ZICA Voices Concerns Over BOZ's Statutory Reserve Ratio Hike: Impact on SMEs and Kwacha's Depreciation

 

The Zambia Institute of Chartered Accountants (ZICA) has expressed concern over the Bank of Zambia's (BOZ) decision to raise the Statutory Reserve Ratio to 17%, citing significant drawbacks for Small and Medium Enterprises (SMEs) and a potential hindrance to entrepreneurial growth. During a quarterly media briefing attended by the Zambian Business Times (ZBT), ZICA President Yande Mwenye asserted that this move would impede access to funds for small businesses, as commercial banks might prioritize larger corporations, creating a setback for entrepreneurship.

On November 13th, 2023, the Bank of Zambia initially increased the statutory reserve ratios for both the kwacha and foreign currency by 3%, raising it from 11.5% to 14.5%. This was an attempt to address rising inflation and the continual depreciation of the kwacha. Subsequently, on November 27th, 2023, the central bank further elevated the statutory reserve ratio by an additional 2.5% to reach 17%. This decision was grounded in the need to tighten liquidity in the market and alleviate pressure on the local currency.

Mwenye acknowledged that, despite a cumulative 17% appreciation in the previous quarter, the kwacha depreciated by 5.8% against the US dollar in the third quarter of 2023. She highlighted that between September 1st and November 21st, 2023, the kwacha depreciated by an additional 10.9% per dollar, with this trend persisting into the fourth quarter, trading at K23.3 per US dollar as of November 21st, 2023.

The ZICA president identified key drivers of the kwacha's depreciation, including low foreign exchange supply from the mining sector, heightened demand for critical imports like fuel, medicines, and agricultural inputs, global financial conditions causing outflows of foreign currency, and negative sentiments related to prolonged debt restructuring negotiations.

To counter the kwacha's downward trend, ZICA proposed recommendations to the government. This includes addressing structural disparities in Zambia's economy, diversifying the export base toward sectors like Agriculture, Manufacturing, and Tourism, in line with the 8th National Development Plan (NDP) and other policy documents. Mwenye emphasized that such diversification would ensure a multitude of foreign currency sources, potentially stabilizing the kwacha.

Furthermore, Mwenye suggested that BOZ should assess the impact of financial practices by large firms on the forex market to strengthen interventions. From a fiscal perspective, she urged the government to continue efforts to reduce debt service costs, emphasizing the importance of expediting debt restructuring to cut interest payments.

In the long term, Mwenye emphasized the necessity for the government to prioritize fiscal adjustment through containment of capital expenditure, which perpetually widens the fiscal deficit and leads to increased borrowing. Given the significant role of the exchange rate in Zambia's economy, she stressed the need for a combination of short-term and long-term measures to address the persistent depreciation of the kwacha and safeguard the economy from associated shocks.