CSPR Slams MPR Hikes

... Interest Rate Hikes Hurting SMEs, Inflation Still Rising

By Francis Maingaila ♥️

Lusaka, Zambia - (20-02-2025) - The Civil Society for Poverty Reduction (CSPR) has questioned the effectiveness of Zambia’s continued monetary tightening, arguing that rising interest rates have done little to curb inflation while deepening economic challenges.

CSPR Executive Director Isabel Mukelebai told journalists that while the Monetary Policy Rate (MPR) is a critical tool for inflation control, its sustained increases over the past three years have produced mixed results.

"The ambitious target of maintaining inflation within the 6-8% band remains questionable," Mukelebai stated, emphasizing that despite policy tightening, inflation continues to rise.

Harsh Impact of Monetary Tightening

In an effort to control inflation, the Bank of Zambia (BoZ) has raised the MPR from 9.25% in early 2023 to 14.5% in early 2025.

Mukelebai pointed out that this represents a shift from a neutral to a contractionary stance, contrasting with the relatively stable 9.00% rate in 2022.

She warned that the move has resulted in increased borrowing costs, which have negatively affected households and businesses.

"Higher interest rates mean higher loan costs, which reduce disposable incomes and increase the cost of doing business," she explained.

"This has serious implications for economic growth, as Small and Medium Enterprises (SMEs) struggle to access capital."

Mukelebai cautioned that the crowding-out effect on the private sector is particularly concerning, as it stifles SME expansion, limits job creation, and slows down economic transformation.

Inflationary Pressures Persist

Despite continued monetary tightening, inflation has remained high, reaching 16.7% in January 2025—well above the 6-8% target band. Mukelebai questioned the effectiveness of MPR hikes as a singular approach to controlling inflation.

"Inflation is not just about interest rates. It is influenced by multiple factors, including exchange rate volatility, supply-side constraints, and fiscal policies," she stated.

Zambia’s heavy dependence on copper exports has made the kwacha highly vulnerable to external shocks.

Mukelebai noted that the local currency has depreciated by about 55% over the past three years, significantly raising the cost of living in an import-dependent economy.

"With over 80% of Zambia’s consumed products being imported, the impact of currency depreciation is severe," she explained.

Call for Policy Rethink

CSPR is urging policymakers to reconsider their approach, emphasizing the need for a coordinated strategy that goes beyond monetary tightening.

"While stabilizing the currency and controlling inflation are necessary, they should not come at the cost of economic growth and employment," Mukelebai said.

She called for a multi-faceted strategy that includes fiscal policy alignment, investment in manufacturing and agriculture, and stronger measures to track export proceeds.

"Stronger legislation to curb Illicit Financial Flows (IFFs) is crucial, as these deplete our forex reserves," she added.

"Additionally, a clear roadmap for implementing the dedollarization policy is needed to reduce inflationary pressures."

Mukelebai concluded by urging a more consultative and inclusive policy approach, stating,

"Sustainable economic growth requires innovative solutions. Zambia must rethink its strategy to balance inflation control with long-term development."