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MONETARY POLICY COMMITTEE STATEMENT FOR

FOURTH QUARTER 2016

Governor’s Presentation to the Media

22nd February, 2017

1

INTRODUCTION

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

2

MONETARY POLICY DECISION

At the Meeting held on 20 – 21 February 2017, Monetary Policy Committee decided the following:

• Reduce the BOZ Policy Rate by 150 basis points to 14.0% from15.5%;

• Restore the Overnight Lending Facility Rate to 600 basispoints from 1,000 basis points above the Policy Rate.

• Reduce the Statutory Reserve Ratio by 250 basis points to15.5% from 18.0%; and,

3

In the November 2016 MPC Statement, Committee made acommitment that changes in the Policy Rate would be guided byinflation outcomes and forecasts as well as progress in fiscalconsolidation.

In this regard, the Committee took into account the followingfactors in arriving at the current decision:

decline in inflation to single digits, and projected to trendbelow the 2017 target of 9.0% and to be within the medium-term target range of 6-8% by end 2018;

better anchored inflation expectations given the currentrelative macroeconomic stability, return of investorconfidence and anticipated good agricultural season;

MONETARY POLICY DECISION4

relative stability in the foreign exchange market as exhibited by arelatively stable exchange rate for more than a year;

signs of recovery in the external sector as global economic growthis projected to gain momentum over the next two years;

the prevailing high lending rates, which are discouraging access to credit by the productive sector of the economy, as reflected in contraction of credit to the private sector in most of 2016;

deterioration in commercial banks’ assets, with non-performing loans rising to 10.0% in December 2016 from 7.0% in December 2015; and

sluggish economic growth over the past two years, with modest recovery projected over the next two years.

MONETARY POLICY DECISION5

In Q4, liquidity levels (excess reserves) in the market increasedfurther, pushing the average overnight interbank rate closer towardsthe Policy Rate.

OVERVIEW

Figure 1: Interest Rates and Excess Reserves

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Excess Reserves BOZ Policy Rate Interbank RateUpper-Bound OLF Rate Lower Bound

6

The Kwacha appreciated in Q4, drawing support from rising copper prices and renewed non-resident investors interest in Government securities.

OVERVIEW

0.40

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ZA

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D,

GB

P,

EU

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

Figure 2: Exchange rate developments

7

OVERVIEW

Annual inflation decline to 7.5% in December 2016 from 18.9% at end-Q3.In January 2017, inflation declined further to 7.0%.

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Overall Inflation Food inflation Non-food inflation

Figure 3: Inflation developments

8

Global growth remained subdued in Q4 as downside riskspersisted. It is estimated to have grown by 3.1% in 2016, downfrom 3.2% in 2015(IMF WEO, January 2017).

Slowdown in growth mainly reflects:

lower economic activity in advanced countries, mainly attributed to theuncertainty surrounding the impact of Brexit; and

weaker than expected economic growth in the US.

Growth was driven by emerging market and developing economies, whichgrew by 4.1% (same as in 2015).

Global commodity prices exhibited mixed performance in Q4(Table 1).

GLOBAL ECONOMIC DEVELOPMENTS

9

Table 1: Commodity Prices

Copper prices rose by 10.5%, driven by plans for fiscal stimulus forinfrastructure development in the US and pick-up in Chinese economy.

Crude oil prices rose by 10.4% on account of the agreement to reduce supplyby oil producers.

Prices for most agricultural commodities declined due to increased supply.

2016 Q3 2016 Q4

Copper Price (US$/ton) 4,778.0 5,281.0

Oil Price (Dubai) (US$/barrel) 43.4 47.9

Wheat (US$/ton) 161.1 164.3

Maize Price (US$/ton) 153.4 152.2

Cotton (US$/kg) 1.76 1.74

Sugar (US$/kg) 0.45 0.45

Soya beans (US$/ton) 417.0 412.0


10

According to the IMF WEO (January, 2017), world GDP growthis projected to expand to 3.4% in 2017 and 3.6% in 2018,premised on:

Strong growth in emerging markets and developing economies due to:

Recovery in commodity prices;

Rebalancing of the Chinese economy gaining momentum;

Normalization of economic conditions in Brazil, Nigeria and Russia; and

Increased investments supported by the US stimulus policies.


11

DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy Operations

Monetary policy operations continued to focus on reducing inflationarypressures and anchoring inflationary expectations.

Market liquidity increased further with the banks’ aggregate currentaccount almost doubling to K2.7 billion (Table 2 below).

Net Government spending and net foreign exchange purchases by theBank of Zambia boosted liquidity levels (Table 2)

With increased liquidity levels, the average overnight interbank ratetrended lower to close the Q4 at 15.8% from 16.6% at end-Q3 (Figure 1).

Notwithstanding the increase in liquidity levels, the Bank scaled downOMO, withdrawing only K1.4 billion compared to K13.5 billion in Q3(Figure 4).

12


2016Q3 2016Q4

Opening balance 0.8 1.4

Net Govt spending 0.5 4.1

BoZ FX influence 1.2 2.4

BoZ operations -0.4 -2.1

change in CIC 0.4 -0.6

change in SR deposits -0.7 -1.5

OLF -0.1 -0.01

Net Govt Sec Influence 0.4 -4.7

Open market operations -0.6 0.9

Closing balance 1.4 2.7

Table 2: Key Liquidity Influences (K’billion)

13

3.7

17.4

12.9

2.3

(3.2)

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(17.7)

(13.5)

(1.4)

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0.9

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(15.0)

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15.0

20.0

Q4'15 Q1'16 Q2'16 Q3'16 Q4'16

Maturing Term Deposits/Repos Term Deposits borrowed/ Repos entered into Net


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

14

DOMESTIC ECONOMIC DEVELOPMENTSMoney Market

32.6

46.2

33.2

26.4

17.2

10.2

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Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16

Figure 5: Interbank Trading Activity (K’billion)

Interbank trading reduced further…

15

Table 3: Government Securities Auctions

DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market

Demand for Government securities rose further, with strong participation from foreign investors.

Amount on offer

Amount Received

Subscriptionrate (%)

T-bills

2016Q3 4.2 2.6 62.0

2016Q4 5.3 5.8 109.0

Bonds

2016Q3 0.8 2.5 313.0

2016Q4 1.8 5.4 300.0

16

Funds raised from auctions amounted to K7.0 billion against thematurity of K3.4 billion, resulting in a surplus of K3.6 billion.

Figure 6: Government Securities


2.1

3.83.3

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Q'1 2016 Q'2 2016 Q'3 2016 Q'4 2016

K’Billion

Funds Raised Maturities Surplus/Deficit

17


Due to net sales, the total outstanding stock of Government securitiesincreased by 30.4% to K32.9 billion.

Figure 7: Total Outstanding Government Securities

12.9 13.4 12.8 12.1 10.9 10.9 10.513.2

11.9 12.7 12.8 12.612.7 13.5 14.8

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T-bills Bonds

18

Figure 8: Non-resident Holdings of Government Securities


Non-resident investors’ holdings of Government securities more thandoubled in Q4 to K6.6 billion from K2.9 billion in Q3

1.5 1.61.2 1.4

0.8 0.7 0.50.0 0.1 0.0

1.2 1.21.4

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T-bills Bonds

19


Yield rates on Government securities edged downwards in Q4 onthe back of improved demand for securities (Figure 9).

The weighted average Treasury bill yield rate decline to 23.2%in December 2016 from 24.2% in September 2016.

The weighted average Government bond yield rate fell to 24.6%from 25.2%.

20


Figure 9: Government securities yield rates (%)

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Average Composite Rate T-bills Average Composite rate Bonds

21

DOMESTIC ECONOMIC DEVELOPMENTSBanks’ Nominal Interest Rates

The average lending rateedged up to 29.2% in Q4from 28.9% in Q3.

Lending rates rangedfrom 10% – 41% (9.0%-40.0% in Q3);

However, savings rates onnegotiated depositsdeclined slightly (18.5%-36% in Q4; 25%-40% inQ3).

Figure 10: Nominal Interest Rates (%)

0.0

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Average lending rate Policy Rate

Interbank Rate 180-day deposit rate

22

DOMESTIC ECONOMIC DEVELOPMENTSMoney supply and credit

Money supply grewfurther by 0.8% in Q4,up from a growth rate of0.2% in Q3.

Growth mainly driven bythe Bank’s accumulationof internationalreserves.

On a year-on-year basis, money supply contracted by 11.8% in Q4 compared to 5.0% in Q3.

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M3 (K billion) LHS M3 Growth (Q/Q, %) RHSM3 Growth (Y/Y, %) RHS

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Figure 11: Money Supply

23


Growth in total credit slowed down to 1.1% in Q4 from 4.9% in Q3 (Table 4).

Excluding Government, credit contracted further by 5.4% following a 1.7% contraction in Q3.

Credit to private enterprises continued to decline, falling by 4.6% compared to a decline of 1.3% in Q3.

Possible reasons for contraction in credit growth to the private sector include:

high funding cost;

high lending rates; and

low risk appetite by banks.

24

Table 4: Credit growth


Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016

Total Credit

(Incl. Govt)-5.3 -3.8 0.7 4.9

1.1

Total -(Excl.

Govt)-1.7 1.1 -3.7 -1.7

-5.4

Public

Enterprises-12.1 -11.0 -0.3 -3.1 -9.2

Government 3.3 -11.8 9.0 15.7 10.2

Private

Enterprises-0.2 3.6 -5.2 -1.3 -4.6

Households 5.7 -2.4 -2.1 -0.9 -7.1

NBFIs 3.7 -1.8 10.3 -0.1 17.6

25

Figure 12: Exchange rate developments

DOMESTIC ECONOMIC DEVELOPMENTSForeign Exchange Market

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The Kwacha appreciated in Q4 due to increased supply of foreign exchange (Figure 12).

Supply of foreign exchange by mines and foreign financial institutions increased in Q4 relative to Q3 (Figure 13)

26

DOMESTIC ECONOMIC DEVELOPMENTSForeign Exchange Market

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

(200.0) (100.0) 0.0 100.0 200.0 300.0

Other

Foreign Financials

Mining and quarrying

Agriculture, hunting and forestry

Construction

Households

Manufacturing

Wholesale and retail trade

Public administration

2016 Q4 2016 Q3

27

In Q4, the production of copper, cement and selectedmanufactured products and electricity generation declined.

copper production declined by 3.8% to 193,667.4 metric tons due to reduced output at some mines (Figure 14); but gemstone production increased on account of high mineralisation stock.

Cement production declined by 3.7% due to temporaryshutdown of some plants for routine maintenance.

DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity

28

Figure 14: Mining Sector Output


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5,000

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Copper (MT) Gemstones (KG)-RHS

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electricity generation fell by 9.2% due to low water levels in reservoirs; imports also declined; diesel consumption picked-up

150,000

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3,500,000

2012Q2

2012Q4

2013Q2

2013Q4

2014Q2

2014Q4

2015Q2

2015Q4

2016Q2

2016Q4

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

Figure 15: Electricity Generation and Diesel Consumption


30

Consumer spending rebounded in Q4 as retail sales rose by 9.5% compared to a decline of 6% in Q3.


-10.0

-5.0

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0

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Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2015 2016

Nominal Retail Sales (K'Mn) Real Sales (K'm) YoY Real Growth (%)-RHS

Figure 16: Consumer Spending

31

The current account deficit widened to US$190.5 million from US$162.7 million due to higher imports growth relative to growth in export earnings.

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

DOMESTIC ECONOMIC DEVELOPMENTSExternal Sector

Q3 2016 Q4 2016

Curr Acc Bal -162.7 -190.5

Balance on Goods 13.9 -93.5

Total Exports 1,578.2 1,810.1

Copper 1,031.8 1,253.1

Cobalt 33.4 37.9

Gold 52.4 35.0NTEs 440.5 464.0

Total Imports 1,564.4 1,903.7

Primary Income -121.4 13.4

Secondary Income 78.4 52.6

Services Account -133.6 -163

Capital Acc 13.8 13.8

Financial Acc -10.4 -332.0

Net Errors/Omissions -0.5 -0.5

Overall Balance 139.1 -154.8

Change in Reserve Assets and Related items -143.3 131.3

32

In December 2016, the 2017 National Budget was approved byParliament.

As indicated in the November MPC Statement, the aim for 2017is to reduce the deficit to 7% of GDP. The Budget appropriatelyfocuses on addressing the challenges to fiscal sustainability,economic diversification and growth.

Effective implementation of the Budget presents a good basefor rebalancing fiscal and monetary policies going forward.

DOMESTIC ECONOMIC DEVELOPMENTSFiscal performance

33

Inflation declined to an average of 9.6% from 19.6% in Q3 2016.

At end-Q4, inflation was 7.5%, 11.4 percentage points lower than theend-Q3 outturn of 18.9% (Figure 17).

food inflation decelerated to 7.8% from 23.4% while non-foodinflation declined to 7.1% from 14.0%.

deceleration in overall inflation was mostly driven by food inflation(contributed 6.7 percentage points); non-food contributed 3.3percentage points.

DOMESTIC ECONOMIC DEVELOPMENTSInflation

34


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Overall Inflation Food inflation Non-food inflation

Figure 17: Year-on-year Inflation rate

35

Sharp decline in inflation in Q4 was mainly the result of the dissipation of the base effect.

Decline was also due to improved supply of some food items and the appreciation of the exchange rate.

However, month-on-month inflation rose in Q4, ending at 0.9% in December 2016 from 0.1% in September 2016 (Figure 18), mainly due to:

(a) seasonal pattern associated with the increase in food prices in Q4; and

(b) increase in fuel prices.


36

(1.0)

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Overall Food Non-food


Figure 18: Month-on-month Inflation rate

37

MACROECONOMIC OUTLOOKInflation

Inflation is projected to remain relatively stable in 2017,fluctuating around the 7% level and to be within the 6-8%inflation target range in 2018.

38

GDP growth projected at 3.9% for 2017 and 4.6% for 2018. In 2016, growth is estimated to be 3.4% (preliminary).

Figure 19: GDP Growth

MACROECONOMIC OUTLOOKGDP growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2011 2012 2013 2014 2015 2016* 2017f 2018f

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

39

Over the next two years, growth is expected to emanate from

agriculture

mining

recovery in energy and construction

manufacturing

accommodation and food services (tourism).

MACROECONOMIC OUTLOOKGDP growth

40

THANK YOU AND GOD BLESS…

41

powerpoint presentationtitle powerpoint presentation author francis chipimo created date 2/22/2017...

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