High lending rates are a reflection of the economy – BAZ
The Bankers Association of Zambia – BAZ has revealed that the current [high] levels of lending rates are a mirror reflection of where the economy is in relation to the key macro economic indicators.
Zambian businesses and retail clients have had to contend with market lending rates that are currently above 20% for banks and above 60% from micro-finance institutions. This has led to a high cost of doing business, a high cost of living and slow down of economic growth.
Single digit market lending rates remain a pipe dream and successive governments continue to blindly drive the job creation agenda but are shy to aim for the needed below 10% lending rate that could actually spur the much needed local investments that could deliver overall national economic development.
Responding to the Zambian Business Times – ZBT on why interest rates have remained high and as to whether the general public should expect a reduction following the recently announced restructure of $6.3 billion out of the about $18.6 billion external debt, the association disclosed that lending rates are set considering various parameters.
BAZ President Leonard Mwanza told ZBT that some of the benchmarks that Banks use for price loans include interest rates on treasury bills, interest rates on government bonds as well as the overall inflation rate which determines the cost of doing business.
A check by ZBT revealed that indeed, treasury bills and bonds discount rates, considered as risk free lending to government, remain relatively high and expecting banks that are lending to local business and individuals to lower rates may be illogical and counter intuitive.
Mwanza further stated that now that the debt restructure bridge has been crossed which had been a major bottleneck in unlocking the economy and passing on the benefits to consumers, there is renewed hope of some economic recalibration around some of the key economic indicators.
The BAZ President stated that once government starts accessing the funding from the international market, and the benefit that will be acrude from the debt restructuring, it is expected that the government willingness to source funding from the local markets might scale down.
“If the government does not have a lot of demand to borrow on the local market through Treasury Bills and Government bonds, the natural expectation is that the market interest (or lending) rate will start coming down. Obviously you cannot determine that this will happen tomorrow, it is a process”.
“So once we start seeing those benchmark interest rates which were around 15% for treasury bills, and above 20% for government bonds depending on the tenure, we expect that the [effective market lending rates] will start going lower than the current 15%”, said Mwanza .
He explained that this would mean that the new base on which pricing would be referenced will be much lower than the current base, hence the accrued benefits will begin to show.
Mwanza hopes that the inflation trajectory will start going to the country’s medium term target which is between 6 to 8% as this will mean that another variable used to price from the base will start coming down. He added that once the savings on the foreign exchange come in through the debt restructuring, there might be more liquidity coming in on the local foreign exchange market that can eventually support and stabilize the Kwacha.
The BAZ President also noted that resolving the issues surrounding Mopani and KCM will result in an increase in Mineral royalties remittance [through Bank of Zambia] due to more copper production and exports, thereby more foreign currency which can be further used to support the Market.
Mwanza said that the Kwacha has a big say on how inflation is computed, hence a stable and downward trending Kwacha (relative to US dollar) will answer to questions of the high cost of doing business. BAZ is confident that once the bases begin coming down, there will no question of whether interest rates should be reduced or not as it will be an automatic adjustment.