1. MONETARY POLICY COMMITTEE STATEMENT FOR THE SECOND QUARTER OF 2019
Governor’s Presentation to the Media
August 21, 2019
Bank of Zambia

2. PRESENTATION OUTLINE Decision of the Monetary Policy Committee
Global Economic Developments
Domestic Economic Developments
Macroeconomic Outlook
Conclusion

3. MONETARY POLICY DECISION
At 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.

4. GLOBAL ECONOMIC DEVELOPMENTS
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; and
rising geopolitical tensions in the Middle East.

5. GLOBAL ECONOMIC DEVELOPMENTS
Copper prices declined by 1.3% in Q2 while crude oil prices rose by 3.5% .
Table 1: Commodity Prices
2018 Q2
2018 Q3
2018 Q4
2019 Q1
2019 Q2
Copper Price (US$/ton)
6,881.0
6,118.0
6,164.0
6,226.0
6,144.7
Oil Price (Dubai) (US$/barrel)
71.8
74.0
66.8
63.3
65.5
Wheat (US$/ton)
204.9
208.8
221.6
212.6
206.7
Maize Price (US$/ton)
173.3
157.9
162.8
167.5
175.9
Cotton (US$/kg)
2.1
1.91
1.82
1.80
Sugar (US$/kg)
0.3
Soya beans (US$/ton)
436.0
370.0
374.0
378.0
353.0
Source: World Bank

6. DOMESTIC ECONOMIC DEVELOPMENTS Inflation
The increase in inflation was largely due to rising food prices and the pass-through from the depreciation of the Kwacha.
Table 2: Annual Inflation (%)
Figure 1: Annual Inflation (%)
Q1 2019
Q2 2019
Annual Overall Inflation
7.7
8.1
Food Inflation
8.0
8.9
Non-Food Inflation
7.4
7.3
Mar
2019
Jun
Jul
7.5
8.6
8.8
8.2
9.2
9.3
6.8
8.3
Source: Central Statistical Office

7. DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations
Liquidity 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

8. DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations
Key Liquidity Influences (K ’billion)
DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations
Table 3: Key Liquidity Influences (K’billion)
2018 Q3
2018 Q4
2019 Q1
2019 Q2
Opening balance
1.1
2.5
1.4
2.2
Net Govt spending
-0.9
-0.1
-3.8
-4.2
BoZ FX influence
1.0
0.4
1.3
1.9
CIC
0.2
-0.7
-1.2
Change in SR deposits
-1.0
-0.5
OLF
-0.6
0.0
Net Government securities influence
2.4
Open market operations
1.5
Miscellaneous
0.6
Closing balance
0.9
Source: Bank of Zambia

9. DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market
Demand for Government securities declined as liquidity conditions remained tight
Table 4: Government Securities Auctions
Amount on Offer
Amount
Received
Subscription
Rate (%)
T-bills
2019Q1
5.7
5.2 91
2019Q2
6.7
5.3 79
Government Bonds
1.7
0.5 29
3.3 15
Source: Bank of Zambia

10. DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market
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)
Figure 4: Govt. Securities Holdings
(K’billion)
Source: Bank of Zambia

11. DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market
Yield 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

12. DOMESTIC ECONOMIC DEVELOPMENTS Banks’ Nominal Interest Rates
Commercial 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% % from 10.3% % in Q 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

13. DOMESTIC ECONOMIC DEVELOPMENTS Domestic Credit
Figure 7: Contribution to Credit Growth (Y-o-Y, Percentage)
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.
Source: Bank of Zambia

14. DOMESTIC ECONOMIC DEVELOPMENTS Money Supply
Money 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 Supply
Source: Bank of Zambia

15. DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market
In 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.
Figure 9: Exchange rate developments
Table 5: Exchange rate developments
Period
ZMW/USD
ZMW/GBP
ZMW/EUR
ZMW/ZAR Q1
11.96
15.57
13.59
0.85 Q2
12.89
16.54
14.47
0.90
% chg
7.7
6.2
6.5
4.8
Source: Bank of Zambia

16. DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market
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 $103 million in Q
Figure 10: Supply and Demand (US$’million)
Source: Bank of Zambia

17. DOMESTIC ECONOMIC DEVELOPMENTS External Sector
Preliminary data for Q indicate that the current account deficit narrowed to US $168.0 million from US$246.4 million in Q1, driven by favorable performance of the primary income account which more than outweighed the reduction in the goods account.
Table 6: Balance of Payments (US$’ million)
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Current Account Balance
-295.5
131.6
112.2
-246.4
-168.0
Balance on Goods
88.0
194.6
-98.7
348.3
305.6
  Total Exports
2,230.8
2,289.7
2,094.6
1,986.8
1,977.6
   Copper
1,641.2
1,628.6
1,480.9
1,431.9
1,335.2
   Cobalt
38.2
28.7
17.5
3.3
0.0
   Gold
37.5
31.3
36.9
43.2
46.0
   NTEs
496.3
583.5
541.7
489.7
577.6
Total Imports
2,142.9
2,095.1
2,193.3
1,638.5
1,672.0
Primary Income
-294.7
30.9
309.3
-519.3
-397.4
Secondary Income
67.9
68.9
70.2
71.9
75.4
Services Account
-156.8
-162.8
-168.7
-147.3
-151.6
Capital Account
17.2
16.3
17.9
39.9
Financial Account
-359.0
355.0
147.0
-22.6
-269.8
Net Errors/Omissions
24.0
37.7
-25.0
57.3
-82.4
Overall Balance
-104.6
169.4
43.5
148.6
-59.3
Change in Reserve Assets
78.3
-172.0
-72.0
-163.9
44.0
Current Account Chart in Billions of US Dollars
Source: Bank of Zambia

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

19. MACROECONOMIC OUTLOOK Inflation
Inflation 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.

20. MACROECONOMIC OUTLOOK Real GDP Growth
Real 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.

21. CONCLUSION
The 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.

22. THANK YOU AND GOD BLESS…