Zambia’s Central Bank steps in to curb ‘Covid-19’ credit risks

IN a press release dated 3 April 2020, the central bank in Africa’s red metal hot spot, Zambia, announced a set of measures to curb Covid-19 related credit risks. The Bank of Zambia will open credit lines to the tune of K10billion ($540million) in a Medium-Term Refinancing Facility (MTRF) to commercial banks to allow for liquidity provision to its clients.
This measure will be targeted towards banks that will seek to cushion impacts of Covid-19 experienced by its clientele.
Zambia’s credit assessment was lowered by Standards and Poor’s, Moody’s and Fitch to CCC, Caa2 with negative outlook of account of rising risks to growth fuelled by increased debt service energy risks and frail growth. Moody’s recently commented on Zambia’s debt situation and is confident that it will restructure its debt. Covid-19 effects adds adverse pressure to the copper producers’ fiscal posture and growth momentum. This stems from the slide in aggregate demand, business disruption and impact of the production ecosystem. Central banks globally have responded through easing monetary policy and embarking on bond buying back programs to instil confidence while the fiscal side has also provided stimulus to supplement the monetary authorities.
Zambia’s central bank provided a set of measures purportedly aimed at curbing credit risk concerns that coronavirus has exposed the local ecosystem to. Employment is at risk as the tourism, airline and hotel industry faces shut down as demand collapses. The mining industry is faced with low copper prices at $4,879/MT making it costly for production in a feeble mining sentiment environment factoring business reviews to remain afloat. Construction projects have slowed with delays in delivery of specialist equipment to technical staff failing to travel into Zambia to execute tasks.
To Curb Currency Volatility. The central bank also stated in its release that it will review the inter-bank foreign exchange rules to address to curb volatility in the currency market. The Zambian Kwacha is trading at an all-time low of 18.5 for a unit of dollar which has seen the copper currency compete with the South African Rand in loss streaking over the last month.
Relaxation of Credit Provisioning Rules. The central bank will relax provisioning rules for commercial banks while simultaneously easing capital requirements for non-bank financial institutions allowing them access to capital instruments for tier 1 and 2 purposes. This will allow for credit extension by these NBFI’s.
Extension of Day1 impact of IFRS9. The Bank of Zambia has extended the period with which banks will absorb day 1 impact of International Financial Reporting Standard (IFRS-9) from 31 Dec 2022 from 2020. The central bank will relax provisioning rules to provide stimulus to commercial banks to onward ease pressure on its distressed clients. Commercial banks have delayed passing loan holidays to clients on account of no motivation and guidance from the regulator. It is expected the body representing banks will provide a position on the offering commercial banks will offer to clients.
Fee Waivers and Higher E-Money Limits. Earlier in the week the banking regulator increased limits for usage of electronic money to encourage usage of digital platforms by both retail and corporate clients. The central bank memo cited a slash in transaction fees on Zambia Interbank Payment Settlement System (ZIPSS) to encourage the usage of Real Time Gross Settlement System (RTGS).
Operational Resilience. The central bank note prescribed for operational resilience protocols to allow for continuity in service provision in the COVID pandemic time.
Intervention Adequacy. We remain of the view that this intervention is 3 weeks late and more reactive. Zambian businesses have borne the brunt of a steep currency slide which the central bank will need to be very agile about. The Bank of Zambia grapples with curbing a currency slide, rising inflation and stimulating growth in a feeble environment. It is very vivid that anaemic reserves incapacitate the central bank from selling dollars onto the open market to stabilise the currency let alone the interim measures such as mineral royalty taxes paid directly to the Bank of Zambia to shore reserves needs re-enforcement. The gold avenue is a more of long-term measure to build strategic reserves but what the market needs is measures that will restore currency market confidence to curb businesses haemorrhaging value through volatility impacts.
If the currency slide is not addressed adequately, Zambia’s inflation will balloon wider to throw the government security curve underwater causing readjustment higher in an interest rate spiral. There is urgent need for fiscal stimulus as well because the mismatches between monetary and fiscal policy are self-inflicted and must be curbed by a curtail in spending.
Pre – Covid-19 Zambia faced rising energy risks as climate change effects precipitated receding dam levels that strained power generation to a deficit of 810MW while grappling with balance sheet vulnerabilities fuelled by rising debt. Covid-19 effects will provide additional strains on the macros that will exacerbate credit risks that if not managed will widen downgrade risks with the international rating agencies. Bold implementation of proposed measures will determine the resilience of the economy. Zambia needs to act or risk further downgrade risk which will make refinance or access to multilateral or international capital market funding a mirage.
Mutisunge Zulu is A Financial Analyst and Economist currently serving as the Economics Association of Zambia National Secretary.