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MONETARY POLICY COMMITTEE STATEMENT

FOR
SECOND QUARTER 2016

Governors Presentation to the Media

17th May, 2016

INTRODUCTION
2

The structure of this presentation is as follows:

1.

Decision on the monetary policy stance

1.

Overview

2.

Global economic developments

3.

Developments in the domestic economy

4.

Macroeconomic outlook

MONETARY POLICY DECISION


3

The MPC decided to maintain the Policy Rate at 15.5%.


The Committee took the following factors into account in deciding
to maintain the Policy Rate at 15.5%:
tight monetary policy measures taken in fourth quarter of 2015

are producing the desired results;

a relatively stable exchange rate since November 2015;

annual inflation seem to have peaked in the first quarter, and is

projected to slowdown in the remaining quarters of 2016.

monthly inflation has also been declining, reaching 0.3% in April

2016 from a peak of 6.2% in October 2015.

MONETARY POLICY DECISION


4

liquidity conditions remain relatively tight as reflected in high

market interest rates;


weaker economic growth prospects, which could be adversely

affected by a further tightening of monetary policy; and,


financial stability.

OVERVIEW
5

Liquidity

conditions
remained tight in the first
quarter of 2016 due to
monetary policy measures
implemented in the fourth
quarter of 2015.

35.00

2,000.00
30.00

25.00

1,500.00

The

interbank
rate
remained above the Policy
Rate corridor and banks
lending rates generally
rose.

(%)

20.00
1,000.00

15.00

10.00
500.00

Excess Reserves
Lower Bound
OLF Rate

5-day Moving-Ave
Upper-Bound

13-May-16

29-Apr-16

15-Apr-16

1-Apr-16

18-Mar-16

4-Mar-16

19-Feb-16

5-Feb-16

22-Jan-16

8-Jan-16

25-Dec-15

11-Dec-15

27-Nov-15

13-Nov-15

30-Oct-15

2-Oct-15

18-Sep-15

4-Sep-15

21-Aug-15

Bank
left
the
interbank rate outside the
Policy Rate corridor due
to the need to contain
pressure on the exchange
rate.

7-Aug-15

The

16-Oct-15

5.00

BOZ Policy Rate


Interbank Rate

OVERVIEW
6

Though the Kwacha depreciated modestly against major foreign


currencies, the domestic currency remained relatively stable.

OVERVIEW
7

Annual inflation rose to 22.2% in March 2016 from 21.1% in December


2015, but month-on-month inflation continued to decline to 0.5% in
March 2016 and 0.3% in April from 2.1% in December 2015.
8.0
7.0
6.0
5.0

Percent

4.0
3.0
2.0
1.0
(1.0)
Jan- Feb- Mar14 14 14
Overall
0.9 0.5 1.2
Food
0.8 0.6 1.3
Non-food 1.0 0.4 1.2

Apr14
0.7
0.7
0.7

May14
0.9
0.8
1.0

Jun14
0.4
0.2
0.7

Jul- Aug- Sep14 14


14
0.8 0.7 0.2
(0.1 0.9 0.2
1.7 0.4 0.3

Oct14
0.1
(0.0
0.2

Nov14
0.4
0.5
0.3

Dec14
0.7
1.3
0.2

Jan- Feb- Mar15 15 15


0.7 0.3 1.0
0.7 0.8 1.0
0.7 (0.3 1.1

Apr15
0.7
0.6
0.8

May15
0.6
0.8
0.4

Jun15
0.6
0.2
1.0

Jul- Aug- Sep15 15


15
0.8 0.9 0.7
0.6 0.8 0.5
1.0 0.9 0.9

Oct15
6.2
7.4
5.0

Nov15
5.0
6.8
3.1

Dec15
2.1
2.5
1.6

Jan- Feb- Mar16 16 16


1.3 1.2 0.5
1.6 1.2 0.9
0.9 1.2
-

Apr16
0.3
0.8
(0.3

GLOBAL ECONOMIC DEVELOPMENTS


8

In the first quarter of 2016, global economic growth is


estimated at 2.6% (IMF WEO, April 2016).
Downside risks to growth persist, reflected in:
falling commodity prices (Table 1)
weakening trade
financial markets volatility
Modest recovery was recorded in the Euro area while growth
in China and United States slowed all adding downward
pressure to global growth.

GLOBAL ECONOMIC DEVELOPMENTS


9

Commodity prices continued to decline due to excess supply and


subdued demand.
Copper prices declined by 4.3% while crude oil fell by 20.4%.
Table 1: Selected Commodity Prices

GLOBAL ECONOMIC DEVELOPMENTS


10

In Sub-Sahara Africa, macroeconomic indicators suggest a


slowdown in economic activity in the first quarter of 2016 due
to:

further fall in commodity prices


geopolitical and domestic strife in a few countries
climate change factors (drought and floods)
reduced foreign direct investments in resource rich SSA
countries from China.

External positions of most resource-dependent countries


continued to deteriorate and foreign exchange reserves
remained under pressure.

GLOBAL ECONOMIC DEVELOPMENTS


11

SSA Sovereign bonds prices rose (yields declined) on the back


of a broadly weak US dollar.

GLOBAL ECONOMIC DEVELOPMENTS


12

Consistent with other SSA Eurobonds, yields on the Zambian


Eurobonds fell as rising copper prices (particularly in March)
added to improved sentiments for the domestic economy.

GLOBAL ECONOMIC DEVELOPMENTS


13

OUTLOOK:
IMF WEO (April 2016) revised downwards global growth to 3.2% in
2016 from the earlier projection of 3.4%.
Advanced countries expected to grow at 1.9% in 2016

Growth in the US is expected to remain stable at 2.4%

In the Euro area, growth is projected to be around 1.5%

In emerging and developing economies, growth is projected to rise


marginally to 4.1% from 4.0% in 2015.

Growth in China is projected to be around 6.5% in 2016

In SSA, growth is projected to be 3.0%, the lowest in the past 15


years.

DOMESTIC ECONOMIC DEVELOPMENTS


Monetary Policy
14

Monetary policy continued to focus on dampening


pressures and maintaining relative exchange rate stability.

inflationary

A tight monetary policy stance was maintained during the review period.

The Bank continued to restrict access to the Overnight Lending Facility


(OLF) window to stem the growth in Kwacha liquidity.

As a result, the interbank rate, at 26.9%, persisted above the upper

bound of the Policy Rate corridor and OLF rate (Figure 1 below).
The Bank deliberately did not supply funds to the market to bring the

interbank rate back into the Policy Rate corridor in order to help
contain the persistent pressures on the exchange rate.

As at May 16, 2016, the interbank rate declined to below 20.0%,


reflecting easing liquidity conditions.

DOMESTIC ECONOMIC DEVELOPMENTS


Monetary Policy
15

Figure 1: Policy Rate Corridor and Interbank Rate


35.00

2,000.00
30.00
25.00

1,500.00

(%)

20.00
1,000.00

15.00
10.00

500.00
5.00

Excess Reserves
Upper-Bound

5-day Moving-Ave
Interbank Rate

BOZ Policy Rate


OLF Rate

13-May-16

29-Apr-16

15-Apr-16

1-Apr-16

18-Mar-16

4-Mar-16

19-Feb-16

5-Feb-16

22-Jan-16

8-Jan-16

25-Dec-15

11-Dec-15

27-Nov-15

13-Nov-15

30-Oct-15

16-Oct-15

2-Oct-15

18-Sep-15

4-Sep-15

21-Aug-15

7-Aug-15

Lower Bound

DOMESTIC ECONOMIC DEVELOPMENTS


Money Market
16

With tight liquidity conditions, trading in the interbank market


increased by 27.2% to K33.6 billion.
Figure 2: Volume of Interbank Transactions

DOMESTIC ECONOMIC DEVELOPMENTS


Money Market
17

The volume of liquidity accessed through OLF window fell to


K13.3 billion from K32 billion.
Figure 3: OLF Transactions

DOMESTIC ECONOMIC DEVELOPMENTS


Government Securities Market
18

Tight liquidity conditions posed a roll-over risk for Government


securities in the first quarter of 2016 compared to the fourth quarter
of 2015 as reflected in deficits on auctions (Figure 4).
The subscription rates for Government securities improved as more
non-bank financial institutions participated in the auctions.
In the Treasury bill market, subscription rates rose to an average of
58.1% from 32.5%.
In the Government bonds market, subscription rates increased to
38.1% from 4.0%.
However, the outstanding stock of Treasury bills and bonds fell by
10.5% and 0.7% to K9.0 billion and K10.1 billion, respectively due to
net maturities.

DOMESTIC ECONOMIC DEVELOPMENTS


Government Securities Market
19

Figure 4: Performance of Government Securities Auctions

DOMESTIC ECONOMIC DEVELOPMENTS


Government Securities Market
20

Yield rates on Government securities increased further as


money market liquidity remained tight.
The weighted average Treasury bill yield rate rose to 27.4%

from 20.7%.
The weighted average Government bond yield rate also

increased to 27.5% from 25.9% (Figure 5).

DOMESTIC ECONOMIC DEVELOPMENTS


Government Securities Market
21

Figure 5: Government Securities Composite Yield Rates


30.00

25.00

Percent

20.00

15.00

10.00

5.00

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Tbills Average Composite Rate

Mar-13

Sep-13

Mar-14

Sep-14

Mar-15

Bonds Average Composite Rate

Sep-15

Mar-16

DOMESTIC ECONOMIC DEVELOPMENTS


Government Securities Market
22

Foreign investors holdings of Government securities declined


further due to, among other things, risk aversion towards
emerging and developing economies.
Figure 6: Foreign Portfolio Holdings

DOMESTIC ECONOMIC DEVELOPMENTS


Banks Nominal Interest Rates
23

Banks
nominal
interest rates rose
due to high funding
costs, tight liquidity
and high inflation.
Banks lending rates
ranged
between
15.5% to 41% while
the average rose to
27% from 23.8%.
The savings rate for
amounts
above
K20,000.00
also
rose to 12.9% from
10.8%

Figure 7: Nominal Interest Rates

DOMESTIC ECONOMIC DEVELOPMENTS


Foreign Exchange Market
24

Though the Kwacha depreciated by a modest 1.4% against the US


dollar, the domestic currency remained relatively stable.
Figure 8: Exchange Rate Developments

DOMESTIC ECONOMIC DEVELOPMENTS


Foreign Exchange Market
25

During the quarter, the supply of foreign exchange declined


sharply.
Figure 9: Net Supply of Foreign Exchange

2,500.00
1,959

2,000.00

1,671

USD' Millions

1,500.00
1,000.00
500.00
207

240

156

56

8
-

-83

-37

-87

-257

-55

-340

(500.00)
-685

(1,000.00)

-859

Quarter 3 -2015

Mining

FA Foreign - Bank

Quarter 4 -2015

Wholesale and Retail

Quarter 1-2016

Manufacturing Total

Other

DOMESTIC ECONOMIC DEVELOPMENTS


Foreign Exchange Market
26

Demand for US dollars from the public declined as reflected in

commercial banks net purchases during the review period.


Figure 10: Banks Net Purchases of FX from the Pubic
300

229

200

194

184

152

US $ Million

100
57

36

(20)

(42)
(98)

(100)

(138)

(149)

(167)

(200)
(260)

(300)

Qtr1

Qtr2

Qtr3
2013

Qtr4

Qtr1

Qtr2

Qtr3
2014

Qtr4

Qtr1

Qtr2

Qtr3
2015

Qtr4

Qtr1
2016

DOMESTIC ECONOMIC DEVELOPMENTS


Money Supply and Credit
27

On a quarterly basis, money supply contracted 4.9% in the first


quarter compared to a growth of 1.5% in the fourth quarter of
2015.
On an annual basis, money supply growth slowdown to 19.9%
from 35.2% in the previous quarter.
Credit contracted by 3.8% compared to a contraction of 5.3% on a
quarter-on-quarter basis.
On an annual basis, credit growth slowed down to 7.0% in March
2016 from 21.2% in December 2015.
Slowdown in money supply and credit growth reflects tight
monetary conditions.

DOMESTIC ECONOMIC DEVELOPMENTS


Money Supply and Credit
28

Figure 11: Money Supply Developments

Figure 12: Developments in Credit

DOMESTIC ECONOMIC DEVELOPMENTS


Real Sector Activity
29

Economic activity remained subdued in the first quarter of


2016 as evidenced by reduction in:
imports
exports
consumer spending
volume of services (tourism, financial and transport
sectors)
Power generation, mining output, cement production and

tourist arrivals also declined (Figures 13 and 14).

DOMESTIC ECONOMIC DEVELOPMENTS


Real Sector Activity
30

Figure 13: Power Generation and Mining Sector Output


Power Generation
3,600,000

Mining Sector Output


15

300,000

35,000.00

250,000

30,000.00

10

3,400,000

5
3,200,000

0
3,000,000

25,000.00
200,000

-5

2,800,000

-10

20,000.00
150,000

15,000.00

-15

2,600,000

-20

100,000
10,000.00

2,400,000
-25

2,200,000

50,000

5,000.00

-30

Electricity (MWh)

Year-on-year Change (%)

Copper (MT)

2016 Q1

2015 Q4

2015 Q3

2015 Q2

2015 Q1

2014 Q4

2014 Q3

2014 Q2

2014 Q1

2013 Q4

2013 Q3

2013 Q2

2013 Q1

2012 Q4

2012 Q3

2012 Q2

0
2012 Q1

-35
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
2015 Q4
2016 Q1

2,000,000

Gemstones (KG)

DOMESTIC ECONOMIC DEVELOPMENTS


Real Sector Activity
31
Figure 14: Cement Production and Tourist Arrivals
Tourist Arrivals

Cement Production
600,000

50

500,000

40

200,000

15

180,000
10

160,000
30

400,000
20

140,000

120,000
100,000

300,000
10
200,000
0

80,000
-5

60,000
40,000

100,000

-10

-10

20,000

Cement (MT)

Year-on-year growth

Tourist Arrivals

Year-on-year Change (%)

2016 Q1

2015 Q3

2015 Q1

2014 Q3

2014 Q1

2013 Q3

2013 Q1

-15

2012 Q3

2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
2015 Q4
2016 Q1

-20

2012 Q1

DOMESTIC ECONOMIC DEVELOPMENTS


External Sector
32

Current account deficit narrowed to US $168.6 million from US


$482.5 million due to higher decline in imports (25%) than in
exports (10.5%).
Figure 15: Current Account US $ Million
800.0
600.0
436.2

400.0

304.0

200.0

0.0

223.7

-77.1

-81.8

-214.4

-200.0

-168.6
-294.5

-400.0

-482.5

-600.0
-800.0
2014 Q1

2014 Q2

2014 Q3

Balance on goods
Balance on Seconday Income

2014 Q4

2015 Q1

Balance on Services
Current Account Balance

2015 Q2

2015 Q3

2015 Q4

2016 Q1

Balance on Primary Income

DOMESTIC ECONOMIC DEVELOPMENTS


Fiscal Performance
33

Government registered a small fiscal surplus, which was used

on domestic debt repayment and other critical expenditure


needs.
Figure 16: Fiscal Performance

DOMESTIC ECONOMIC DEVELOPMENTS


Inflation
34

Inflation rose modestly to 22.2% in March 2016 from 21.1% in

December 2015.
Food inflation rose to 26.2% from 24.8%.
Non-food inflation increased to 17.9% from 17.1%.

Increase in inflation attributed to:


high production costs;
low supply of selected food items;
grain deficit in the region;
increase in taxes and customs duty on some non-food items.

DOMESTIC ECONOMIC DEVELOPMENTS


Inflation
35

Figure 17: Inflation Developments


30.0

20.0

15.0

10.0

Overall Inflation

Food inflation

Non-food inflation

Apr-16

Mar-16

Feb-16

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

5.0

Jan-15

Percent

25.0

DOMESTIC ECONOMIC DEVELOPMENTS


Inflation
36

Month-on-month inflation continued to slowdown to 0.5% in March 2016


from 2.1% in December 2015. In April 2016, month-on-month inflation
declined further to 0.3%.
Figure 18: Month-on-month Inflation Developments
8.0
7.0
6.0
5.0

Percent

4.0

3.0
2.0
1.0
-

(1.0)
Jan14
Overall
0.9
Food
0.8
Non-food 1.0

Feb14
0.5
0.6
0.4

Mar14
1.2
1.3
1.2

Apr- May14
14
0.7 0.9
0.7 0.8
0.7 1.0

Jun14
0.4
0.2
0.7

Jul- Aug- Sep14 14 14


0.8 0.7 0.2
(0.1 0.9 0.2
1.7 0.4 0.3

Oct14
0.1
(0.0
0.2

Nov14
0.4
0.5
0.3

Dec14
0.7
1.3
0.2

Jan15
0.7
0.7
0.7

Feb15
0.3
0.8
(0.3

Mar15
1.0
1.0
1.1

Apr- May15
15
0.7 0.6
0.6 0.8
0.8 0.4

Jun15
0.6
0.2
1.0

Jul- Aug- Sep15 15 15


0.8 0.9 0.7
0.6 0.8 0.5
1.0 0.9 0.9

Oct15
6.2
7.4
5.0

Nov15
5.0
6.8
3.1

Dec15
2.1
2.5
1.6

Jan16
1.3
1.6
0.9

Feb16
1.2
1.2
1.2

Mar16
0.5
0.9
-

Apr16
0.3
0.8
(0.3

MACROECONOMIC OUTLOOK
37

GDP growth projected at 3.7% in 2016, but to strengthen


significantly thereafter.
The projected growth reflects the continuing headwinds, which
include power supply shortages, reduced investments and
sluggish global growth.
In the medium term, growth is projected to rebound to levels
close to historical average (6%).

MACROECONOMIC OUTLOOK
38

Inflation is projected to decelerate in the remaining quarters of


2016, with a sharp decline in the fourth quarter of 2016 towards
single digit levels.
In the second quarter, inflation is projected to average 20.3%,
partly reflecting improved supply of food during the harvest
season and relative exchange rate stability.
Inflation is projected to average 17.7% in the third quarter and to
decline further to an average of 8.7% in the fourth quarter of
2016.

MACROECONOMIC OUTLOOK
39

The outlook from the results of the survey of business opinions

and expectations indicate (Figure 18 below):


Slowdown in inflation expectations in the second quarter of

2016, mainly on account of improved food supply and relatively


tight monetary policy;
Moderation in the rate of depreciation of the exchange rate;
Slight easing of credit conditions in the second quarter of 2016;

and,
Lending rates remaining relatively high in the second quarter of

2016.

MACROECONOMIC OUTLOOK
40
Figure 19: Expectations

Exchange rate expectations

Lending rates expectations

Credit expectations

Inflation expectations

-3

-2

2016_Q1

-1

2015_Q3

2015_Q1

End of Presentation
Thank you

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