1. MONETARY POLICY COMMITTEE STATEMENT FOR THIRD QUARTER 2018
Governor’s Presentation to the Media
21st November, 2018
Bank of Zambia

2. INTRODUCTION The presentation is structured as follows:
Decision of the Monetary Policy Committee
Overview
Global economic developments
Domestic economic developments
Macroeconomic outlook
Conclusion

3. MONETARY POLICY DECISION
At its Meeting held on 19 – 20 November 2018, Monetary Policy Committee decided to maintain the Policy Rate at 9.75%.
In arriving at the decision, the Committee took into account the following factors:
Inflation projections which indicate that inflation will remain outside the upper bound of the 6-8% target range in the earlier part of the forecast period, but trend into the target range thereafter;
Continued low economic growth, with heightened downside risks;
Low private sector credit growth, though picking up;

4. MONETARY POLICY DECISION
Sustained high fiscal deficits, rising public debt and external debt service payments; and
Continued fragilities in the financial sector as reflected in high non-performing loans.

5. OVERVIEW
Inflation averaged 7.9% in the third quarter, up from an average of 7.5% in the second quarter.
Reduced supply of selected food items and the depreciation of the exchange rate of the Kwacha against the US dollar were the main reasons for the increase in inflation.
In October, inflation rose to 8.3% from 7.9% in September 2018, driven by the increase in fuel pump prices.
Figure 1: Inflation (Annual Change, %)
Source: Central Statistical Office and Bank of Zambia

6. Figure 2: BOZ Policy Rate and the Interbank rate (%)
OVERVIEW
The overnight average interbank rate was contained within the Policy Rate corridor and closed the quarter at an average of 9.73%, close to the Policy Rate of 9.75%.
Figure 2: BOZ Policy Rate and the Interbank rate (%)
Source: Bank of Zambia

7. Figure 3: Exchange rate developments
OVERVIEW
The Kwacha depreciated against the US dollar and the Euro, but appreciated against the British pound and South African rand.
Figure 3: Exchange rate developments
Source: Bank of Zambia

8. GLOBAL ECONOMIC DEVELOPMENTS
Global growth momentum was maintained in the third quarter, but downside risks appear to have increased.
In 2018 and 2019, the global growth was revised downwards to 3.7% from the previous 3.9% for both years (WEO, October 2018).
Underlying global growth was largely:
continued growth in the United States on account of fiscal stimulus;
strong growth in some oil exporting emerging market economies; and
accommodative monetary policy in most major central banks.

9. GLOBAL ECONOMIC DEVELOPMENTS
Commodity prices were mixed in the third quarter. Copper prices declined by a further 6.8%, while crude oil prices increased by 3.4%.
Table 1: Commodity Prices
Source: World Bank

10. DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations
Monetary policy continued to focus on keeping inflation within the 6-8% target range.
In terms of monetary operations, the Bank continued to keep the interbank rate close to 9.75%.
Consistent with the policy stance, the average overnight interbank rate remained within the Policy Rate corridor, closing the quarter at an average of 9.73%.
During the quarter, market liquidity rose to K2.5 billion from K1.1 billion mainly on account of:
Net Government securities maturities; and
BoZ foreign exchange purchases for foreign reserves build-up (Table 2).

11. DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations
Key Liquidity Influences (K ’billion)
DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations
Table 2: Key Liquidity Influences (K’billion)
2017 Q4
2018 Q1
2018 Q2
2018 Q3
Opening balance
0.7
1.4
0.8
1.1
Net Govt. spending
2.6
1.9
-0.9
BoZ FX influence
1.0
0.6
Currency in Circulation
-0.4
-1.0
0.2
Change in SR deposits
-2.2
-1.8
-4.2
Overnight Lending Facility
-1.9
-0.7
Net Government securities influence
-0.5
2.3
2.2
Open market operations
0.4
Miscellaneous
0.0
Closing balance
2.5
Source: Bank of Zambia

12. DOMESTIC ECONOMIC DEVELOPMENTS Money Market
The volume of funds traded in the interbank market increased to K45.4 billion from K42.5 billion as liquidity continued to be concentrated in a few banks.
Figure 5: Interbank Trading Activity (K’billion)
Source: Bank of Zambia

13. DOMESTIC ECONOMIC DEVELOPMENTS Money Market
Due to continued liquidity concentration, the volume of funds accessed through Overnight Lending Facility rose to K10.5 billion from K4.2 billion.
Figure 6: Volume of Funds accessed at the OLF (K’billion)
Source: Bank of Zambia

14. DOMESTIC ECONOMIC DEVELOPMENTS Government securities market
Demand for Treasury bills improved slightly while that for Government bonds declined further in the third quarter.
Table 3: Government Securities Auctions
Amount
on offer
Amount Received
Subscription
rate (%)
Treasury bills  
2018Q2
6.7
2.9
43.0
2018Q3
4.5
68.0
Government bonds 
3.3
4.1
124.0
1.7
0.5
32.0
Source: Bank of Zambia

15. DOMESTIC ECONOMIC DEVELOPMENTS Government securities market
Total funds raised through Government Securities auctions declined further to K5.3 billion (at cost) from K6.2 billion (at cost). With maturities worth K6.4 billion, a deficit of K1.1 billion was recorded.
Figure 6: Government Securities
Source: Bank of Zambia

16. DOMESTIC ECONOMIC DEVELOPMENTS Government securities market
The outstanding stock of Government securities increased to K54.7 billion from K51.8 billion due to the rise in outstanding bonds.
Figure 7: Total Outstanding Government Securities (K’billion)
Source: Bank of Zambia

17. DOMESTIC ECONOMIC DEVELOPMENTS Government securities market
Non-resident investor holdings of Government Securities declined to K8.6 billion from K8.9 billion as demand for bonds fell.
Figure 8: Non-resident Holdings of Government Securities (K’billion)
Source: Bank of Zambia

18. DOMESTIC ECONOMIC DEVELOPMENTS Government securities market
Yield rates on Government securities rose, with the weighted average Treasury bills rate increasing to 18.45% from 16.96% while the composite yield rate on Government bonds increased to 19.64% from 18.07%.
Figure 9: Government securities yield rates (%)
Source: Bank of Zambia

19. DOMESTIC ECONOMIC DEVELOPMENTS Banks’ Nominal Interest Rates
Figure 10: Nominal Interest Rates (%)
In the third quarter, commercial banks average lending rate declined to 23.0% from 24.3% in June. The accommodative monetary policy stance provided an opportunity for banks to lower lending rates. However, the average savings rate for 180-day deposits remained unchanged at 8.3%.
Source: Bank of Zambia

20. DOMESTIC ECONOMIC DEVELOPMENTS Banks’ Nominal Interest Rates
The average lending rate, excluding banks with the highest and lowest lending rates, declined further to 21.0% from 21.7%.
Figure 11: Nominal Interest Rates (%)
Source: Bank of Zambia

21. DOMESTIC ECONOMIC DEVELOPMENTS Credit growth and money supply
Total credit grew by 9.9%, up from a growth of 2.9% as lending to private enterprises and households increased (Table 4). Excluding Government, credit grew by 14.3% compared to a growth of 5.0% in the second quarter. However, growth in credit to Government rose to 6.2% in the third quarter from 1.3% in the preceding quarter. Credit growth to private enterprises increased to 19.2% from 4.7% while growth in credit to households rose to 7.5% from 5.3%. Sustaining high growth in credit to private enterprises is critical to supporting strong private sector-led economic activity.

22. DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit
Table 4: Domestic Credit Growth, Quarterly percent changes)
Percent change
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Total Credit (Incl.Govt)
6.0
4.9
0.3
2.9
9.9
Total -(Excl. Govt)
3.0
4.5
-1.3
5.0
14.3
Public Enterprises
89.3
-15.6
-18.7
9.7
8.6
Government
8.9
5.3
1.7
1.3
6.2
Private Enterprises
-2.2
8.3
-3.5
4.7
19.2
Households
7.6
3.1
7.5
NBFIs
49.4
-30.1
-13.6
1.4
20.4
Source: Bank of Zambia

23. DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit
Growth in money supply increased to 13.0% from 7.3% in the second quarter.
Growth was due to increase in Kwacha deposits and valuation effects on foreign currency deposits following the depreciation of the Kwacha against the US dollar.
On an annual basis, money supply grew by 24.7%, 9.1 percentage points higher than in the second quarter.
Continued high money supply growth rates are important to supporting sustained economic activity.
Figure 11: Money Supply
Source: Bank of Zambia

24. DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market
Following relative stability for most of the year to August, the Kwacha depreciated by 19.5% against the US dollar in September.
For the quarter as a whole, the Kwacha depreciated against the US dollar by 4.2%, up from a depreciation of 1.4% in the second quarter.
Sustained demand for foreign exchange, particularly for procurement of petroleum products, a strong US dollar and negative market sentiment following credit rating downgrades explains the depreciation of the Kwacha/US dollar exchange rate.
The Kwacha also depreciate against the Euro by 1.7%, but appreciated by 0.1% and 6.4% against the British pound and South African rand, respectively.
Figure 12: Exchange rate developments
Source: Bank of Zambia

25. DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market
Source: Bank of Zambia

26. DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market
Net supply of foreign exchange reduced to US $280.4 million from a net US $334.2 million in the second quarter. Mining firms continue to dominate supply, while the public administration continued to dominate the demand-side.
Figure 14: Supply and Demand (US$’million)
Source: Bank of Zambia

27. DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity
Preliminary estimates indicate a year-on-year real GDP growth of 3.3% the first half of 2018, up from 3.1% in the corresponding period of 2017.
Selected indicators of economic activity point to improved performance, with copper production increasing by 4.4% to 220,130.7 metric tons (mt) in the third quarter;
On a year-to-date basis, copper production at 631,359.4 mt in September 2018 was 10.4% higher than produced in the corresponding period of 2017.
Production of cement grew by 24.2% to 628,293.6 mt in the third quarter, supported by increased demand for construction activities.

28. DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity
Electricity generation increased by 5.9% in the quarter under review to 3,656.1 GWh; During the year to September 2018, electricity generation was 10.4% higher than produced in the corresponding period of 2017.
Figure 15: Electricity Generation
Source: Zambia Electricity Supply Corporation

29. DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity
In the manufacturing sector, the performance was mixed during the third quarter.
Table 5: Selected Manufactured Products (Quarterly, Metric Tons)
Product
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q/Q % change
Chemicals, Rubber & Plastics
733
591
576
723
715
-1.1
Leather
8,001
8,063
7,445
9,911
10,084
1.7
Basic Metals
6,822
5,949
5,200
6,900
7,835
13.5
Fabricated Metal Products
18,813
15,426
12,101
15,117
18,826
24.5
Wood & Wood Products
5,836
5,747
5,718
6,195
6,518
5.2
Paper & Paper Products
557
553
558
559
514
-8.0
Non-metallic Minerals
7,018
4,880
5,411
5,666
4,367
-22.9
Textile & Clothing
136
110
118
155
-29.2

30. DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity
Consumer spending declined by 4.7% in the third quarter compared to an increase of 4.7% in the second quarter; However, compared to the corresponding quarter in 2017, consumer spending was 1.0% higher.
Figure 16: Retail Sales (Quarterly, K’million and annual growth)
Source: Bank of Zambia

31. DOMESTIC ECONOMIC DEVELOPMENTS External Sector
Preliminary data indicate that the current account deficit narrowed by 4.4% to US $277.5 million, underpinned by an increase in the surplus on the balance on goods*.
Table 6: Balance of Payments (US$’million)
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Current Account Balance
-107.1
-240.4
-290.3
-277.5
Balance on Goods
435.3
329.9
73.6
158.5
  Total Exports
2,429.7
2,414.2
2,230.8
2,289.5
   Copper
1,864.4
1,907.6
1,641.2
1,628.6
   Cobalt
37.1
32.3
38.2
28.5
   Gold
42.2
37.5
31.3
   NTEs
475.3
414.6
496.3
583.5
Total Imports
1,994.4
2,084.3
2,157.2
2,131.0
Primary Income
-480.7
-430.4
-271.8
-338.4
Secondary Income
100.1
68.9
68.0
67.6
Services Account
-161.8
-208.8
-160.1
-165.1
Capital Account
14.8
16.3
17.2
Financial Account
-101.7
62.0
-372.4
-88.3
Net Errors/Omissions
14.0
5.0
6.9
1.8
Overall Balance
-23.5
281.1
-106.1
171.0
Change in Reserve Assets
23.5
-281.1
106.1
-171.0
Current Account Chart in Billions of US Dollars
Source: Bank of Zambia
*Trade data was revised after adjustments made to imports of cobalt ores from Congo (DR). The revised data was realigned to the International Monetary Fund’s Balance of Payments Manual 6 Standards.

32. DOMESTIC ECONOMIC DEVELOPMENTS Fiscal performance
The fiscal deficit, on a cash basis, for 2018 is estimated at around 7% of Gross Domestic Product (GDP) against the budget target of 6.1%, and the actual outturn of 7.8% of GDP in
However, as reflected in the Ministry of Finance November 2018 Statement, domestic arrears rose to K14.7 billion as at end-June 2018 from K13.9 billion in March 2018.
Speedy implementation of austerity measures outlined by Government has the potential to moderate the pressures on Government financing, private sector liquidity challenges, debt distress, inflationary pressures, and threats to the stability of the financial sector.

33. DOMESTIC ECONOMIC DEVELOPMENTS Inflation
During the quarter, inflation rose to an average of 7.9% mainly due to high food prices and the depreciation in the Kwacha exchange rate.
Inflation outcome was 0.4 percentage points higher than the average of 7.5% recorded in second quarter.
At end-September 2018, inflation was 7.9%, up from 7.4% in June (Figure 15).
Food inflation increased to an average of 8.3% from 7.0% in the second quarter.
However, non-food inflation declined to an average of 7.7% from 8.2% in the second quarter.

34. DOMESTIC ECONOMIC DEVELOPMENTS Inflation
Month-on-month inflation closed at 0.2% in September 2018, same as in June 2018 (Figure 16).
Monthly food inflation was recorded at 0.1% in September, down from 0.3% in June while monthly non-food inflation rose to 0.3% from 0.2%.
In October 2018, annual inflation rose to 8.3%, driven by non-food inflation which increased to 8.3% from 7.3% following increase in fuel prices and depreciation in the Kwacha/US dollar exchange rate; however, food inflation declined to 8.3% from 8.6%.
Monthly inflation rose to 0.7% in October 2018 on the back of the increase in both food and non-food inflation to 0.3% and 1.2% from 0.1% and 0.3%, respectively.

35. DOMESTIC ECONOMIC DEVELOPMENTS Inflation
Figure 17: Inflation Developments, y-o-y
Source: Bank of Zambia

36. DOMESTIC ECONOMIC DEVELOPMENTS Inflation
Figure 18: Inflation Developments, m-o-m
Source: Bank of Zambia

37. MACROECONOMIC OUTLOOK Real GDP growth
Real GDP growth outlook remain positive, but faces significant downside risks.
Growth expected to be driven by:
Mining;
Manufacturing;
Construction; and,
Wholesale and retail
Stable supply of electricity will support growth in these sectors.
Figure 19: Real GDP Growth (%)
Source: Ministry of Finance, Central Statistical Office

38. MACROECONOMIC OUTLOOK Inflation
Inflation is projected to remain outside the upper bound of the 6-8% target range during the first three quarters (i.e. fourth quarter 2018 to second quarter 2019) of the forecast period (i.e. fourth quarter 2018 to third quarter 2019), and trend toward the mid-point of the target range (7%) thereafter.
The inflation outlook is dominated by upside risks, which include:
tighter than expected global financial conditions;
higher than expected crude oil prices;
lower than anticipated copper prices;
higher than programmed fiscal deficits; and,
rising debt service payments.

39. CONCLUSION
The MPC observed that although inflation is projected to exceed the upper bound of the target range in the early part of the forecast period, it will return and remain within the target range in the latter part of the forecast period. The Committee also noted that growth in the economy remains low, with increased downside risks. Further, the Committee observed that sticking to the 2019 Budget and speedy implementation of the austerity measures announced by Government is critical to restoring macroeconomic stability, investor confidence and supporting economic growth.

40. CONCLUSION
High non-performing loans (NPLs) also remain a concern to the Committee given the potential to compromise the stability of the financial sector if not reduced to acceptable levels. On the whole, the Committee concluded that should inflation remain outside the upper bound of the target range for longer than projected, adjustments to the policy stance would be taken.

41. THANK YOU AND GOD BLESS…