2/19/20201

MONETARY POLICY COMMITTEE STATEMENT FOR THEFOURTH QUARTER OF 2019

Governor’s Presentation to the Media

February 19, 2020

OUTLINE OF PRESENTATION

1. Decision of the Monetary Policy Committee

2. Inflation Outturn and Outlook

3. GDP Growth Prospects

4. Monetary Operations

5. Government Securities Market

6. Interest Rates

7. Domestic Credit

8. Money Supply

9. Fiscal Policy

10. Foreign Exchange Market

11. Global Economic Growth

12. Selected Commodity Prices

13. Current Account

14. Gross International Reserves

15. Conclusion

2/19/20202

DECISION OF THE MONETARY POLICY COMMITTEE

At its Meeting held on February 17–18, 2020, the Monetary Policy Committeedecided to maintain the Policy Rate at 11.50%.

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

Inflation is expected to remain high in the earlier part of the forecastperiod, but decline towards the upper bound of the target range thereafteras food supply improves;

Inflation could decline faster than currently projected on account of theanticipated improvement in agricultural output due to the favourablerainfall pattern observed so far during the 2019/2020 crop season;

Subdued economic activity with growth prospects remaining weak over theperiod 2020–2021;

Persistent liquidity challenges; and

Risks to financial stability.

2/19/20203

2/19/20204

INFLATION OUTTURN AND OUTLOOK

Inflationary pressures heightened further in Q4 2019, driven by a sharp increasein the prices of maize grain and its products and the depreciation of the Kwacha.

Figure 1: Inflation projections and outcomes (%)

Q4

Outcome

(Quarterly

Averages)

Q3

Outcome

(Quarterly

Averages)

Q4

End-period

Q3

End-period

Overall Inflation 11.1 9.511.7 10.5

Food Inflation 14.0 10.7 15.2 12.4

Non-Food Inflation 7.8 8.3 7.8 8.3

In January, inflation rose to 12.5% following the upward adjustment in electricitytariffs and fuel prices.

2/19/2020 5

INFLATION OUTTURN AND OUTLOOKFigure 2: Inflation Developments, y-o-y (%)

5.0

7.0

9.0

11.0

13.0

15.0

Dec

-18

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Overall Inflation Food inflation Non-food inflation

Source: Zambia Statistics Agency (ZSA)

2/19/2020 6

INFLATION OUTTURN AND OUTLOOK

Inflation is projected to remain elevated in the earlier part of the forecastperiod and decline thereafter towards the upper bound of the target range.

Upside risks to the inflation outlook include:

• Further increase in maize grain prices;

• Slow progress on fiscal consolidation; and

• Second round effects of the increases in electricity tariffs and fuel prices.

In Q4 2019, indicators of economic activity suggest further slowdown in growth due to contraction in mining output, electricity generation, cement production and consumer spending.

Growth is estimated at 2.0% in 2019, down from 4.0% in 2018.

In 2020, growth is projected to pick-up to 3.0% and further rise to 3.7% in 2021.

The projected growth is premised on expected improved performance in agricultural and mining output, as well as electricity generation.

Figure 3: Annual Real GDP – Actual and Forecast (%) 2010-2021

REAL GDP GROWTH

2/19/20207

5.6

7.6

5.1

4.7

2.9

3.83.5

4.0

2.0

3.0

3.7

5.3

1.0

3.0

5.0

7.0

9.0

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

e

20

20

f

20

21

f

Real GDP Growth (%) Growth projections (%)

Average 2010 - 18

MONETARY OPERATIONS

In November 2019, the Policy Rate was increased to 11.5% from10.25%.

In December 2019, the statutory reserve ratio was increased to 9.0%from 5.0%, and the period of compliance on statutory reserverequirement reduced to daily from weekly.

These measures were aimed at addressing emerging exchange ratepressures in order to rein in inflationary pressures.

The average overnight interbank rate rose to an average of 11.44% inQ4 2019 from 10.76% in Q3 2019, but remained broadly within thePolicy Rate Corridor of 10.50% - 12.50%.

The interbank rate was consistently around the upper bound of thecorridor due to tight liquidity conditions.

2/19/20208

MONETARY OPERATIONS

2/19/20209

Figure 4: Interbank Rate and BoZ Policy Rate (%)

7.00

9.00

11.00

13.00

De

c-1

7

Fe

b-1

8

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

De

c-1

8

Fe

b-1

9

Ap

r-1

9

Jun

-19

Au

g-1

9

Oct

-19

De

c-1

9

Fe

b-2

0

Policy Band Daily Average O/N Interbank Rate BOZ Monetary Policy Rate (Target)

MONETARY OPERATIONS

2/19/202010

Figure 5: Liquidity Influences (K’ billion)

Q1 2019 Q2 2019 Q3 2019 Q4 2019

Opening balance 1.4 2.2 0.9 1.8

Net Govt. spending -3.8 -4.2 -2.7 -1.1

BoZ FX influence 1.3 1.9 4.1 0.1

CIC 1.0 -1.2 0.0 -0.3

Change in SR deposits -0.5 0.2 -0.5 -1.0

OLF -0.1 0.0 0.6 0.1

Net Government securities

influence

2.4 0.0 1.0 2.4

Open market operations 0.0 1.5 -1.50.0

Miscellaneous Transactions 0.2 0.4 0.2 0.0

Closing balance 2.2 0.9 1.8 2.0

The banks’ aggregate current account balance rose slightly mainly due to net Government maturities.

GOVERNMENT SECURITIES MARKET

Demand for Government securities improved in Q4 2019, but remained subduedwith respect to financing needs.

2/19/202011

Figure 6: Demand for Govt. Securities (K’ bn) Figure 7: Funds raised and maturities

Amount on

Offer

Amount

Received

Subscription

Rate (%)

T-bills

2019Q3 6.7 5.0 75

2019Q4 5.7 5.2 91

Bonds

2019Q3 1.7 0.6 35

2019Q4 3.3 1.4 42

5.8

5.25.4

5.0

6.1

5.4

6.0

4.75.0

6.2

0.5

-0.9

0.7

0.0

-0.1

(2.0)

(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Q'4 2018 Q'1 2019 Q'2 2019 Q'3 2019 Q'4 2019

K' B

illi

on

s

Funds Raised Maturities Surplus/Deficit

GOVERNMENT SECURITIES MARKET

The stock of outstanding Government securities rose to K80.2 billion from K72.3billion mainly on account of issuances of securities through private placements.

Non-resident investor holdings of Government securities rose by 18.9% to K8.8billion (11% of the total stock).

2/19/202012

Figure 9: Holdings of Government Securities by Non-Residents (K’ bln)

0.1 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0

1.8

2.8

6.66.9

7.5 7.6

8.4 8.5 8.88.5

8.0

8.78.2

7.4

8.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jun

-16

Sep-1

6

Dec-1

6

Mar-1

7

Jun

-17

Sep-1

7

Dec-1

7

Mar-1

8

Jun

-18

Sep-1

8

Dec-1

8

Mar-1

9

Jun

-19

Sep-1

9

Dec-1

9

T-bills Bonds

20.2 20.3 19.2 17.5 18.6 18.2 20.1 20.4 20.9

28.2 30.6 32.6 37.239.8 40.0

40.2

51.959.4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

T-bills Bonds

Figure 8: Govt Securities Holdings (K ’bln)

Interest rates remain high, reflecting elevated Government financing needs and tight liquidity conditions.

Yield rates on Treasury bills and Government bonds at 25.2% and 31.1% were relatively unchanged in Q4 2019 from 25.1% and 30.5% in Q3 2019, respectively.

Commercial banks’ average lending rate rose to 28.0% in December 2019 from 26.1% in September 2019.

Savings rates for 180-day deposits rose to 10.1% in December 2019 from 9.9% in September 2019.

Figure 10: Nominal Interest Rates (%)

INTEREST RATES

2/19/202013

5

10

15

20

25

30

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Average Lending Rate Policy Rate

Interbank Rate Weighted Avg TB Rate

Composite Bond rate

Figure 11: Contribution to Y/Y Domestic Credit growth

In nominal terms, growth of credit tothe private sector rose to 17.2% inQ4 2019 from 8.2% in Q3 2019.

The increase in credit growth to theprivate sector was driven by highdemand for working capital by firmsto bridge the liquidity gap created bydelayed payment for goods andservices supplied to Government.

Credit to Government also grew to17.2% from 10.8% mainly in form ofGovernment securities to meetfinancing needs.

DOMESTIC CREDIT

2/19/202014

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Public enterprisesGross Claims on Central GovernmentNBFIsHouseholdsPrivate enterprises Gross Domestic Credit Growth (RHS)

Figure 12: Money Supply Growth

Money supply growth rose to12.5%, y-o-y, in December 2019from 6.0% in September 2019.

The growth in money supply wasmainly on account of theexpansion in domestic credit toGovernment.

MONEY SUPPLY

2/19/202015

-10.0

-5.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Dec

-14

Mar

-15

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Y/Y Growth Rate Q/Q Growth rate

Preliminary estimates indicate a cash fiscal deficit of 8.2% of GDP in2019 against a budget target of 6.5%.

The outturn largely reflects higher than programmed spending oncapital projects and the Farmer Input Support Programme, as well asexternal debt service payments. The depreciation of the Kwacha againstthe US dollar compounded expenditure pressures.

The continued accumulation of domestic arrears is constrainingworking capital for the private sector and pose risks to the stability ofthe financial sector through high non-performing loans.

Effective and sustained implementation of fiscal adjustment measurestherefore remains critical to restoring macroeconomic stability as wellas promoting robust and sustained growth.

FISCAL POLICY

2/19/202016

FOREIGN EXCHANGE MARKET

2/19/202017

The Kwacha depreciated by 6.8% against the US dollar to a quarterlyaverage of K13.86 on account of subdued supply of foreign exchangeamidst increased demand for the importation of farming inputs,petroleum products and electricity.

Pressure on the Kwacha mounted towards the end of November and inDecember resulting in the Kwacha reaching the K14 and K15 levels,respectively. To moderate exchange rate pressures, the Central Bankraised the statutory reserve ratio to 9.0% from 5.0% and changedcompliance of the statutory reserve requirement to daily from weekly.

Since then, the Kwacha has stabilised around K14.70 against the USdollar.

FOREIGN EXCHANGE MARKET

2/19/202018

Figure 14: Nominal Exchange Rates

0.40

0.60

0.80

1.00

1.20

1.40

11

12

13

14

15

16

17

18

19

20

21

1-Dec-1

8

29-Dec-18

26-Jan

-19

23-Feb

-19

23-M

ar-19

20-Apr-19

18-M

ay-19

15-Ju

n-19

13-Ju

l-19

10-Aug-1

9

7-Sep

-19

5-Oct-1

9

2-Nov-1

9

30-Nov-1

9

28-Dec-19

25-Jan

-20

ZMW/USD ZMW/GBP

ZMW/EUR ZMW/ZAR(RHS)

Period ZMW/USD

ZMW/GBP

ZMW/EUR

ZMW/ZAR

Q312.97 15.98 14.41 0.88

Q413.86 17.84 15.34 0.94

% Chg 6.8 11.6 6.4 6.4

Figure 13: Quarterly Average Exchange Rates

FOREIGN EXCHANGE MARKET

2/19/202019

Figure 15: Foreign Exchange Net Supply by Sector (US$’)

Demand for foreign exchange by the public sector rose in Q4 2019. Mining sector remains the major source of foreign exchange.

(500.00) (300.00) (100.00) 100.00 300.00 500.00

Other Businesses

Foreign Financials

Mining and quarrying

Agric, hunting and forestry

Construction

Households

Manufacturing

Wholesale and retail trade

Public administration

Bureaux

2018 Q4 2019 Q3 2019 Q4

GLOBAL ECONOMIC GROWTH

The global economy is estimated to have grown by 2.9% in 2019, downfrom 3.6% in 2018, reflecting: Trade policy uncertainty; Geo-political tensions; and Weather related disasters.

In 2020 and 2021, growth is projected at 3.3% and 3.4% , respectively,supported by:

Reduced uncertainty relating to trade tensions; Recovery in manufacturing, business confidence, investment and global trade;

and Loose monetary policy stance adopted by central banks across the regions.

Downside risks to growth include:

Possibility of a re-escalation of trade tensions; Renewed geopolitical tensions in the Middle East; Lower commodity prices; and Recent outbreak of the Coronavirus (COVID-19).

2/19/202020

SELECTED COMMODITY PRICES

2/19/202021

Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019

Copper Price

(US$/ton) 6,118.0 6,164.0 6,226.0 6,113.0 5,803.0 5,898.0

Oil Price (Dubai)

(US$/barrel) 74.0 66.8 63.4 67.0 60.9 61.4

Wheat (US$/ton) 208.8 209.4 211.5 201.7 189.0 204.5

Maize Price

(US$/ton) 157.9 162.8 167.5 175.9 170.1 166.8

Cotton (US$/kg) 2.1 1.9 1.8 1.8 1.6 1.7

Sugar (US$/kg) 0.3 0.3 0.3 0.3 0.3 0.3

Soya beans

(US$/ton) 370.0 374.0 377.0 353.0 366.0 378.0

Figure 16: Commodity Prices

Both copper and crude oil prices rose in Q4 2019 by 1.6% and 0.8%, respectively.

In Q4 2019, the current account surplus expanded to US$166.1 million (0.7% of GDP) from US$76.9 million (0.3% of GDP) in Q3 2019 as net exports of goods improved. Exports increased by 11.9% while imports contracted by 3.0%.

For 2019, current account surplus was US$241.6 million (1.0% of GDP) against a deficit of US$341.5 million in 2018 (1.3% of GDP).

Figure 17: Balance of Payments (Quarterly Change - US$ million)

CURRENT ACCOUNT DEVELOPMENTS

2/19/202022

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019

Current Account Balance 112.2 -5.0 3.6 76.9 166.1

Balance on Goods -98.7 348.3 281.7 92.4 238.4

Total Goods Exports 2,094.6 1,926.6 1,884.3 1,612.3 1,804.9

Copper 1,480.9 1,431.9 1,320.3 1,013.7 1,228.6

Cobalt 17.5 3.3 0.0 0.0 39.4

Gold 36.9 43.2 46.0 50.1 57.1

NTEs 541.7 429.4 499.2 529.7 461.1

Total Imports 2,193.3 1,638.5 1,679.2 1,615.01 1,566.53

Primary Income 309.3 -225.2 -131.8 100.3 -41.5

Secondary Income 70.2 79.2 83.7 84.8 83.2

Services Account -168.7 -147.2 -153.4 -105.6 -113.9

Capital Account 16.3 17.9 39.9 19.5 19.3

Financial Account 112.5 157.5 -3.7 19.8 290.1

Net Errors/Omissions -59.5 -16.7 11.5 -0.9 29.2

Overall Balance 43.5 161.3 -58.7 -75.6 75.5

Change in Reserve Assets -72.0 -163.9 31.8 73.1 -87.6

Figure 18: Gross International Reserves (US$ mln)

At end-December 2019, GrossInternational Reserves declinedslightly to US$1.45 billion(equivalent to 2.1 months of importcover - this followed downwardrevision to projections of importsto reflect subdued economicactivity) from US$1.48 billion(equivalent to 1.8 months of importcover) at end-September 2019.

Relative stability in foreignreserves was largely due to Bank ofZambia net purchase of US$812million, of which US$285 millionwere mineral royalties.

GROSS INTERNATIONAL RESERVES

2/19/202023

0

0.5

1

1.5

2

2.5

3

3.5

4

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

Dec

-15

Sep

-16

Jun

-17

Mar

-18

Dec

-18

Jun

-19

Sep

-19

Dec

-19

Gross International Reserves(LHS) US $ millions

Months of import cover for GIR (RHS)

CONCLUSION

2/19/202024

The MPC held the Policy Rate at 11.50%. In arriving at the decision, the Committee took intoaccount:

• Expected persistence in inflation in the earlier part of the forecast period and thedecline in inflation toward the upper bound of the target range thereafter as food supplyimproves;

• The possibility of faster decline in inflation than currently projected on account of theanticipated improvement in agricultural output due to the favourable rainfall patternobserved so far during the 2019/2020 crop season;

• Continued weak economic activity and persistent liquidity challenges, which continue topose risks to financial stability; and

• the need to allow measures effected in the fourth quarter of 2019 to take effect.

The Committee reiterates the need to implement effective and sustained fiscal andstructural adjustment measures to address elevated debt levels, debt service, rapidaccumulation of arrears and liquidity challenges in order to restore macroeconomicstability as well as promote robust and sustained economic growth.

THANK YOU

GOD BLESS…

2/19/202025