saasa said.
“The major challenge is in the fiscus and I think this is one thing that many people must understand, but unless, and I think he mentioned this, unless you focus on growth, which is not in the central bank, that is within the Ministry of Finance. Grow the economy, focus on how you provide stimulus for the private sector to grow and to survive the COVID-19, reign a little bit or reduce your appetite for both domestic and external borrowing, because the debt burden is the elephant number one now and it’s the elephant in the room.”
Prof Saasa, however, observed that the cost of borrowing on credit facilities would increase.
“It definitely is going to affect, as you expect, the cost of business, the cost of money and you should expect the commercial banks to adjust their interest rates upwards; it will mean that access to finance will be partially affected, but what’s important, and I think this is another point that he made, what’s important to realise is that there are two things that we have to face: first one is stability and the second one is growth. You have to stabilise the macroeconomic fundamentals before you talk about growth,” he said.
And he urged government to control its expenditure and highlighted that the International Monetary Fund (IMF) remained better placed to help the country prudently manage its resources.
“Control your expenditure pattern. If you look at the amount of money we are putting into road construction, which, of course, is important to invest in roads, but at what cost, at what price? And are we able, especially if we are borrowing, to pay these debts that we are collecting when they fall due? And that is really the biggest challenge,” Prof Saasa said.
“And perhaps, lastly, which was also important that he acknowledged it, that we must focus and invest heavily on the ongoing discussions with the IMF because, really, external input is important in this regard both in terms of the fiscal contribution, money, but also at the level of the sort of immediate fiscal stringency, including macroeconomic fundamentals that need to be addressed. The IMF are well placed to help the country do that, especially when it comes to fiscal prudency, we are not managing our financial resources in a manner that can give hope towards growth of the economy.”
He added that high inflation will affect a lot of critical areas as planning would become difficult in terms of escalating production costs.
“And if you look at what has been happening, and if we are placed in a position to be able to, there is very little that is happening at the moment. Inflation at the moment, last month it went up to 21.5 per cent and the projection into 2021 suggests that we might probably reach 23 per cent! That is itself means that it will affect most of the macroeconomic fundamentals the governor indicated because it means that planning becomes extremely difficult, not only for government in terms of service delivery, but also for the private sector that have to factor in what it will take to produce whatever they are providing, so that has to be managed,” said Prof Saasa.