MONETARY POLICY COMMITTEE STATEMENT FOR THE - PowerPoint Presentation

1. MONETARY POLICY COMMITTEE STATEMENT FOR THESECOND QUARTER OF 2019Governor’s Presentation to the MediaAugust 21, 2019Bank of Zambia 1

2. PRESENTATION OUTLINEDecision of the Monetary Policy CommitteeGlobal Economic DevelopmentsDomestic Economic DevelopmentsMacroeconomic OutlookConclusion2

3. MONETARY POLICY DECISIONAt its Meeting held on 19 – 20 August 2019, Monetary Policy Committee decided to maintain the Policy Rate at 10.25%.In arriving at the decision, the Committee took into account the following factors:The projected inflation that will remain above the upper bound of the 6-8% target range for much of the forecast horizon, but revert to the target range towards the end of the forecast period; Further weakening of near-term growth prospects since the last MPC Meeting; Liquidity challenges; and,Risks to financial stability. 3

4. Global growth slowed down in Q2 2019, with advanced economies registering weaker growth.Subdued growth was largely due to:decline in investment and demand across advanced and emerging markets economies;reduction in global trade due to on-going trade disputes between the USA and China;continued Brexit-related uncertainties; andrising geopolitical tensions in the Middle East. GLOBAL ECONOMIC DEVELOPMENTS4

5. Copper prices declined by 1.3% in Q2 while crude oil prices rose by 3.5% . Table 1: Commodity PricesGLOBAL ECONOMIC DEVELOPMENTSSource: World Bank  2018 Q22018 Q32018 Q42019 Q12019 Q2Copper Price (US$/ton)6,881.06,118.06,164.06,226.06,144.7Oil Price (Dubai) (US$/barrel)71.874.066.863.365.5Wheat (US$/ton)204.9208.8221.6212.6206.7Maize Price (US$/ton)173.3157.9162.8167.5175.9Cotton (US$/kg)2.12.11.911.821.80Sugar (US$/kg)0.30.30.30.30.3Soya beans (US$/ton)436.0370.0374.0378.0353.05

6. DOMESTIC ECONOMIC DEVELOPMENTSInflationThe increase in inflation was largely due to rising food prices and the pass-through from the depreciation of the Kwacha.Figure 1: Annual Inflation (%)Source: Central Statistical Office6 Q1 2019Q2 2019  Annual Overall Inflation7.78.1  Food Inflation8.08.9  Non-Food Inflation 7.47.3  Mar 2019Jun2019Jul 2019 Annual Overall Inflation7.58.68.8 Food Inflation8.29.29.3 Non-Food Inflation6.88.08.3Table 2: Annual Inflation (%)

7. DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy OperationsLiquidity conditions tightened in Q2 with the aggregate current account balance for banks declining to K0.9 billion from K2.2 billion in Q1.As liquidity conditions tightened, the overnight interbank rate rose to 10.05% from 9.90%.To keep the interbank rate within the Policy Rate corridor, the Bank of Zambia supplied K1.5 billion through open market operations (Table 3).Figure 2: BoZ Policy Rate and Interbank Rate (%)Source: Bank of Zambia 7

8. DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy OperationsKey Liquidity Influences (K ’billion)Table 3: Key Liquidity Influences (K’billion)Source: Bank of Zambia 2018 Q32018 Q42019 Q12019 Q2Opening balance1.12.51.42.2Net Govt spending-0.9-0.1-3.8-4.2BoZ FX influence1.00.41.31.9CIC0.2-0.71.0-1.2Change in SR deposits-1.0-1.0-0.50.2OLF-0.7-0.6-0.10.0Net Government securities influence2.20.42.40.0Open market operations0.40.00.01.5Miscellaneous0.20.60.20.4Closing balance2.51.42.20.98

9. Table 4: Government Securities AuctionsDOMESTIC ECONOMIC DEVELOPMENTSGovernment Securities MarketDemand for Government securities declined as liquidity conditions remained tightSource: Bank of Zambia  Amount on OfferAmount Received Subscription Rate (%)T-bills   2019Q15.75.2912019Q26.75.379Government Bonds   2019Q11.70.5292019Q23.30.5159

10. Despite a fall in demand, a surplus of K0.7 billion was raised in Q2 compared to a deficit of K0.9 billion in Q1. Consequently, the outstanding stock of Government securities (at face value) rose by 3.5% to K60.2 billion.Figure 3: Government Securities (K’billion)DOMESTIC ECONOMIC DEVELOPMENTSGovernment Securities MarketSource: Bank of Zambia Figure 4: Govt. Securities Holdings (K’billion)10

11. DOMESTIC ECONOMIC DEVELOPMENTSGovernment Securities MarketYield rates on Treasury bills rose to 24.3% from 22.6% in Q1 Government bonds yield rates increased to 29.6% from 27.4%. The increase was largely attributed to tight liquidity conditions. Figure 5: Government securities yield rates (%)Source: Bank of Zambia 11

12. DOMESTIC ECONOMIC DEVELOPMENTSBanks’ Nominal Interest RatesCommercial banks’ nominal lending rate rose to 25.4% in June 2019 from 24.6% in March.Lending rates on new large Kwacha loans widened to a range of 11.5% - 46.0% from10.3% - 34.5% in Q1 2019.Savings rates generally increased, with the 180-day deposit rate rising to 10.1% from 9.8% in March.The rise in interest rates followed an upward adjustment in the Policy Rate in May and tight liquidity conditions. Figure 6: Nominal Interest Rates (%)Source: Bank of Zambia 12

13. DOMESTIC ECONOMIC DEVELOPMENTSDomestic Credit Figure 7: Contribution to Credit Growth (Y-o-Y, Percentage)Source: Bank of Zambia Although growth in total domestic credit growth increased to 20% from 17.9% y-o-y, growth in credit to the private sector slowed down to 21.4% from 22.5% y-o-y. Growth in total domestic credit was on account of increased lending to Government.Slow down in credit growth to the private sector is a reflection of tight credit conditions.13

14. DOMESTIC ECONOMIC DEVELOPMENTSMoney SupplyMoney supply (M3) growth slowed down to 15.4%, year-on-year, from 17.6% the previous quarter, largely due to the decline in foreign currency deposits. Figure 8: Money SupplySource: Bank of Zambia 14

15. Figure 9: Exchange rate developmentsDOMESTIC ECONOMIC DEVELOPMENTSForeign Exchange MarketIn Q2, the Kwacha depreciated against all major trading partner currencies.Elevated demand related to petroleum imports, a stronger US dollar, and negative market sentiments arising from credit rating downgrades were the major drivers. Source: Bank of Zambia 15PeriodZMW/USDZMW/GBPZMW/EURZMW/ZARQ111.9615.5713.590.85Q212.8916.5414.470.90% chg7.76.26.54.8 Table 5: Exchange rate developments

16. Net supply of foreign exchange rose to US $237.1 million from US $212.4 million in Q1.In Q2, the Bank of Zambia purchased US $140 million from the market, up from US $103 million in Q1 2019.DOMESTIC ECONOMIC DEVELOPMENTSForeign Exchange Market Figure 10: Supply and Demand (US$’million)Source: Bank of Zambia 16

17. Preliminary data for Q2 2019 indicate that the current account deficit narrowed to US $168.0 million from US$246.4 million in Q1, driven by favorable performance of the primary income account which more than outweighed the reduction in the goods account. DOMESTIC ECONOMIC DEVELOPMENTSExternal Sector Source: Bank of Zambia Table 6: Balance of Payments (US$’ million) Q2 2018Q3 2018Q4 2018Q1 2019Q2 2019Current Account Balance-295.5131.6112.2-246.4-168.0Balance on Goods88.0194.6-98.7348.3305.6  Total Exports2,230.82,289.72,094.61,986.81,977.6   Copper1,641.21,628.61,480.91,431.91,335.2   Cobalt38.228.717.53.30.0   Gold37.531.336.943.246.0   NTEs496.3583.5541.7489.7577.6Total Imports2,142.92,095.12,193.31,638.51,672.0Primary Income-294.730.9309.3-519.3-397.4 Secondary Income67.968.970.271.975.4Services Account-156.8-162.8-168.7-147.3-151.6Capital Account17.216.316.317.939.9Financial Account-359.0355.0147.0-22.6-269.8Net Errors/Omissions24.037.7-25.057.3-82.4Overall Balance-104.6169.443.5148.6-59.3Change in Reserve Assets 78.3-172.0-72.0-163.944.017

18. Preliminary estimates from CSO indicate a slowdown in real GDP growth to 2.6% in Q1 2019 compared to 2.7% achieved in the corresponding period in 2018. Indicators of economic activity point to reduced growth in Q2 2019. In addition, liquidity challenges and constrained aggregate demand continued to weigh on economic activity. DOMESTIC ECONOMIC DEVELOPMENTSReal Sector18

19. MACROECONOMIC OUTLOOKInflationInflation is projected to remain above the upper bound of the 6-8% target range for much of the forecast horizon on account of the persistent rise in food prices due to low agricultural food output. However, towards the end of the forecast horizon, inflation is expected to revert to the target range as pressure on food prices dissipates. Key upside risks to the inflation outlook include:persistent drought conditions that may result in reduced domestic and regional agricultural production and lower electricity generation;higher than programmed fiscal deficits; elevated external debt service payments; and weaker than projected global growth. The foregoing notwithstanding, inflationary pressures may be moderated by subdued domestic aggregate demand and relatively loose global financial conditions. 19

20. MACROECONOMIC OUTLOOKReal GDP GrowthReal GDP growth is projected to decline to 2.0% in 2019 from 3.7% in 2018 (Ministry of Finance). The slowdown largely reflects the contraction in agriculture production and constrained electricity generation due to the drought. The lower than anticipated mining output due to operational challenges at some major mines is also projected to weigh on growth in 2019.20

21. CONCLUSIONThe MPC noted elevated inflationary pressures in Q2, and projected inflation remaining above the upper bound of the 6-8% target range for much of the forecast horizon, but expected to revert to the target range towards the end of the forecast horizon.Upside risks are judged to dominate the inflation outlook, and if they materialise, may lead to higher inflation outcomes.The Committee also noted, since the last MPC Meeting, the further weakening of near-term growth prospects, liquidity challenges, and risks to financial stability. Addressing large fiscal deficits, elevated debt and debt service levels, high domestic arrears and liquidity challenges remains critical for overall macroeconomic stability.21

22. THANK YOU AND GOD BLESS…22