THE IMPACT OF CHANGING THE STATUTORY RESERVE RATIO (S.R.R) BY THE CENTRAL BANK (B.O.Z)
In every country where the Central Bank is mandated to effect the tools of monetary policy, it is the duty of the Monetary Authority of a country to implement appropriate tools depending on the economic situation at that particular time. This is what our Central Bank has done by effecting the Statutory Reserve Ratio (S.R.R).But what is (S.R.R) all about?
The (S.R.R) is basically a legal requirement imposed on Commercial Banks to set aside a certain portion of customer deposits which are either left in the vaults of the Banks or remitted to the Central Bank.
In other words, it is how much money a Commercial Bank should deposit with Bank of Zambia for every deposit received from a bank customer. This means from the previous 5%, the Bank of Zambia was receiving 5 ngwee for every K1 deposit. With the adjusted SRR from 5% to 9% it means at 9% Commercial Banks will be required to deposit 9 ngwee for every K1.
There are positives and negatives of effecting the S.R.R, it only depends on which side of the coin you are. The negative effect is that the raising of the S.R.R will reduce the Commercial Bank’s ability to multiply the excess reserve resulting in reduced liquidity and high interest rates in the economy.
On the other hand, decreasing the S.R.R leaves depositories initially with excess reserves which can induce an expansion of bank credit and deposit levels with a decline in interest rates.
My take is, this is one of the hardest measures the Central Bank has invoked in such an unforgiving economy like ours but it is somehow a necessary tool to contain the free fall of the Kwacha as well as reduce the quantity of money in circulation.