Question

INSTRUCTIONS:

1. The maximum number of pages is TEN (10), excluding references and the cover page.
2. The minimum number of references is FIVE (5) (including textbooks, journal articles, and other sources)

QUESTION

The Zambian economy has been facing significant macroeconomic challenges as reflected in low growth, high fiscal deficits; rising inflation and debt service obligations as well as low international reserves. The outbreak of Coronavirus (COVID-19) pandemic has compounded the situation, resulting in unprecedented global public health and economic crises. Although the full impact of the COVID-19 shock on public health and the economy cannot be determined at the moment, indications are that it will be unprecedented. The Bank of Zambia has introduced a number of measures to address the impact of the pandemic on the economy.

The Monetary Policy Committee (MPC), at its May 18 -20, 2020 meeting, decided to lower the policy rate by 225 basis points to 9.25%. The Bank has also introduced a K10 billion stimulus package to give the economy a boost.

Required: Critically analyse the performance of the downward revision of monetary policy in May 2020 and the Targeted Medium-term Refinancing Facility on the Zambian financial markets.

Answer 1

Answer: Performance of the downward revision of monetary policy:-

The COVID-19 pandemic is having an unprecedented impact on human life and livelihoods. The exponential rise in infections, that characterised the onset of the pandemic, led to a strain on health care systems and adversely affected fiscal budgets. In an effort to curb the further spread of the virus, governments have responded by implementing, among other measures, widespread lockdowns, which have disrupted global supply chains and induced economic contraction. This is affecting global demand through reduced consumer and business spending and generally heightened uncertainty about the economic outlook.

Domestic economy:- the covid-19 pandemic the already challenge domestic macroeconomics environment has worsened most under these circumstances the zambian economy is projected to contract by 2.6 % in 2020 from growth of 1.9 % 2019 this is the first contraction in real GDP in more than 20 years.

Demand for government sercurity: Demand for government sercurity remains weak  demand for government securities remained subdued largely due to tight liquidity condition the subscription rate from treasury bills and government bond decline to average of 84 % and 27% from 91 % and 42% respectively

To meet the shortfall in the government financing needs additional security were issued through private placement the outstanding stock of government securities as a result rose by 84% to k86.9 billion.

interest rate increase:- Tight liquidity condition in hai government domestic financial needs gift interest rate elevated the commercial bank average lending rate mergely increase 220 8.8 % in march 2020 from 28 % in December 2019.

fiscal pressure heighten:- fiscal pressure are expected to be height in 2020 as a performance is adversely affected by covid-19 while spending to combat the unprecedented virus rises. revenue reduction is estimated ad ke 14.6 billion additional spending pressure related external debt service which have been exacerbated by the recent sharp depreciation of the kwacha against the US dollar.

kwacha depreciation sharply :- Kwacha which had executed relative stability were the first two month of the year following significant tightened of monetary policy in November and December 2019 came to under the intense pressure in march this reflected the unresolved macro economic challenges associated with height debt services and debt level. Rising fiscal deficit as well as declining international reserves.

Targeted Medium-term Refinancing Facility on the Zambian financial markets:- In April 2020, the Bank of Zambia (the Bank) established a Targeted Medium-Term Refinancing Facility to enable Financial Service Providers support businesses and households that have been impacted by COVID–19. The Facility has an initial amount of K10 billion and tenors of five years for priority sectors identified in the 7th National Development Plan (agriculture, manufacturing, tourism and energy) and three years for other sectors.