Here is an example: let’s say out of every K100 deposit that is made or already deposited at any commercial bank in Zambia….K17.5 (K100 X K17.5%) has to be remitted to BOZ.
Implying that of every K100 deposited…only K82.5 will be available in circulation….if the statutory ratio was say 10%….K90 would have been available in circulation.
What is the effect of increasing the statutory reserve ratio? There will be less money in the economy, this measure can be used to slow down inflation….the cost of borrowing goes up as there is less money in the economy. On the Forex side…there will be less Kwacha to “chase” the USD and other tradable currencies ie less demand for USD thus slowing or maintaining the USD exchange rate or any other tradable currency.
If a bank had K1bn, statutory reserve ratio at 14.5%…..K145m would have been/had to be remitted to BOZ….at 17.5%, K175m has to be in a current account at BOZ. Simply put …for every K1bn deposit that any bank(s) is holding, BOZ is “calling for additional” K30m out of circulation.
The above measures can be used in as a short term measure to arrest rapid depreciationof a currency. Long-term solution in the performance of any currency lies in addressing the fundamentals, ie producing more to earn forex.