• This implies that the money which banks are supposed to hold back has increased, hence stifling liquidity out of the economy.
• This is one of the monetary policy measures to ensure that the country meets its inflation target range.
• The move also reduces demand for goods and services as people will have less money to spend.
An Economist says upward adjustment of the Statutory Reserve Ratio (SRR) by 3 percent will reduce liquidity levels in the economy as commercial banks will be required to keep more money instead of giving it out as loans.
Speaking to Money FM News, Emmanuel Zulu said this implies that the money which banks are supposed to hold back or not give to the public in form of loans has increased, hence stifling liquidity out of the economy.
Mr. Zulu explained that raising the statutory reserve ratio, is one of the monetary policy measures Bank of Zambia has employed to ensure that the country meets its inflation target range of between 6 to 8 percent.
“Measures have to be employed to ensure that we are within the target range and one of the measures that we have seen is the Bank of Zambia raising the statutory reserve ratio by 3 percent. This means that the money that the Banks are supposed to hold back or not give back to the public has increased.
So the Central Bank is basically saying you are supposed to keep this money always without giving it to the public so if at all the banks, it means they will not give out that money to the public as loans and that also need to hold on to certain monies they wanted to dish out using other instruments. This stifles money out of the economy, and the banks still need to see to it that they make profits, interest rates through loans, so if they are not able to do that they will try to raise the interest rates on existing loans, so it has that effect,” Mr. Zulu stated.
He added that this move also reduces demand for goods and services because people will have less money to spend as the assumption is that when there is less demand, there is a reduction in prices, hence constraining inflation rate.
“It also lessens economic activities because if the money was given out, it would stimulate economic activities, maybe people would have borrowed for investment, to venture into businesses and the like but that money will not be available to be given out to the public, it is withheld by the banks.
“It gets that stimulation for economic activities but at the same time you are also curbing demand because now people will have less money to spend, the assumption is that when there is less demand there is also a reduction in prices, suppliers are prompted to reduce their prices because there are few people that have liquidity to buy. So in that sense you are constraining inflation rate,” he observed.
And Mr. Zulu said having inflation rate at 12.6 percent from a single digit of 9.8 percent is worrying because it shows that the rate at which prices are increasing is very high, while the value of money erosion is rapid.
“We have seen commodity prices rising sharply and this is confirmed by the ZamStats report in terms of the inflation rate. We saw inflation rate hit single digit, we were at 9.8 percent and it has kept increasing we are now at 12.6 percent.”
“That is worrying and it shows that the rate at which prices are increasing is very high and the value of money erosion is very rapid, meaning that if you have a K50 today, in the next two weeks it is not able to buy the things that it can buy today and that is a concern because prices will keep rising sharply. We also have the inflation target of the government of between 6 to 8 percent, so if you look at where we are, we are at 12.6 percent, which is way beyond the target band,” Mr. Zulu noted.
Bank of Zambia (BoZ) has increased the Statutory Reserve Ratio on both local and foreign currency deposits by 3 percentage points to 14.5% from 11.5 percent, effective Monday, 13th November, 2023.
The move is aimed at relieving persistent foreign exchange market pressure with a view to contain inflation.