1. 1 MONETARY POLICY COMMITTEE STATEMENT FOR THIRD QUARTER 2015 11 th August 2015 Bank of Zambia

2. 2 INTRODUCTION The Monetary Policy Committee met on 10 August, 2015 to review developments in the second quarter of 2015 with regard to: 1.Global economic developments 2.Conduct of monetary policy 3.Developments in the domestic economy 4.Decision on the monetary policy stance

3.  In the July WEO, global economic growth was revised downwards to 3.3% from 3.5%.  Slowdown in economic activity in Europe, China as well as emerging and developing economies accounted for the downward revision.  US economy continued to show signs of recovery.  Monetary policies remained divergent during the review period:  the US and the UK are expected to start raising interest rates  Other advanced economies are expected to maintain accommodative policies. 3 GLOBAL ECONOMIC DEVELOPMENTS

4.  Commodity prices continued to decline on account of subdued global demand and excess supply.  The average copper price declined to US $5,833.0 per metric tonne from US $5,940 in the first quarter of 2015.  Average price of crude oil also declined to US $61.3 per barrel from US $63.7 during the same period. 4 GLOBAL ECONOMIC DEVELOPMENTS

5. Monetary Policy  Monetary policy remained focused on the achievement of the inflation target of 7.0% for 2015.  During the second quarter, monetary policy was further tightened through an increase in the Statutory Reserve ratio to 18.0% from 14.0%.  This measure was aimed at addressing exchange rate volatility, induced by the deteriorating external environment and domestic factors.  The Bank also continued to manage liquidity conditions in the market by ensuring that the interbank rate remained close to the Policy Rate (see Figure 1 below). DEVELOPMENTS IN THE DOMESTIC ECONOMY

6.  Due to tight liquidity conditions, the weighted average interbank rate rose during the quarter to 14.6% from 12.9 %. DEVELOPMENTS IN THE DOMESTIC ECONOMY Figure 1: Policy Rate Corridor and Interbank Rate

7. 7 DEVELOPMENTS IN THE DOMESTIC ECONOMY ◦ As a result of tight liquidity conditions, the Bank injected liquidity to ensure the interbank rate was consistent with the BoZ policy rate corridor. ◦ Banks also relied on the Overnight Lending Facility for adjustment funds. Figure 2Figure 3

8.  Demand for Government securities remained weak due to tight liquidity conditions.  The subscription rate on Treasury bills auctions declined to an average of 42.0% from 68.0% in the first quarter.  Subscription on Government bonds auctions also declined to an average of 42.0% from 60.0% over the same period.  Consequently, yield rates on Government securities rose, with the weighted average Treasury bills yield rate increasing to 21.2% from 19.6%, while the composite bond yield rate increased to 23.8% from 21.1%. DEVELOPMENTS IN THE DOMESTIC ECONOMY Government Securities Market

9. DEVELOPMENTS IN THE DOMESTIC ECONOMY Government Securities Market Figure 4Figure 5

10. 10 DEVELOPMENTS IN THE DOMESTIC ECONOMY  Foreign investments in Government securities rose as high interest rates attracted yield-seeking investors. Figure 6

11. DEVELOPMENTS IN THE DOMESTIC ECONOMY Money supply and Domestic Credit Due to tight monetary policy, money supply contracted by 1.6% during the quarter under review compared to 12.1% growth rate in the preceding quarter. In real terms, growth in money supply was 5.7% in the second quarter, up from 4.9% recorded in the first quarter of 2015. Growth in domestic credit slowed down to 1.7% in the second quarter compared to 12.8% growth rate recorded in the first quarter. In real terms, annual domestic credit growth was 40.6% compared with 5.9% in March 2015.

12. 12 Money supply and Domestic Credit Figure 7: Developments in Broad Money and Domestic Credit

13. FISCAL SECTOR DEVELOPMENTS  In his 2015 Mid-Year Economic and Budget Review Statement, the Hon. Minister of Finance indicated that due to external and domestic developments, the budget deficit was likely to be higher than initially projected in 2015.  The Minister also indicated that the Government would address revenue shortfalls and rationalise expenditures to achieve fiscal consolidation.  We welcome these actions by Government as fiscal consolidation along with monetary policy action will support macroeconomic stability and growth.

14. FOREIGN EXCHANGE MARKET  The performance of the Kwacha against major foreign currencies was mixed in the period under review.  The local currency depreciated by 5.7% and 3.7% against British Pound and Euro, respectively.  However, the Kwacha appreciated by 0.9% and 0.8% against the US dollar and South African rand.

15. 15 FOREIGN EXCHANGE MARKET Figure 8:

16. FOREIGN EXCHANGE MARKET Supply of foreign exchange continued to decline… Figure 9

17. FOREIGN EXCHANGE MARKET Commercial bank sales to the market similarly declined… Figure 10

18. FOREIGN EXCHANGE MARKET As a result, commercial banks closed with a positive net open position following a net supply of dollars from the rest of the public. Figure 11

19. 19 EXTERNAL SECTOR External sector performance continued to be unfavourable…  Overall balance of payments deficit narrowed to US $27.8 million in the second quarter from US $405.2 million in first quarter of 2015.  This followed improvements in the financial account, which moderated the effects of the unfavourable performance in the current account.  The current account deficit widened to US $305.9 million from US $83.6 million in the preceding quarter.  This is on account of unfavourable performance in the balance on goods, services, and the primary income account.  The trade account recorded a deficit of US $12.5 million compared with a surplus of US $262.2 million the previous period, following a decline in goods exports and a rise in goods imports.

20. 20 Copper export earnings edged up while earnings from cobalt and NTEs continued to decline… Cobalt export earnings declined by 60.0%, mainly on account of a 59.9% fall in export volumes. Non-traditional exports fell by 27.6% following a decline in earnings of key export of products.

21. 21 Selected indicators of economic activity showed a mixed performance for the second quarter of 2015. National Output  GDP has been revised downwards to 5.8% from 7.0%  Reflecting lower economic activity in a number of sectors, including agriculture output and mining.  The crop forecast survey for 2014/15 farming season indicates a decline in output of a number of crops.  Maize output is projected to have declined by 21.9%.  However, the food balance sheet indicates sufficient stocks for human consumption and industrial use for the 2015/2016.

22. 22 Manufacturing output was mixed... In the second quarter of 2015,  Production of soft drinks rose by 1.2%;  Production of clear beer increased by 17.5%;  Production of opaque beer increased by 7.6%;  Production of fresh milk declined by 7.7%;  Production of packaged mineral water decreased by 1.3%.

23. 23 Copper output marginally increased…  Copper production rose by 2.5% to an estimated 168,421 mt.  However, the production of gemstones declined by 62.9% to 8,057 Kgs. Figure 13

24. 24 Generation of electricity increased while the production of cement continued to decline…  On a year-to-date basis, generation of electricity was 3.7% higher during the second quarter than the amount generated over the same period in 2014.  However, production of cement was 15.1% lower in the second quarter than that produced in the preceding quarter.

25. 25 INFLATION Inflation declined marginally to 7.1% in June from 7.2% in March 2015 as both food and non-food inflation slowed down….  Non-food inflation declined to 7.0% from 7.1%.  The decline in non-food inflation was due to tight monetary policy and the second round effects of the reduction in fuel pump prices earlier in the year that were reflected in lower transportation costs.  Food inflation fell to 7.0% from 7.2% on account of:  Sales of maize grain by Food Reserve Agency (FRA) at lower than market prices and increased availability of food items.

26. 26 INFLATION Figure 15

27. MPC DECISION The MPC decided to leave the policy rate unchanged at 12.5%. In arriving at this decision, the Committee took into account the external and domestic developments discussed above. The MPC also took into account the following factors:  In the third quarter of 2015, annual inflation is projected to be slightly above the end year target of 7.0%.  However, emerging risks to the real economy arising from power rationing (load shedding) are expected to adversely impact economic growth. In this regard, external and domestic risks to inflation must be balanced against the risks of a sharper decline in economic output than is currently anticipated, given the emerging challenges in the energy sector.

28. 28  Liquidity conditions continue to be tight following the increase in the statutory reserve ratio to 18.0% from 14.0% in the second quarter. The Committee is of the view that this measure along with OMO will continue to help contain inflationary pressures. Fiscal consolidation by addressing revenue shortfalls and rationalising expenditures will help to achieve fiscal sustainability and help in lowering yield rates on government securities. This is critical to achieving a stable macroeconomic environment which will enable lower interest rates that support economic activity. MPC DECISION

29. END OF PRESENTATION… THANK YOU!!! Bank of Zambia