24th May 2019
The Bank of Zambia Monetary Policy Committee released its policy statement on 22nd May 2019. The statement was indicative of a steady hand at the wheel.
The two areas of concern raised in the BoZ policy statement are mainly inflation and slow growth, a condition generally referred to as stagflation in economics. How to address these is critical to how the economy will perform in the next quarter.
The need for stimulus
An area of note is stimulus, which is the primary role of the central bank especially in times of slow growth. Zambia is in dire need of a stimulus policy. The problem at hand, of course, is that Zambia is already facing an inflation rate of between 6-8%. A stimulus package would require a loosening of money supply. The quantity theory of money (QTM) places restrictions on interventions that involve increasing money supply as a stimulus. Consequently, the natural response to this would be the requirement for the central bank to contract rather than increase money supply. This can be observed by the increase in the monetary policy rate by 50 basis points to 10.25%.
Stagflation raises a unique problem. An increase of 50 basis points may make sense in that it reduces money supply by slightly increasing the cost of borrowing, which is intended to hold back inflation. The dilemma is that the economy requires stimulus from the central bank, which requires an increase in money supply or lowering of interest rates so business can access loans they can use to engage in higher levels of productivity and output. At this point monetary policy has been exhausted as a means for gaining traction and the central bank has done its best to maintain financial system stability.
Fundamentally, when monetary policy options or interventions are limited the simple way out of stagflation may be to borrow from an external source. Zambia has already pushed external borrowing to the outer limits of 70% of GDP. Therefore, resources have to be raised internally. The option to do this is through Government Securities. The MPC indicates that total outstanding stock of Government securities decreased by 0.2% to K58.2 billion. Though securities raise funds for Government the down side reality is that what they can raise is small and they represent an increase in the debt load.
The commercial bank lending rate rose from 23.6% to 24% and the average lending rate from 21.8% to 22.8%, this increase, is being used to lower demand for loans, consequently help rein in inflation.
An area of note is how to raise the resources to pay back creditors, how to rein in inflation and at the same time provide a stimulus for the economy that will kick start the economic growth required to address Zambia’s economic challenges.
The BoZ is making good headway in ensuring that these are addressed, that there is financial system stability and that the economy will be positioned to pay back its debts.
The Bank of Zambia is amongst the best in Africa and the Zambian economy is being steered in the right direction.
Alternative Suggestions: Other Monetary Policy options that can be considered for future use
Applying Advanced Monetary Policy
To create a stimulus for Zambia action at the structural level would entail managing money supply by adjusting its velocity thereby advancing the cost equation for businesses from:
Profit=Total Revenue (TR) -Total Cost (TC)
To the more advanced Split Velocity (SV-Tech) cost equation:
Profit (Return) = Total Revenue (TR)= Total Cost (TC)
What this change does is it contracts the velocity of money by the equivalent of 100% of GDP. In other words, it has the same effect as reducing money supply. This creates a deficit in money supply equivalent in value to GDP caused by adjusting the velocity of money (This is no different from, if someone owes you K1,000 when you give them back K1,000, you have not increased their income). Similarly, this means that money supply can now be increased or restored by the same deficit which results in no change in the real value of money supply [the stock of money remains the same] which remains in line with QTM and fiduciary rules a central bank is expected to follow by the international banking community. This provides an internally created stimulus value for Zambia equivalent to GDP or K249 billion at constant price (without triggering inflation) by applying a simple monetary policy reconfiguration.
This is not an increase in money supply, but in line with QTM, it is a correction of money supply due to the fact that the value of the stock of money in the economy has been deliberately kept constant by adjusting its velocity to create a deficit that is then restored as a stimulus or catalyst for growth.
The central bank now has K249 billion at constant price with which to stimulate growth in the Zambian economy. If the central bank restored 50% of this, the economy would be financed by ZMK124.5 billion in the course of the fiscal year with no inflationary trigger or pressure since, technically this does not represent an increase in money supply, the real value of which remains constant, it is in line with QTM rules. Therefore, by simply strategically altering the velocity of money K249 billion or the equivalent of GDP becomes available to the economy at constant price through businesses guaranteeing the next fiscal period will experience double digit growth. The fact that this stimulus is strategically moved through businesses without the risk of intermediaries increases systemic integrity of this approach ensuring that the impact is directly on output and productivity within the economy. Unlike other methods of stimulus this approach ensures that economic growth takes place in tandem with economic development. In other words, not only will there be growth in non-human capital such as infrastructure, there will be simultaneous enhancements in human capital seen through living standards and employment.
Since this is an intervention, the stimulus would lead to a potential doubling of resources in the economy for example instead of K75 billion the revenue collection for the budget would have the potential of doubling to K150 billion, in one year, at constant price by the end of the fiscal year. In addition to this it demonstrates the capacity to shrink the debt load from 70% to 35% of GDP in a very short space of time.
At this point the rate of economic growth in each fiscal period is now guaranteed and can be sustained internally, year on year, at a double-digit growth rate that moves at the pace of the technology paradigm. This guarantee is more formidable than a gold standard. Since the creation of money through fractional reserve banking and other credit creation methods with a debt load depend on economic growth to support amortization, it acts as a loan guarantee for creditors and can be relied upon to significantly reduce the risk local commercial banks face when issuing loans. This guarantee also reassures international creditors who would naturally be in a position to extend more credit to the economy based on its enhanced growth and capacity to repay loans (credit worthiness). The technology paradigm is simply the rate at which the Zambian economy converts finance into output.
This approach uses fundamental facets of monetary policy. In real terms it maintains a tight monetary policy stance whilst triggering rapid growth with development in an economy and being within the rules and controls of what is acceptable to the international community offers alternative options for maintaining financial system stability that can be considered and that are useful in times ahead.
A Split Velocity model is easily deployed and unlike other strategies the waiting time between implementation and gains is minimal as its benefits to the economy are immediate.
In all it shows that Zambia has many options with which to address its challenges and is an economy that has great potential.
Split Velocity Solutions Ltd 