THE Bank of Zambia’s K10 billion injection into the banking sector aimed at providing financial relief for private sector companies is insufficient as most entities remain financially constrained, says economist Chibamba Kanyama.

Last Friday, Bank of Zambia (BoZ) Governor Dr Denny Kalyalya announced that the central bank had rolled out measures to respond to the deteriorating macroeconomic environment amid the COVID-19 pandemic by injecting K10 billion aimed at providing liquidity relief to targeted private companies that were priority areas in the Seventh National Development Plan (7NDP).

Through this process, commercial banks, therefore, needed to identify from among their clients those that were the priority of government so that they borrowed funds below the average lending rates.

In an interview, Kanyama, however, said the amount advanced by the BoZ was insufficient as the private sector still faced several challenges such as an unfavourable foreign exchange rate, low demand for goods and services, high inflation, unreliable and high cost of energy, among others.
“The importance of this facility is the aspect of amortization in that the companies that will be targeted have enough time to pay back. The key problem with most companies in Zambia is the lead-time issue in that there is always a mismatch between the repayment period and the time for the project to generate money. In most cases, the debt will be overdue before the project has even kicked off. By the time a factory is constructed, the debt would be overdue. Worse still, with bank loans, the creditors want interest payments even before the ink of the debt contract dries up! If the investment takes 24 months to start operations, where does the investor get the money during the first 24 months to start paying interest? This is the reason we have been seeing properties belonging to farmers and other investors daily on sale by commercial banks because of this significant mismatch between loan repayment and project lifecycle,” Kanyama said.

“This facility by the Bank of Zambia treats this problem by ensuring there is a reasonable window from the time of accessing the loan and when the investor starts to pay. For this reason, many companies that will benefit from this facility are likely to repay the loans without much struggle. There are, however, some problems. First, the facility is a drop in the ocean given the challenges this COVID-19 will pose to the private sector. Companies are facing a lot of problems currently such that total recapitalization will be the only answer. Problems involve an unfavourable exchange rate, low demand for goods and services, high inflation, unreliable and high cost of energy, outstanding arrears with statutory bodies and unpredictable weather patterns for companies associated with agriculture. The Bank says this is an initial injection, but we need the other amount released soon because companies need to fully operate shortly after we have solved the Coronavirus pandemic.”

He added that the criteria to select companies to benefit from this process was also unrealistic.

“Secondly, to assume there are companies that are more important than others in Zambia is unrealistic. This is because the interconnection among companies is very deep. One company will benefit from this facility and others in the value chain are not benefiting. The result is that those companies benefiting from this facility will expand their capacity, but still be unable to engage productively in the market because those companies that are linked to them in the backward and forward linkages have little capacity. This is because they are borrowing money at commercial rates. I am personally against the idea of segregating companies between the important and not important (companies) as defined in the 7NDP. The criteria for benefiting from this facility should be on basis of bankable projects. There is no useless investment provided it adds value to the economy,” Kanyama said.

He called for more solutions to stabilize the economy if the private sector was to survive.

“Third, the BoZ facility can only effectively work if we comprehensively attend to problems faced by the private sector. Access to cheap and affordable finance is not the only answer to companies in Zambia. Many of them suffer from poor management and leadership capacities, political patronage, poor governance and other structural problems inherent in the economy. The focus should also be towards stabilizing the economic environment. In other words, we need a comprehensive cocktail of solutions during and after COVID-19 if the private sector is to survive,” advised Kanyama.