Navigating the Bank of Zambia’s Tactical Adjustment to the Statutory Reserve Ratio
The original article was published on the Canary Compass LinkedIn page on November 6, 2023, and is available here: Navigating the Bank of Zambia’s Tactical Adjustment to the Statutory Reserve Ratio
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In alignment with the guidance we provided, the Bank of Zambia (BOZ) has tactically increased the Statutory Reserve Ratio (SRR) by 300 basis points to 14.5% on both local currency and foreign currency deposits. This decisive action, scheduled to commence on 13th November 2023, is a strategic stride to tighten monetary conditions, reflecting the bank's adaptive and proactive monetary policy framework.
Scrutiny of the Kwacha money market, following last Friday’s position and considering Treasury bill maturities and settlements, places market liquidity at approximately ZMW 3.2 billion at the start of next week. The revised SRR will likely sequester close to ZMW 2.4 billion from the money market, trimming Kwacha liquidity to an estimated ZMW 0.8 billion. To offer a comparable perspective, this reduction in liquidity is equivalent to a foreign exchange sale intervention by the BOZ of around USD 108 million, considering the current USD/ZMW exchange rate of approximately 22.260.
Although the Kwacha presents a bearish trajectory, implementing this policy could instigate a pivot. Specifically, should the Kwacha breach key levels at 19.605 and 17.815, it would significantly alter the short-term and long-term bearish outlooks, respectively. A retracement is conceivable; anchoring this to the Fibonacci Retracement levels from the year’s low of 17.025 reached in June 2023, a best-case analysis suggests that the Kwacha could potentially see an appreciation to levels proximate to 18.255.
This monetary tightening exercise underscores the BOZ’s commitment to mitigating persistent foreign exchange market pressures and controlling inflationary trends. It embodies the bank's steadfast resolve to calibrate the financial ecosystem through continuous monitoring and agile responses to ensure macroeconomic stability.
The BOZ's current posture reveals a propensity for a hawkish policy direction. Indications suggest that the SRR and the Monetary Policy Committee (MPC) rate may experience additional ascensions. The MPC rate, for example, could still be adjusted higher by 100 basis points, to 11.00%, during the MPC meeting slated for the 20th to 22nd November 2023.
Indeed, the BOZ could have delivered a more assertive hike, particularly for local currency deposits. Consider the forthcoming liquidity influx from government security maturities; without factoring in governmental expenditures, the period from 14th November to 31st December 2023 will see ZMW6.4 billion in T-bill maturities and ZMW5.7 billion in bond maturities, cumulatively injecting ZMW12.1 billion back into the money market. Therefore, a more aggressive increase in the SRR could have provided the seeds for a more sustained impact.
Nevertheless, the BOZ must judiciously navigate between aggressive monetary interventions and the overarching necessity for financial market equilibrium. As such, the current policy enhancement is an informed step towards the Kwacha's stabilization and, critically, could also provide a temporal grace period for Zambia to solidify other pivotal measures to support the Kwacha, such as definitively concluding debt restructuring negotiations, addressing challenges in the mining sector's output efficiency and, implementing FX market structural reforms.
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Dean N Onyambu is the Executive Head of Trading at Opportunik Global Fund (OGF), a CIMA-licensed fund for Africans and diasporans (Opportunik), and is a co-author of Unlocking African Prosperity. 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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