Tuesday, December 19, 2023

The Bank of Zambia (BoZ) recently announced an upward adjustment of the reserve ratio by 2.5 percentage points from 14.5%, ultimately increasing the reserve ratio to 17%. This measure is aimed at controlling inflation and promoting financial stability. It is imperative to note that the reserve ratio is the amount of funds that Commercial Banks are required to keep with the Central Bank as a percentage of their deposits. An increase in the reserve ratio means that Banks will now have to keep more funds with the Central Bank, leaving less money to lend out to customers. ZUFIAW notes with concern that there are several implications of this decision by the Central Bank.

Firstly, this decision is likely to have an impact on the availability of credit in the economy because banks will have less money to lend out to their customers. Consequently, individuals and businesses looking to borrow will find it more difficult to access credit, particularly those with a poor credit history or without collateral. This could lead to a slowdown in economic activities, potentially causing a reduction in output and increase unemployment levels.

Secondly, the adjustment of the reserve ratio will lead to an increase in the cost of borrowing. Banks will have to pass on the cost of the increased reserve requirement to their borrowers in the form of higher interest rates. This will make borrowing more expensive for individuals and businesses, leading to a decline in consumption and investment spending. Further, the Central Bank recently announced an upward adjustment of the Monetary Policy Rate (MPR) from 10% to 11% and Commercial banks have already started notifying their existing customers to either opt for an increased repayment amount or an extended re-payment period, both of which translate to an increased cost on the borrower.

Thirdly, the adjustment of the reserve ratio is likely to have an impact on the banking sector. Banks will have to hold more funds with the central bank, reducing their capacity to earn profits through lending both retail and commercial. This could lead to a decline in profitability and potentially put pressure on smaller banks that are already struggling, this might lead to job insecurity for our members. 

Inflation and the weaking kwacha are the major concerns for the BoZ, and the upward adjustment of the Reserve Ratio and Monetary Policy Rate is aimed at addressing the situation by reducing the amount of money available for lending. The Central Bank hopes to reduce demand in the economy, thereby curbing inflation and managing the exchange rate. These measures may also help to promote financial stability by reducing the risk of banks becoming over-leveraged and potentially causing systemic problems. However, such measures have the potential to negatively impact essential commodities on the local market and increasing the already high cost of living for workers and citizens. The Union has continuously called on government and the central bank to take advantage of the opportunities presented by the recently discovered and established gold mines to boost the Central Bank’s gold deposits, which may in turn have a positive impact on the local currency’s resilience against foreign currencies. 

In conclusion, ZUFIAW understands the need for such policy adjustments, however, the Union is concerned that the upward adjustment of the reserve ratio and the MPR shall have several implications on the economy, borrowers, and the banking sector making it difficult for workers to make ends meet. While it may help to control inflation, strengthen the Kwacha, and promote financial stability, it could also lead to a slowdown in economic activities and put pressure on banks and other lending institutions. Ultimately, the success of this measure will depend on how effectively it is implemented and monitored by the Central Bank.

Issued By,

Kasapo Sundrea Kabende (Mr.)
Zambia Union of Financial Institutions and Allied Workers (ZUFIAW)

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