As Zambia experiences weak credit growth and stubborn inflation, the country’s central bank governor, Denny Kalyalya, talks to Jason Mitchell about a recovery strategy that includes rate rises and ordering banks to reduce some charges.

Denny Kalyalya

Denny Kalyalya

Zambia’s improving credit growth remains below the expectations of the country’s central bank, as the southern African country's economy remains subdued. Lending rose 2.9% in the first quarter of 2019, compared with just 1.3% in the previous quarter, but such rises remain disappointing, according to Denny Kalyalya, the governor of Bank of Zambia, the country's central bank.

“Credit growth is still not strong enough if we expect the private sector to be the main engine of economic growth in the country. We would like to see it at much healthier levels,” says Mr Kalyalya.

The rise in domestic credit was driven mostly by lending to private enterprises, which was up by 5% in the first quarter of 2019, against a drop of 4.6% in the final quarter of 2018. Credit growth to the government slowed, however, to 1.1% from 3.3% over the same period. Foreign currency-denominated loans grew by 11% during the first quarter against a decline of 2.4% in the final three months of 2018, on the back of higher lending to the transport, mining, agriculture and electricity sectors.

Loans denominated in Zambian kwacha, however, rose by only 2% in the first three months of the year, compared with 4.7% in the fourth quarter of 2018, due to lower lending to households, the wholesale and retail trades, and the electricity sector.

Slowing growth

Mr Kalyalya – who has been governor of Bank of Zambia since February 2015 – notes that the economy expanded by 3.7% in 2018 compared with 3.5% in 2017, but that growth had slowed so far in 2019. “The growth rate is not high enough to fulfil the national objectives of job creation and poverty reduction,” he says. “We saw subdued economic growth during the first quarter of 2019. 

“Mining output, cement production, consumer spending and tourist arrivals registered negative year-on-year growth. For 2019, real gross domestic product growth is expected to slow down, reflecting lower agriculture production and mining output, as well as constrained electricity generation.” 

Mr Kalyalya says the production of copper – which accounts for 75% of Zambia’s exports – declined to 195,244 metric tonnes during the first quarter of 2019 compared with 222,039 metric tonnes during the previous three months. Real consumer spending was also down by 11.7% during the first quarter and electricity generation declined by 5.7% during the same period. 

Interest rate rise

At the end of May, Bank of Zambia’s monetary policy committee decided to raise the policy rate by 50 basis points to 10.25%, in a bid to bring inflation under control. Inflation stood at 7.7% during the first quarter of 2019 compared with 8% in the previous quarter.  

“The interest rate rise is a bitter pill that we must swallow to get the economy performing better,” says Mr Kalyalya. “We must address the factors that have caused higher inflation, including the depreciating exchange rate. Inflation is projected to breach the upper [areas] of the 6% to 8% target range over the forecast horizon. 

“Decisions on the policy rate will continue to be guided by inflation forecasts and outcomes, as well as progress in the execution of fiscal consolidation measures. Should the upside risks to inflation persist and keep inflation above the target range, the monetary policy committee may adjust the policy rate further upwards.”

On the charge

Amid the struggles of the wider economy, Bank of Zambia has taken action to lower the barriers to entry for banking services among the wider population. In September it introduced new rules obliging commercial banks to waive some banking charges, including fees for withdrawals, balance inquiries and account maintenance. 

Banks have argued that the changes have reduced their revenues significantly and that they may have to close rural branches. 

“If a bank can only exist on the basis of charges, it should not be a bank,” says Mr Kalyalya. “A bank cannot survive just for that reason. We should not see a bank branch closure as an aberration. The bank of the future will be digital; it will not be bricks and mortar. That is the direction in which banking is heading and we must encourage that kind of innovation.”

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