1

MONETARY POLICY COMMITTEE STATEMENT FOR

SECOND QUARTER 2017

Governor’s Presentation to the Media

10th August, 2017

INTRODUCTION

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The presentation is structured as follows:

1. Decision of the Monetary Policy Committee

2. Overview

3. Global economic developments

4. Domestic economic developments

5. Macroeconomic outlook

MONETARY POLICY DECISION3

At the Meeting held on 8 – 9 August 2017, Monetary Policy Committee decided to:

1. Lower the Policy Rate by 150 basis points to 11.0% from 12.5%; and

2. Reduce the Statutory Reserve Ratio by 300 basis points to 9.5% from 12.5%.

MONETARY POLICY DECISION4

The Committee took into account the following factors in arriving at its decisions:

Sustained decline in inflation over the last seven months, with inflationbeing firmly anchored in single digit levels;

Inflation projections, which suggest that inflation will remain withinthe medium-term target range of 6-8% over the next 8 quarters;

The prevailing high cost of credit, particularly to the productive sectorsof the economy;

Sluggish growth in credit to the private sector;

Deterioration in commercial banks’ asset quality as reflected risingnon-performing loans; and,

Weak economic growth.

OVERVIEW

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Following further easing of monetary policy stance, the overnightinterbank rate declined to 12.2% at end-Q2 from 13.0% at end-Q1 2017.

Figure 1: Interest Rates and Excess Reserves

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Excess Reserves BOZ Policy Rate Interbank Rate

Upper-Bound OLF Rate Lower Bound

The Kwacha appreciated against major foreign currencies, supported by improved supply of foreign exchange and higher copper prices.

OVERVIEW6

Figure 2: Exchange rate developments

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USD/ZMW GBP/ZMW EUR/ZMW ZAR/ZMW(RHS)

OVERVIEW

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Annual inflation rose marginally to 6.8% in June from 6.7% in March2017 following a hike in electricity tariffs. In July 2017, inflationdeclined to 6.6% Figure 3: Inflation developments

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Overall Inflation Food inflation Non-food inflation

GLOBAL ECONOMIC DEVELOPMENTS

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The global economy is projected to grow by 3.5% in 2017 from3.1% in 2016, premised on strong growth outlook in emergingmarkets and developing economies (EMDEs).

Growth in EMDEs is projected at 4.6% in 2017 and 4.8% in 2018,reflecting;

Projected increase in commodity prices

Stronger demand in China - supported by fiscal policy stimulus measures.

Global commodity prices generally declined in Q2, 2017 (Table1).

GLOBAL ECONOMIC DEVELOPMENTS

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Copper prices declined as LME copper stocks increased and imports fromChina sharply dropped. However, realised copper prices rose.

Oil prices declined, reflecting strong inventory levels in the United States andIran, and a pick-up in supply.

2017 Q1 2017 Q2

Copper Price (US$/ton) 5,840.0 5,668.0

Oil Price (Dubai) (US$/barrel) 52.9 49.7

Wheat (US$/ton) 177.0 176.0

Maize Price (US$/ton) 160.6 157.7

Cotton (US$/kg) 1.9 1.9

Sugar (US$/kg) 0.4 0.3

Soya beans (US$/ton) 419.0 386.0

Table 1: Selected Global Commodity Prices

DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy Operations

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Monetary policy operations continued to focus on containing the overnight interbank rate within the Policy Rate corridor and anchoring inflationary expectations.

Market liquidity increased further following the reduction in the statutory reserve ratio, net Government spending and purchase of foreign exchange by BoZ for international reserves build-up (Table 2).

With the further easing of monetary policy in May 2017, the interbank rate declined to 12.2% at end-Q2 from 13.0% at end-Q1 (Figure 1).

To keep the interbank rate within the Policy Rate corridor, the Bank withdrew K10.8 billion through OMO, up from K4.0 billion in Q1 (Figure 4).

DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy Operations

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Table 2: Key Liquidity Influences (K’ billion)

2017Q1 2017Q2

Opening balance 2.7 0.8

Net Govt. spending 1.3 1.3

BoZ FX influence 0.6 1.8

Change in CIC 0.9 -0.7

Change in SR deposits -0.4 -0.4

Overnight Lending Facility -0.1 0.03

Net Govt securities influence -3.1 -2.4

Open market operations -1.4 -0.3

Miscellaneous 0.3 0.0

Closing balance 0.8 0.3

DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy Operations

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Figure 4: OMO Withdrawals, Quarterly (K’ billion)

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DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy Operations

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Figure 5: Interbank Trading Activity (K’ billion)

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Volume of interbank trading rose despite higher market liquidity

DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market

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Table 3: Government Securities Auctions

Demand for Government securities remained elevated, though subscription rates declined.

Amount on offer(K’Billion)

Amount Received(K’Billion)

Subscription rate (%)

T-bills

2017Q1 5.4 7.1 131

2017Q2 6.3* 7.7 122

Bonds

2017Q1 1.0 5.5 550

2017Q2 1.0 1.7 170

* More Tbill auctions were conducted in Q2, but auction size remained the same.

A total of K7.1 billion was raised from auctions against the maturity of K3.9 billion, resulting in a surplus of K3.2 billion.

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Figure 6: Government Securities

DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market

3.83.3

7.07.3 7.1

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Funds Raised Maturities Surplus/Deficit

DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market

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The total outstanding stock of Government securities increased by 9.7% to K42.0 billion. The increase reflects the switch in financing from foreign to domestic.

Figure 7: Total Outstanding Government Securities

10.9 12.9 13.4 12.8 12.1 10.9 10.9 10.5 13.217.4 19.8

11.611.9 12.7 12.8 12.6 12.7 13.5 14.8

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Figure 8: Non-resident Holdings of Government Securities

DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market

Non-resident investors’ holdings of Government securities increased to K7.5 billion in Q2 from K6.9 billion in Q1 2017.

1.2 1.40.8 0.7 0.5 0.0 0.0 0.0

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DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market

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Yield rates on Government securities continued to trend downwards in Q2 on the back of easing liquidity conditions (Figure 9).

The weighted average Treasury bills yield rate fell to 15.7% in June 2017 from 20.8% in March 2017.

The weighted average Government bond yield rate declined to 19.3% from 20.4%.

DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market

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Figure 9: Government securities yield rates (%)

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Composite T- Bill Composite Bond rate

DOMESTIC ECONOMIC DEVELOPMENTSBanks’ Nominal Interest Rates

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The average lending rate declined to 26.6% in June from 28.8% in March 2017.

Lending rates ranged from 8 – 37% (10% –38.5% in Q1).

Savings rates on negotiated deposits declined to a range of 6 – 29.6% (11.0%-31.0% in Q1).

Figure 10: Nominal Interest Rates (%)

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Lending Rate Policy Rate

Interbank Rate 180-day deposit rate

DOMESTIC ECONOMIC DEVELOPMENTSMoney supply and credit

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Money supply grew by 2.0%on a quarterly basis comparedwith a growth rate of 5.1% inQ1.

Growth mainly driven bylending to Government and uptick in credit to the privatesector.

On a year-on-year basis, money supply grew by 8.3% in June 2017, up from a growth of 4.2% in March 2017.

Year-on-year growth in money supply remains low to support strong economic activity.

Figure 11: Money Supply

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DOMESTIC ECONOMIC DEVELOPMENTSMoney supply and credit

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In Q2, total credit grew by 6.5%, same magnitude as recorded in Q1 2017 (Table 4).

Credit to Government expanded at a slower pace of 11.3% compared with a growth of 18.1% in Q1 2017.

Credit to private enterprises grew by 1.6%, partially reversing a contraction of 4.8% in Q1.

Recovery in credit growth to the private sector was mainly due to improved liquidity conditions, decline in lending rates and banks’ willingness to take on more risk as growth prospects brightened.

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Table 4: Credit growth

DOMESTIC ECONOMIC DEVELOPMENTSMoney supply and credit

Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017

Total Credit

(Incl. Govt)0.7 4.9 1.1 6.5 6.5

Total -(Excl.

Govt)-3.7 -1.7 -5.4 -3.2 1.6

Public

Enterprises-0.3 -3.1 -9.2 -10.0 28.9

Government 9.0 15.7 10.2 18.1 11.3

Private

Enterprises-5.2 -1.3 -4.6 -4.8 1.6

Households -2.1 -0.9 -7.1 -0.3 1.3

NBFIs 10.3 -0.1 17.6 -7.9 5.9

The Kwacha appreciated further in Q2 due to increased supply of foreign exchange and higher copper prices (Figure 12).

Against the US dollar, the Kwacha gained by 5.0% to an average of K9.31 in June 2017.

Foreign financials and mining companies’ remained the major suppliers, while the Government continued to be the lead buyer (Figure 13)

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Figure 12: Exchange rate developments

DOMESTIC ECONOMIC DEVELOPMENTSForeign Exchange Market

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Figure 13: Supply and Demand (US$’million)

(900.00) (400.00) 100.00 600.00

Other

Foreign Financials

Mining and quarrying

Agric, hunting and forestry

Construction

Households

Manufacturing

Wholesale and retail trade

Public administration

2017 Q1 2017 Q2

DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity

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Available real sector data indicate that output in mining,manufacturing, and energy sectors picked up in Q2. Retail salesalso picked up.

copper production rose by 18.2% in Q2 to 197,015.2mt, driven byrebound in prices, continued ramp-up of production, and theresumption of operations at Nchanga mine (Figure 14).

However, electricity generation picked up as water levels inreservoirs improved following above normal rainfall during the2016/17 rainy season.

production of cement increased by 16.2% to 451,529 mt in Q2 on account of the rise in demand occasioned by favourable conditions for construction activities.

DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity

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Figure 14: Mining Sector Output

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DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity

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Electricity generation rose further by 9.0% to 3.1 million Mwh due to rise in water levels in reservoirs; imports declined further but diesel consumption increased, attributed to electricity tariff hike

Figure 15: Electricity Generation and Diesel Consumption

160,000

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Electricity Generation (MWh) Diesel Consumption (Litres '000)-RHS

DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity

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Production of food and beverages increased as electricity supply improved after an extended period of power rationing

Figure 16: Manufacturing Activity

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100,000

200,000

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600,000

2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2

Opaque beer Soft Drinks Clear beer Fresh Milk

Current account deficit widened to US $274.0 million from US$146.0 million as export earnings fell while imports expanded.

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Table 5: Balance of Payments (US$’million)

DOMESTIC ECONOMIC DEVELOPMENTSExternal Sector

Q1 2017 Q2 2017

Current Account Bal -146.3 -274.4

Balance on Goods 298.1 90.1

Total Exports 1,997.9 1,934.5

Copper 1,469.1 1,474.5

Cobalt 36.1 24.9

Gold 45.5 38.9

NTEs 431.3 380.4

Total Imports 1,699.7 1,844.4

Primary Income -353.6 -285.6

Secondary Income 59.6 66.9

Services Account -150.4 -145.8

Capital Acc 14.8 14.8

Financial Acc -111.5 -444.9

Net Errors/Omissions -1.2 3.5

Overall Balance 21.1 -188.8

Change in Reserve Assets and Related items -30.5 174.1

DOMESTIC ECONOMIC DEVELOPMENTSFiscal performance

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Preliminary data indicate that the fiscal deficit, on a cash basis, at 0.8% of GDP, was lower than the target 2.0% of GDP in Q2.

The shortfall in external financing led to a greater reliance on domestic financing, which rose to K3.8 billion in Q2 from K3.2 billion in Q1 2017.

DOMESTIC ECONOMIC DEVELOPMENTSInflation

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Inflation declined marginally to an average of 6.7% from 6.8% in Q1 2017.

At end-Q1, inflation was 6.8%, 0.1 percentage points higher than the end-Q1 2017 outturn of 6.7% (Figure 17).

Food inflation decelerated to 5.8% from 6.7% while non-food inflation rose to 8.0% from 6.6%.

In July 2017, overall inflation declined to 6.6% from 6.8% in June; food inflation fell to 5.3% from 5.8% while non-food inflation rose marginally to 8.1% from 8.0% over the same period.

DOMESTIC ECONOMIC DEVELOPMENTSInflation

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slowdown in overall inflation in Q2 was largely the result ofthe increase in the supply of food items and the appreciation ofthe exchange rate.

However, month-on-month inflation rose to 0.6% at end-Q2 from 0.3% at end-Q1 2017, reflecting the increase in electricity tariffs (Figure 18).

In July 2017, month-on-month inflation declined to 0.1% from 0.6% in June.

Inflation is projected to remain within the target range of 6-8% over the medium-term.

DOMESTIC ECONOMIC DEVELOPMENTSInflation

34

Figure 17: Year-on-year Inflation rate

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DOMESTIC ECONOMIC DEVELOPMENTSInflation

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Figure 18: Month-on-month Inflation rate

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GDP growth for 2016 revised to 3.6% . For 2017 and 2018, GDP growth has been revised upward to 4.3% (3.9%) and 5.1% (4.6%).

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Figure 19: GDP Growth

MACROECONOMIC OUTLOOKGDP growth

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Real GDP Growth (%) GDP Growth Projection (%)

MACROECONOMIC OUTLOOKGDP growth

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Growth is expected to emanate from:

increased agricultural output

increased generation of electricity

higher mining output

construction activities

manufacturing activity

38

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