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Economic gains prone to risks—Alliance Capital

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Alliance Capital Limited has called on monetary authorities to exercise caution to cement gains the economy has registered over the last few months.

Among others, the firm has proposed maintaining the benchmark interest rate or the minimum rate of return investors will accept for buying non-government securities.

This is among other proposals the firm has made in its Quarterly Economic Report released Wednesday.

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For the first half of 2017, inflation has been on a downward trajectory necessitating gradual unwinding of monetary policy.

Looking ahead, Alliance Capital says it expects the price level to decrease further and stability to continue on the exchange rate.

However the firm says there are upside risks to inflation in the second half of the year which could translate into an increase in consumer spending.

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“Trends in labor costs have to be assessed and monetary policy has to be watchful about changes in wages that pose risks to the disinflationary momentum.

“However, we expect open market operations to heighten with elevated economic activity as the economy picks up pace”.

The form has also forecast the kwacha to remain stable to the dollar as the central bank builds reserves to support the currency during lean periods.

“Equilibrium in the kwacha-US dollar market must be good news to the private sector, the farmers and the economy in general. For the private sector, such a stable exchange rate facilitates proper business planning as it ensures certainty in foreign exchange transactions.

“For farmers, the stability of the kwacha means that they don’t suffer exchange rate losses during the selling season during which the kwacha usually appreciates against the dollar provided such stable kwacha is maintained during the lean season. For the general economy, a stable currency is one pointer which foreign investors look into when making a decision to invest in a country,” the firm said.

Alliance further said the stability of the kwacha coupled with the decelerating inflation and other positive macroeconomic fundamentals have the potential of attracting foreign direct investment into the country.

“However, any attempt to create such stability by other means has the potential of creating a cosmetic unsustainable foreign exchange market scenario to the detriment of the economy. As the economy slowly rebounding, the interests rate in commercial banks being revised downwards and the privately sector finally coming to life, it should be interesting to see how the kwacha behaves,” the statement said.

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