1 Bank of Zambia MONETARY POLICY COMMITTEE STATEMENT

1 Bank of Zambia MONETARY POLICY COMMITTEE STATEMENT FOR THE SECOND QUARTER OF 2019 Governor’s Presentation to the Media August 21, 2019

PRESENTATION OUTLINE 2 1. 2. 3. 4. 5. Decision of the Monetary Policy Committee Global Economic Developments Domestic Economic Developments Macroeconomic Outlook Conclusion

MONETARY POLICY DECISION 3 At its Meeting held on 19 – 20 August 2019, Monetary Policy Committee decided to maintain the Policy Rate at 10. 25%. In arriving at the decision, the Committee took into account the following factors: • The projected inflation that will remain above the upper bound of the 6 -8% target range for much of the forecast horizon, but revert to the target range towards the end of the forecast period; • Further weakening of near-term growth prospects since the last MPC Meeting; • Liquidity challenges; and, • Risks to financial stability.

GLOBAL ECONOMIC DEVELOPMENTS 4 Global growth slowed down in Q 2 2019, with advanced economies registering weaker growth. Subdued growth was largely due to: § decline in investment and demand across advanced and emerging markets economies; § reduction in global trade due to on-going trade disputes between the USA and China; § continued Brexit-related uncertainties; and § rising geopolitical tensions in the Middle East.

GLOBAL ECONOMIC DEVELOPMENTS 5 Copper prices declined by 1. 3% in Q 2 while crude oil prices rose by 3. 5%. Table 1: Commodity Prices 2018 Q 2 2018 Q 3 2018 Q 4 2019 Q 1 2019 Q 2 Copper Price (US$/ton) 6, 881. 0 6, 118. 0 6, 164. 0 6, 226. 0 6, 144. 7 Oil Price (Dubai) (US$/barrel) 71. 8 74. 0 66. 8 63. 3 65. 5 Wheat (US$/ton) Maize Price (US$/ton) 204. 9 208. 8 221. 6 212. 6 206. 7 173. 3 157. 9 162. 8 167. 5 175. 9 Cotton (US$/kg) Sugar (US$/kg) Soya beans (US$/ton) 2. 1 0. 3 1. 91 0. 3 1. 82 0. 3 1. 80 0. 3 370. 0 374. 0 Source: World Bank 378. 0 353. 0 436. 0

DOMESTIC ECONOMIC DEVELOPMENTS Inflation 6 Figure 1: Annual Inflation (%) Table 2: Annual Inflation (%) Q 1 2019 Q 2 2019 10 Annual Overall Inflation 7. 7 8. 1 9 Food Inflation 8. 0 8. 9 Non-Food Inflation 7. 4 7. 3 Mar 2019 Jun 2019 Annual Overall Inflation 7. 5 8. 6 8. 8 Food Inflation 8. 2 9. 3 Non-Food Inflation 6. 8 8. 0 8. 3 8 Jul 2019 7 5 4 дек-17 янв-18 фев-18 мар-18 апр-18 май-18 июн-18 июл-18 авг-18 сен-18 окт-18 ноя-18 дек-18 янв-19 фев-19 мар-19 апр-19 май-19 июн-19 июл-19 The increase in inflation was largely due to rising food prices and the pass-through from the depreciation of the Kwacha. 6 Overall Inflation Non-food inflation Inflation Upper Bound Food inflation Inflation Lower Bound Source: Central Statistical Office

DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations 7 Q 2 with the aggregate current account balance for banks declining to K 0. 9 billion from K 2. 2 billion in Q 1. � As liquidity conditions tightened, Figure 2: Bo. Z Policy Rate and Interbank Rate (%) 17, 00 15, 00 13, 00 the overnight interbank rate rose to 10. 05% from 9. 90%. 11, 00 � To keep the interbank rate within 9, 00 the Policy Rate corridor, the Bank of Zambia supplied K 1. 5 billion through open market operations (Table 3). 7, 00 май-17 июн-17 июл-17 авг-17 сен-17 окт-17 ноя-17 дек-17 янв-18 фев-18 мар-18 апр-18 май-18 июн-18 июл-18 авг-18 сен-18 окт-18 ноя-18 дек-18 янв-19 фев-19 мар-19 апр-19 май-19 июн-19 июл-19 авг-19 � Liquidity conditions tightened in Daily Average O/N Interbank Rate BOZ Monetary Policy Rate (Target) Source: Bank of Zambia

DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations 8 Table 3: Key Liquidity Influences (K’billion) 2018 Q 3 2018 Q 4 2019 Q 1 2019 Q 2 1. 1 2. 5 1. 4 2. 2 Net Govt spending -0. 9 -0. 1 -3. 8 -4. 2 Bo. Z FX influence 1. 0 0. 4 1. 3 1. 9 CIC 0. 2 -0. 7 1. 0 -1. 2 Change in SR deposits -1. 0 -0. 5 0. 2 OLF -0. 7 -0. 6 -0. 1 0. 0 2. 2 0. 4 2. 4 0. 0 Open market operations 0. 4 0. 0 1. 5 Miscellaneous 0. 2 0. 6 0. 2 0. 4 Closing balance 2. 5 1. 4 2. 2 0. 9 Opening balance Net Government influence securities Source: Bank of Zambia

DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market 9 Demand for Government securities declined as liquidity conditions remained tight Table 4: Government Securities Auctions Amount on Offer Amount Received Subscription Rate (%) 2019 Q 1 5. 7 5. 2 91 2019 Q 2 6. 7 5. 3 79 2019 Q 1 1. 7 0. 5 29 2019 Q 2 3. 3 0. 5 15 T-bills Government Bonds Source: Bank of Zambia

DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market 10 Despite a fall in demand, a surplus of K 0. 7 billion was raised in Q 2 compared to a deficit of K 0. 9 billion in Q 1. Consequently, the outstanding stock of Government securities (at face value) rose by 3. 5% to K 60. 2 billion. Figure 3: Government Securities (K’billion) Figure 4: Govt. Securities Holdings (K’billion) 70 9, 00 7, 8 8, 00 60 6, 4 6, 0 6, 2 5, 9 6, 00 5, 4 6, 4 5, 8 5, 4 5, 3 6, 0 50 5, 4 5, 2 4, 7 5, 00 24, 2 28, 2 30, 6 32, 6 19, 8 21, 1 20, 2 20, 3 19, 2 17, 5 18, 6 18, 2 20, 1 MMM-yy MMM-yy 30 40, 2 MMM-yy 2, 4 40, 0 MMM-yy 3, 00 39, 8 37, 2 MMM-yy 40 4, 00 MMM-yy 7, 00 22, 2 2, 00 1, 00 0, 4 0, 7 0, 5 0, 3 - 20 10 (1, 00) -1, 1 (2, 00) -0, 9 Q'4 2017 Q'1 2018 Q'2 2018 Q'3 2018 Q'4 2018 Q'1 2019 Q'2 2019 Funds Raised Maturities 0 Surplus/Deficit T-bills Source: Bank of Zambia Bonds

DOMESTIC ECONOMIC DEVELOPMENTS Government Securities Market 11 Yield rates on Treasury bills rose to 24. 3% from 22. 6% in Q 1 Government bonds yield rates increased to 29. 6% from 27. 4%. Figure 5: Government securities yield rates (%) 32, 0 30, 0 28, 0 26, 0 24, 0 22, 0 20, 0 18, 0 16, 0 T-bills Yield Rate Bond Yield Rate Source: Bank of Zambia июн-19 мар-19 дек-18 сен-18 июн-18 мар-18 дек-17 сен-17 июн-17 мар-17 дек-16 12, 0 сен-16 14, 0 июн-16 The increase was largely attributed to tight liquidity conditions.

DOMESTIC ECONOMIC DEVELOPMENTS Banks’ Nominal Interest Rates 12 Lending rates on new large Kwacha loans widened to a range of 11. 5% 46. 0% from 10. 3% - 34. 5% in Q 1 2019. Savings rates generally increased, with the 180 -day deposit rate rising to 10. 1% from 9. 8% in March. The rise in interest rates followed an upward adjustment in the Policy Rate in May and tight liquidity conditions. Figure 6: Nominal Interest Rates (%) 30 25 20 15 10 5 дек-13 мар-14 июн-14 сен-14 дек-14 мар-15 июн-15 сен-15 дек-15 мар-16 июн-16 сен-16 дек-16 мар-17 июн-17 сен-17 дек-17 мар-18 июн-18 сен-18 дек-18 мар-19 июн-19 Commercial banks’ nominal lending rate rose to 25. 4% in June 2019 from 24. 6% in March. Lending Rate Interbank Rate Policy Rate OLF rate Source: Bank of Zambia

DOMESTIC ECONOMIC DEVELOPMENTS Domestic Credit 13 Growth in total domestic credit was on account of increased lending to Government. Slow down in credit growth to the private sector is a reflection of tight credit conditions. Figure 7: Contribution to Credit Growth (Y-o-Y, Percentage) 35, 0 30, 0 25, 0 20, 0 15, 0 10, 0 5, 0 0, 0 -5, 0 -10, 0 MMM-yy MMM-yy MMM-yy MMM-yy MMM-yy MMM-yy MMM-yy Although growth in total domestic credit growth increased to 20% from 17. 9% y-o-y, growth in credit to the private sector slowed down to 21. 4% from 22. 5% y-o-y. Gross Claims on C. Govt Public enterprises Private enterprises Households Source: Bank of Zambia

DOMESTIC ECONOMIC DEVELOPMENTS Money Supply 14 Figure 8: Money Supply 30 60 25 15 40 10 30 5 20 0 10 -5 Broad Money (M 3) июн-19 мар-19 дек-18 сен-18 июн-18 мар-18 дек-17 сен-17 июн-17 мар-17 -10 дек-16 0 Y/Y Growth Rate (RHS) Source: Bank of Zambia Percent (%) 20 50 K, billion Money supply (M 3) growth slowed down to 15. 4%, year-on-year, from 17. 6% the previous quarter, largely due to the decline in foreign currency deposits. 70

DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market 15 In Q 2, the Kwacha depreciated against all major trading partner currencies. Figure 9: Exchange rate developments 20 1, 00 19 Table 5: Exchange rate developments Period ZMW/USD ZMW/GBP ZMW/EUR ZMW/ZAR 18 0, 90 17 16 Q 1 11. 96 15. 57 13. 59 0. 85 Q 2 12. 89 16. 54 14. 47 0. 90 0, 80 15 14 0, 70 13 % chg 7. 7 6. 2 6. 5 4. 8 12 0, 60 11 USD/ZMW GBP/ZMW EUR/ZMW ZAR/ZMW(RHS) Source: Bank of Zambia 16 -авг-19 27 -июл-19 17 -июн-19 28 -май-19 18 -апр-19 29 -мар-19 17 -фев-19 28 -янв-19 19 -дек-18 29 -ноя-18 20 -окт-18 30 -сен-18 10 10 -сен-18 Elevated demand related to petroleum imports, a stronger US dollar, and negative market sentiments arising from credit rating downgrades were the major drivers. 0, 50

DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market 16 � Net supply of foreign exchange rose to US $237. 1 million from US $212. 4 million in Q 1. � In Q 2, the Bank of Zambia purchased US $140 million from the market, up from US $103 million in Q 1 2019. Figure 10: Supply and Demand (US$’million) Bureaux Public. . . Whole. . . Manuf. . . House. . . Constr. . . Agric, . . . Minin. . . Foreig. . . Other. . . (400, 00) (300, 00) (200, 00) (100, 00) 2019 Q 1 0, 00 100, 00 2019 Q 2 Source: Bank of Zambia 300, 00 400, 00 500, 00

DOMESTIC ECONOMIC DEVELOPMENTS External Sector 17 Preliminary data for Q 2 2019 indicate that the current account deficit narrowed to US $168. 0 million from US$246. 4 million in Q 1, driven by favorable performance of the primary income account which more than outweighed the reduction in the goods account. Table 6: Balance of Payments (US$’ million) Current Account Balance on Goods Total Exports Copper Cobalt Gold NTEs Total Imports Primary Income Secondary Income Services Account Capital Account Financial Account Net Errors/Omissions Overall Balance Change in Reserve Assets Q 2 2018 -295. 5 88. 0 Q 3 2018 131. 6 194. 6 Q 4 2018 112. 2 -98. 7 2, 230. 8 1, 641. 2 38. 2 37. 5 496. 3 2, 142. 9 -294. 7 67. 9 -156. 8 2, 289. 7 1, 628. 6 28. 7 31. 3 583. 5 2, 095. 1 30. 9 68. 9 -162. 8 2, 094. 6 1, 480. 9 17. 5 36. 9 541. 7 2, 193. 3 309. 3 70. 2 -168. 7 17. 2 -359. 0 24. 0 -104. 6 78. 3 16. 3 355. 0 37. 7 169. 4 -172. 0 16. 3 147. 0 -25. 0 43. 5 -72. 0 Source: Bank of Zambia Q 1 2019 -246. 4 348. 3 1, 986. 8 1, 431. 9 3. 3 43. 2 489. 7 1, 638. 5 -519. 3 71. 9 -147. 3 17. 9 -22. 6 57. 3 148. 6 Q 2 2019 -168. 0 305. 6 1, 977. 6 1, 335. 2 0. 0 46. 0 577. 6 1, 672. 0 -397. 4 75. 4 -151. 6 39. 9 -269. 8 -82. 4 -59. 3 -163. 9 44. 0

DOMESTIC ECONOMIC DEVELOPMENTS Real Sector 18 Preliminary estimates from CSO indicate a slowdown in real GDP growth to 2. 6% in Q 1 2019 compared to 2. 7% achieved in the corresponding period in 2018. Indicators of economic activity point to reduced growth in Q 2 2019. In addition, liquidity challenges and constrained aggregate demand continued to weigh on economic activity.

MACROECONOMIC OUTLOOK Inflation 19 Inflation is projected to remain above the upper bound of the 6 -8% target range for much of the forecast horizon on account of the persistent rise in food prices due to low agricultural food output. However, towards the end of the forecast horizon, inflation is expected to revert to the target range as pressure on food prices dissipates. Key upside risks to the inflation outlook include: § persistent drought conditions that may result in reduced domestic and regional agricultural production and lower electricity generation; § higher than programmed fiscal deficits; § elevated external debt service payments; and § weaker than projected global growth. The foregoing notwithstanding, inflationary pressures may be moderated by subdued domestic aggregate demand relatively loose global financial conditions.

MACROECONOMIC OUTLOOK Real GDP Growth 20 Real GDP growth is projected to decline to 2. 0% in 2019 from 3. 7% in 2018 (Ministry of Finance). The slowdown largely reflects the contraction in agriculture production and constrained electricity generation due to the drought. The lower than anticipated mining output due to operational challenges at some major mines is also projected to weigh on growth in 2019.

CONCLUSION 21 The MPC noted elevated inflationary pressures in Q 2, and projected inflation remaining above the upper bound of the 6 -8% target range for much of the forecast horizon, but expected to revert to the target range towards the end of the forecast horizon. Upside risks are judged to dominate the inflation outlook, and if they materialise, may lead to higher inflation outcomes. The Committee also noted, since the last MPC Meeting, the further weakening of near-term growth prospects, liquidity challenges, and risks to financial stability. Addressing large fiscal deficits, elevated debt and debt service levels, high domestic arrears and liquidity challenges remains critical for overall macroeconomic stability.

22 THANK YOU AND GOD BLESS…