Q1.

The current economic situation in Zambia is characterized by a gradual recovery from the
impacts of the COVID-19 pandemic. The country's GDP growth has been steadily improving.

The Zambian government appears to prioritize reducing inflation while maintaining moderate
economic growth, with the goal of stabilizing the economy and improving the standard of
living for citizens. Although unemployment is a concern, the government's primary focus
seems to be on inflation and economic recovery. This is evident in the government's measures
to curb inflation, such as fiscal consolidation efforts, increased agriculture and mining output,
and policies to improve the business environment (IMF Country Report No. 23/17).

It has been observed that the Bank of Zambia (BoZ) also shares the government's concern for
inflation. They have implemented a monetary policy aimed at achieving the inflation target of
6-8% over the medium term (Bank of Zambia Monetary Policy Statement, January-June
2023).

According to the World Bank Zambia Overview,, "the Zambian Government's focus is on
restoring macroeconomic stability and achieving fiscal and debt sustainability, including
through implementing an ambitious reform agenda aimed at restoring public finance
management and governance."

This is supported by the country’s central bank which has also emphasised the importance of
striking a balance between inflation control and supporting economic growth.

As for public criticism, there doesn't seem to be significant open criticism between the
government and the central bank. Both entities appear to be working together to navigate the
economic challenges and achieve sustainable growth. However, there might be differences in
opinions and approaches, which are obviously being addressed through private discussions
and negotiations.

In summary, while there might be nuances in the Zambian government and the bank of
Zambia prioritize and address economic challenges such as unemployment and inflation.
Both entities are fundamentally aligned in their objectives to promote economic stability and
growth. The Zambian government and the Bank of Zambia are primarily focused on reducing
inflation while maintaining moderate economic growth. While there may be differences in
opinions, both entities seem to be collaborating to address the country's economic challenges.

References

Q2.
It has been widely observed that the Bank of Zambia opt for raising MPR in such situations.
In fact just recently, they raised the MPR by 50 basis points to contain persistent inflationary
pressures and steer inflation to single digits. Based on these insights, it is reasonable to expect
the Bank of Zambia to adjust its monetary policy, possibly by increasing the MPR, to combat
inflation and maintain economic stability.
a) Given the current economic conditions, the Bank of Zambia is likely to adjust its monetary
policy. Because high inflation and low unemployment may signal an overheating economy,
which can be addressed by tightening monetary policy. This could involve increasing the
Monetary Policy Rate (MPR) to discourage borrowing, reduce money supply, and curb
inflation.

b) The Bank of Zambia's decision to allow the money supply to expand beyond its long-term
target range might indicate that they are prioritizing economic growth over inflation in the
short term. However, given the recent high inflation and the upcoming meeting, the central
bank may still decide to tighten monetary policy by increasing the MPR to bring inflation
under control.

Thus, it is possible that the central bank may decide to increase the MPR at its upcoming
meeting to control inflation, despite allowing the money supply to expand beyond its long-
term target range.

c) If the Treasury decides to borrow a larger amount of funds than originally expected, this
could put additional pressure on the Bank of Zambia to maintain a more accommodative
monetary policy. The increased borrowing may lead to higher government spending and
stimulate economic growth. To support this growth and facilitate the Treasury's borrowing,
the Bank of Zambia might be more cautious in raising interest rates. However, they must also
consider the risk of worsening inflationary pressures. In the end, the central bank will have to
strike a balance between supporting economic growth and controlling inflation.

According to a Bank for International Settlements (BIS) paper on central banks and debt, "A
greater volume of government debt might raise its cost and make the central bank's task more
difficult, by increasing the overall stock of debt, reducing private sector access to financing,
and possibly increasing financial stability risks".
Q3.

Bank regulators are typically more concerned about a large bank failure than a small bank
failure due to many reasons that include; systemic risk, economic impact, and potential
domino effects on the financial sector.
These points are discussed in details below:

1. Systemic Risk: Large banks are often considered "too big to fail" because their
collapse could lead to systemic risk and widespread instability in the financial system.
Systemic risk refers to the risk that a failure in one financial institution could spread
to other institutions and sectors, potentially causing a financial crisis. Smaller banks,
on the other hand, usually have a more localized impact, and their failure is less likely
to cause widespread disruption.

2. Economic Impact: The failure of a large bank can have a significant impact on the
overall economy, leading to reduced lending, job losses, and decreased consumer
confidence. Small bank failures, while still detrimental, often have a more limited
impact on the economy as a whole. A study by the Federal Reserve Bank of
Minneapolis found that the economic costs of a large bank failure are substantially
higher than those of a small bank failure (Engle & Fuhrer, 2020).

3. Domino Effects: Large banks are often interconnected with other financial
institutions and markets, both domestically and internationally. The failure of a large
bank can cause a chain reaction, leading to financial distress in other institutions and
potentially causing a financial crisis (IMF, 2014).

4. Resolution Challenges: Resolving the failure of a large bank is often more complex
and challenging than resolving a small bank failure. Large banks typically have a
more complex organizational structure, with diverse business lines, extensive cross-
border operations, and numerous counterparties. As a result, the resolution process for
a large bank involves navigating intricate legal, operational, and logistical challenges,
which can pose significant risks to financial stability if not managed effectively.

5. Public Confidence: The failure of a large bank can erode public confidence in the
stability and soundness of the banking system. Depositors may panic and withdraw
their funds from other banks, leading to bank runs and further destabilizing the
financial system. Maintaining public confidence in the banking system is crucial for
financial stability, which is why regulators prioritize preventing the failure of large
banks to preserve trust and stability.
In conclusion, bank regulators are more concerned about large bank failures due to the
potential for systemic risk, significant economic impact, and domino effects on the financial
sector. While small bank failures are also a concern, their impact is generally more limited in
scope.

References

Acharya, V., Richardson, M., & Van Nieuwerburgh, S. (2012). Guaranteed to Fail: Fannie
Mae, Freddie Mac, and the Debacle of Mortgage Finance. Princeton University Press.

Engle, R. F., & Fuhrer, J. C. (2020). The economic cost of large bank failures. Federal
Reserve Bank of Minneapolis Quarterly Review, 24(1), 2-15.

IMF (2014). Too big to fail and systemic risk. IMF Financial Stability Note. Available at:
[https://www.imf.org/external/np/fsn/eng/2014/fsn130314.pdf](https://www.imf.org/
external/np/fsn/eng/2014/fsn130314.pdf)

Systemic risk. (n.d.). In Investopedia. Retrieved from

[https://www.investopedia.com/terms/s/systemicrisk.asp](https://www.investopedia.com/
terms/s/systemicrisk.asp)