Zambia’s Socialist Party President, Dr. Fred M’membe, has raised serious concerns over the ballooning domestic debt in the country. He says that the government has been borrowing money by selling government treasury securities to finance its operations while operating under a deficit, with little attention being paid to this growing problem.
“There is a serious maturity risk here because the government is managing the risk it by forcing local institutional investors to roll over their government treasury bills and bond holdings in order to avoid a balloon payout, which they may be unable to meet, causing a default on the domestic market,” warns M’membe.
He questions the government’s plans on the relentless issuance of government securities and asks, “What are the government plans on the relentless issuance of government securities to finance its operations, and when are we going to slow down on raising money by the issuance of government securities? This is what we are currently using to fund our budget deficit, but for how long and is this going to be sustainable?”
M’membe also highlights the need to know the debt ceiling on treasury bills and government bonds, asking, “Where are we at now?” He calls for journalists to ask the Bank of Zambia at the MPC briefing on February 14 where the country’s reserves currently sit and to know the details of any borrowing from China and other multilateral institutions.
“Let’s offer real checks and balances to avoid the country from crashing,” adds M’membe.
The Bank of Zambia’s recent decision to increase the statutory reserve ratio held by commercial banks has further added to the financial woes of Zambians. The Bank has instructed commercial banks to reduce money circulation by increasing the statutory reserve ratio to 11.5% from the current 9%.
M’membe states, “The decision by the Bank of Zambia to increase the bank reserve ratio means more money problems for Zambians. The move has effectively squeezed money out of circulation, forcing commercial banks to only deal or lend money to pristine clients like mines or big business.”
He further adds, “The ordinary already poor Zambian shall suffer even more as money is squeezed out of the market and suppliers are not paid, it’s going to be tough for many poor Zambians. What Zambians need is more money and not less money – more, and not less, money in circulation.”
M’membe believes that there is pressure on the Bank of Zambia to keep the exchange rate low, as promised by Mr. Hakainde Hichilema, but warns that “This will mean more money because increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.”
He explains that while reserve requirements are one of the monetary policy tools used by the Bank of Zambia, “an over-employment of changes in reserve requirements to enact monetary policy can be very detrimental. Open market operations are a much more precise tool.”
M’membe concludes, “The impact of changes in reserve requirements is difficult to estimate. Each change has the potential to affect depository institutions in different ways, depending on each institution’s deposit base. Changes in reserve requirements may also lead to changes in pricing schedules for some bank services, because some bank fees and credits are set based on reserve requirements.”