Monetary policy in the monetary approach to the balance of payments: The case of Zambia (1980-2011)
Shamabobo, Yenda G.
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The Zambian economy has been grappling with Balance of Payment (BoP) problems since the mid-1970s. This led the country to resort to seeking support from multilateral institutions and subsequently, the adoption of the IMF’s structural adjustment programmes as a solution. The Monetary Approach to the Balance of Payments (MABP) as an alternative to the Elasticities and Absorption approaches, was generated by the Chicago School in the late 1960s and adopted by the IMF in the 1970s as a means of solving BoP problems. Therefore, the IMF prescribed policy solutions for BoP problems to Zambia and other countries were largely based on the MABP. This study tried to establish the relevance and significance of the MABP theory in the Zambian economy during the period 1980 to 2011. The research tested the MABP in Zambia by estimating the Reserve Flow Equation (RFE) using OLS regression and joint hypotheses testing of the preconditions outlined by the MABP using the F-Statistic. The research also investigated the implications of monetary variables in the MABP in Zambia by employing the SVAR model and estimating the underlying impulse reaction functions (IRF). The hypothesis testing of both estimations, based on annual data for the period 1980-2011 and monthly data for 1995 to 2011, led to the conclusion that the MABP did not hold in Zambia for the study period. This implies that the Zambian BoP is not purely a monetary phenomenon. It is worth noting that the domestic price level (CPI) and domestic credit were found to be highly significant in both the monthly and annual data regressions. The IRF analysis revealed that changes in the domestic price level (CPI), domestic credit, and income (real GDP) had significant impact on the BoP. A 1 percent shock in the CPI led to a positive response from the BoP in the first 2 months then negative by the 5th month, while a 1 percent shock in domestic credit resulted in a negative shock in the BoP in the first 3 months, then positive by 5th month and negative by the 7th month. It was also revealed that interest rates and the money multiplier did not have significant impact on the BoP. Therefore, the research recommends that monetary authorities in Zambia should consider using domestic credit as a tool for inducing stability in the BoP, alongside other policies. This could be done through increased credit to the private sector for production purposes at a lower cost as one of the strategies for restoring (stabilising) positive performance of the BoP. The study also recommends that the domestic price level could be used as an anchor not only in managing domestic performance of the economy but also external performance.
The University of Zambia