A Reverberation to Dr. Patrick Chileshe's Saving the Kwacha: Why Monetary Policy Alone Won’t Solve the Crisis?
We deeply respect Dr. Chileshe’s incisive analysis in his article Saving the Kwacha: Why Monetary Policy Alone Won’t Solve the Crisis? He skillfully highlights Zambia’s challenges in aligning monetary policy with broader economic realities.
While we differ on the role of tighter monetary policy—seeing it as a necessary response to fiscal misalignment and a lack of coordination [someone must take the lead as the more responsible party]—we strongly agree with many of his observations and aim to expand on areas that warrant additional focus.
Disregard for Market Dynamics and Psychology
Fiscal authorities must respect and understand market dynamics. Economic fundamentals alone do not drive markets; sentiment, expectations, and psychology play equally significant roles. Ministry of Finance and National Planning (MoFNP) policymakers must actively engage with these behavioural drivers. Their continued disconnect from market realities destabilizes the economy and weakens financial market stability.
Misalignment Between Fiscal and Monetary Policy
The Bank of Zambia (BoZ) has executed its mandate effectively, yet fiscal policies frequently counteract its efforts. Fiscal and monetary policies must align to achieve consistent economic outcomes. Allowing yields to capitulate during inflationary pressures constitutes fiscal easing, directly undermining the monetary tightening necessary to stabilize the economy. This persistent lack of coordination between fiscal and monetary authorities erodes the effectiveness of both policy arms.
Debt Maturity Profiles Pose Significant Risks
A critical yet under-discussed issue is Zambia's domestic debt maturity profile, which presents severe risks, particularly in election years like 2026 and 2031. Between 2019 and 2021, the government issued significant debt at discount rates, clustering maturities in 2024, 2026, and 2031. The liquidity pressures observed in 2024 warn of more significant challenges ahead.
Election cycles in 2026 and 2031 will magnify these risks as large-scale redemptions collide with political and economic uncertainties. Artificially suppressing yields will inevitably strain the USD/ZMW exchange rate, compounding economic imbalances. Fiscal consolidation and prudent debt management are no longer optional but urgent necessities.
Distortions in Monetary Policy Tools
The reliance on monetary tools like the statutory reserve ratio (SRR) to address fiscal inefficiencies exposes deeper structural imbalances. In February 2024, the Bank of Zambia (BoZ) raised the SRR by 900 basis points to 26.0%. Given Zambia’s unresolved debt maturity challenges and money supply imbalances, the current SRR likely represents a floor. Without meaningful fiscal consolidation, further increases in the SRR are inevitable.
Global Market Dynamics Must Be Appreciated
Zambia operates within an interconnected global financial system, where external conditions heavily influence its domestic economy. The Federal Reserve's likely slower path in reducing rates amidst higher U.S. Treasury yields reflects global inflationary expectations culminating in slowed or reversed capital flows away from emerging markets. Investors will be more selective and increasingly favour economies with disciplined fiscal policies, leaving nations like Zambia with limited options for attracting foreign investment.
Additionally, fluctuations in global commodity prices and geopolitical tensions amplify Zambia's vulnerabilities. Policymakers must adopt a globally informed approach.
The Dreaded Option will be Back on the Table
Prudential adjustments, such as changes to the SRR or liquidity requirements, remain essential but insufficient without complementary fiscal actions. Fiscal consolidation is no longer optional but a non-negotiable prerequisite for Zambia's economic stability. Without it, the country risks perpetuating cycles of instability, policy misalignment, and overreliance on monetary tools that distort their intended purpose. Worse still, the absence of fiscal reform ensures that local debt restructuring looms again. Are holders of local currency debt truly ready to revisit that conversation?
Dean N Onyambu is the Founder and Chief Editor of Canary Compass, a co-author of Unlocking African Prosperity, and the Executive Head of Treasury and Trading at Opportunik Global Fund (OGF), a CIMA-licensed fund for Africans and diasporans (Opportunik). Passion and mentorship have fueled his 15-year journey in financial markets. He is a proud former VP of ACI Zambia FMA (@ACIZambiaFMA) and founder of mentorship programs that have shaped and continue to shape 63 financial pros and counting! When he is not knee-deep in charts, he is all about rugby. His motto is exceeding limits, abounding in opportunities, and achieving greatness. #ExceedAboundAchieve
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