The Central Statistics Office has recently issued a statement projecting a positive growth rate for Zambia with slowing down inflation rate in 2009. What does not give much comfort is that the growth is skewed towards one sector, the agriculture, whose output will remain reasonably high in 2009. But on the balance of things, GDP growth that is supported by a few sectors makes an economy vulnerable to internal and external shocks.

As the application of the 2009 fiscal year takes effect after approval of the national budget by parliament last month, it is important for the government to know that most other sectors will still be affected by a number of factors such as rising interest rates, exchange rate and price of cement. The Ministry of Finance has not yet acknowledged whether or not the Zambian economy is in recession. This information will prove critically important for all the economic players in Zambia including external partners as they make adjustments on the investment outlay. The expectations, however, are that GDP growth will be substantially be lower than what has been projected in the national budget. We need quarterly communication about any such developments.

What industry seeks to know are the trends in consumer spending in view of the rise in interest rates. The emergency of new commercial banks in the country has not mitigated the interest rate hikes either. At the same time, there is reported decline in retail deposits and this is affecting bank margins. As a way of compensating for anticipated losses, banks have resorted to raising the interest rates. So far, there has been no indication the Bank of Zambia will adjust the minimum reserve requirements. This adjustment may cushion the falling liquidity available for commercial banks.

Because of the high interest rates, we expect the total industrial and retail sales to be negative this year with a number of companies likely to post poor earnings. This result alone will continue to affect the performance of the Lusaka Stock Exchange index as external investors may find little attraction to invest in the poorly performing stocks.

The solution for now depends on how the Bank of Zambia responds to the gloomy picture. The Bank of Zambia, unlike in other regimes, does not have direct control of key lending rates. However, it has two instruments at its disposal. First, it should once again lower the statutory reserve ratios from 8 percent to 6 percent. This will lower the opportunity cost that commercial banks incur as they currently receive no interest on these deposits. This will also help release more cash into the system.

Second, the core-liquid asset ratio can be reduced by a percentage point from the current 9 percent to allow banks lend money to projects that create employment and not merely participate in the money market and their equivalents. Unemployment is growing in Zambia and this can be arrested by an effective use of monetary policy to revamp the economy.