1. 1 MONETARY POLICY STATEMENT FOR SECOND QUARTER 2015 14 th May 2015 Bank of Zambia

2. 2 INTRODUCTION The Monetary Policy Committee met on 12 May, 2015 to review developments in the first quarter of 2015 with regard to: 1.Global economic environment 2.Conduct of monetary policy 3.Domestic economic environment 4.Decision on the Policy Rate

3. Global economic growth in 2014 continued to be modest at 3.4%. In 2015, the global economy is projected to be at 3.5%. Growth in advanced economies are expected to increase while growth in emerging economies will slow down. Monetary policies are expected to be divergent: the US expected to start raising interest rates Other advanced economies will maintain accommodative policies. 3 GLOBAL ECONOMIC DEVELOPMENTS

4.  Commodity prices are expected to remain subdued due to low global demand.  In the first quarter of 2015, average copper price declined by 7.8% to US $5,940 per metric ton from US $6,446 in Q4 2014  Average price of crude oil also declined by 10.4% to US $55.8 per barrel from US $62.3 per barrel during the same period 4 GLOBAL ECONOMIC DEVELOPMENTS

5. Monetary Policy  Monetary policy remained focused on the achievement of the inflation objective of the 7% inflation target for 2015.  During the first quarter of 2015, monetary policy remained tight as inflation was projected to remain at elevated levels relative to the inflation target.  The period under review was characterised by exchange rate volatility, induced by the deteriorating external environment and domestic factors – new mining tax regime  To address the exchange rate volatility, monetary policy was tightened further through an increase in the Statutory reserve ratio to 18% from 14%, effective 8 th April, 2015.  The Bank also continued to manage liquidity conditions in the market by ensuring that the interbank rate remained close to the Policy Rate (see Chart below). DOMESTIC ECONOMIC DEVELOPMENTS

6.  As a consequence of the tight monetary conditions, the weighted average interbank rate rose during the quarter to 12.9 % from 11.5% DOMESTIC ECONOMIC DEVELOPMENTS

7.  Demand for Government securities remained weak.  Investors subscription on Treasury bill auctions averaged 68% compared with an average of 52% the previous period.  Subscription on Government bond auctions declined to an average of 60% compared with the subscription rate of 92.5% in the fourth quarter of 2014.  Consequently, yield rates on Government securities rose, with the weighted average Treasury bill yield rate increasing to 19.6% from 18.0% while the composite bond yield rate rose marginally to 21.1% from 21.0%. DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market

8. 8 DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market

9. DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market

10. 10 DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market

11. DOMESTIC ECONOMIC DEVELOPMENTS Money supply and Domestic Credit Growth in money supply slowed down to 12.1% during the quarter under review from 12.3% in last quarter of 2014. When compared to the first quarter of 2014, growth was 17.2% lower in the first quarter of 2015. In real terms, growth in money supply was 4.9% in the first quarter of 2015, up from 4.4% in the fourth quarter of 2014 and down from 21.6% in the first quarter of 2014. The decline in the year-on-year growth in money supply is mainly a reflection of the tight monetary policy implemented since the second quarter of 2014.

12. Domestic credit rose by 12.8% in the quarter under review compared with 10.8% in the last quarter of 2014, mainly due to higher lending to Government and private sector. Annual domestic credit growth rose to 13.1% compared with 11.3% in Q4 2014 largely due to lending to private enterprises. 12 Money supply and Domestic Credit

13. 13 Money supply and Domestic Credit

14. THE FOREIGN EXCHANGE MARKET Kwacha depreciated against major currencies on combination of factors  The new Mine tax regime, falling copper prices, Fitch’s downgrade of Zambia’s economic outlook largely weighed down on the domestic currency.  The Kwacha recorded a depreciation of 19%, 13%, 12% and 5% against the US dollar, South African rand, British Pound and Euro, respectively.  Nonetheless, kwacha recovered towards the end of the quarter on account of higher statutory reserve requirements imposed on commercial banks.

15. 15 THE FOREIGN EXCHANGE MARKET

16. 16 THE FOREIGN EXCHANGE MARKET

17. 17 ZAR depreciated more than ZMK against USD  Kwacha depreciated by about 50% against the dollar over the last three years.  Rand depreciated by about 80% against the dollar over the same period THE FOREIGN EXCHANGE MARKET

18. THE FOREIGN EXCHANGE MARKET The supply of Foreign Exchange Declined  Traditional lines of supplies - mining houses and foreign portfolio activists - dropped 

19. THE FOREIGN EXCHANGE MARKET Demand for Foreign Exchange Increased  Net demand for forex from the public and bureaux eventually weighed down on the local unit.

20. 20 THE FOREIGN EXCHANGE MARKET Demand for Foreign Exchange Increased

21. 21 EXTERNAL SECTOR External sector performance continued to be unfavourable… Overall BoP deficit widened to US $405.2 million from US $131.9 million in Q4 2014, due to unfavourable performance in the current and financial accounts.  Current account deficit widened to US $223.3 million from US $179.6 million, following a narrowing balance on goods surplus and lower secondary income inflows  Balance on goods surplus narrowed to US $157.0 million from US $364.5 million  Export earnings declined by 31.2% to US $1,783.9 million from US $2,592.6 million on account of lower earnings from copper, cobalt and NTEs  Imports declined by 27.0% to US $1,629.9 million from US $2,228.1 million  Capital account declined to US $40.9 million from US $51.0 million following a fall in project grants  Financial account deficit widened to US $220.5 million from US $1.8 million previously

22. 22 Decline in merchandise exports earnings was due to declines in copper, cobalt and NTEs by 40.5%, 25.2% and 3.3%, respectively.

23. 23 Selected indicators of economic activity showed a general decline on quarterly and year-to-date basis … Agriculture  The stock of maize grain held by the Food Reserve Agency (FRA) were 9.0% lower than the end-December 2014 stock.  Stock of rice held 6.6% lower than that held as at end-December 2014  However, the level of maize stocks, together with expected harvest for the 2014/15 season is expected to be enough for domestic consumption and industrial use.

24. 24 FRA Maize and Rice Stocks declined, but still enough for domestic consumption ◦ FRA Maize and Rice Stocks (MT) Source: Food Reserve Agency

25. 25 Mining output declined… Copper production was 16.5% lower in the first quarter of 2015 than the 190,190 mt produced in the last quarter of 2014, and was 10.0% lower than the 179,583.7 mt produced in Q12014 Production of coal declined by 22.3% to 35,008 mt in Q1 2015 from 45,068 mt in Q4 2014. This level of production was 19.1% lower than the 43,249 mt produced in Q1 2014

26. 26 Cement output declined by 23.1% in Q1 2015 …  Production of cement declined by 23.1% to 352,033.7 mt in Q1 2015 from 457,624 mt in Q4 2014. This was 4.7% lower than the 336,373 mt produced in Q1 2014

27. 27 INFLATION Inflation slowed down to 7.2% in March 2015 from 7.9% in December due to a decline in both food and non-food inflation….  Non-food inflation declined to 7.1% from 8.4% mainly due to the reduction in fuel pump prices.  Decline in non-food inflation is partly a reflection of the monetary policy measures implemented by the central bank and the reduction in fuel pump prices.  Food inflation fell to 7.2% from 7.5% on account of sales of maize grain by Food Reserve Agency (FRA) at lower than market prices to moderate mealie meal prices as well as increased availability of fresh food items.

28. 28 INFLATION

29. MPC DECISION Monetary Policy Committee decided to leave the Policy Rate unchanged at 12.5%. The Committee took the following factors into account in arriving at the decision:  The recent downward movement in inflation from 7.9% in December to 7.2% in March 2015, with non-food inflation being the main driver. This development is partly a reflection of the monetary policy measures taken in 2014 as well as the reduction in fuel pump price.  The onset of the crop marketing season in the second quarter is likely to moderate inflationary pressures The recent tightening of monetary policy through the upward adjustment in the statutory reserve ratio from 14% to 18% effective 8 th April 2015 and the impact of this measure is yet to be fully realized.

30. 30  The recent decision by the Government to resolve the 2015 mining tax impasse is likely to help dampen the negative sentiments in the economy and mitigate inflationary pressures. To complement monetary policy, further fiscal adjustments are required to address revenue shortfalls and rationalise expenditure so as to achieve fiscal sustainability. This is critical to achieving to a stable macroeconomic environment going forward. MPC DECISION

31. END OF PRESENTATION… THANK YOU!!! Bank of Zambia