Bank of Zambia

MONETARY POLICY COMMITTEE STATEMENT

FOR
FIRST QUARTER 2016

Governors Presentation to the Media

12th February, 2016

1

INTRODUCTION
The Monetary Policy Committee met on 11th February, 2016. to review developments in the fourth
quarter of 2015 and decide on the monetary policy stance for the first quarter of 2016.
The structure of this presentation is as follows:
1.

Overview

2.

Global economic developments

3.

Conduct of monetary policy

4.

Developments in the domestic economy

5.

Macroeconomic outlook

6.

Decide on the monetary policy stance

2

OVERVIEW

Liquidity conditions
tightened
following
monetary
policy
measures taken to
address
rising
inflationary pressures
and
stabilize
the
exchange rate.

The
overnight
interbank rate rose
sharply above the BoZ
Policy Rate corridor
and overnight lending
rate.

OVERVIEW
The Kwacha appreciated as the foreign exchange market stabilised

GLOBAL ECONOMIC DEVELOPMENTS

IMF January 2016 WEO estimates global growth to have declined to 3.1% in 2015 from 3.4%
in 2014.
Advanced countries and the Euro area exhibited some recovery while emerging market
economies particularly China, sub-Saharan Africa (SSA) and developing economies registered
weaker growth.
The slowdown in global growth is due to:
Low commodity prices (see Table 1);
Weakening trade;
Declining capital flows;
Increased financial market volatility; and
Slow recovery in advanced economies.

GLOBAL ECONOMIC DEVELOPMENTS

Crude oil prices continued to decline, falling by 17.4% in the fourth quarter.
Copper prices also declined by 7.6%.
Some agricultural commodity prices also declined due to excess supply.

GLOBAL ECONOMIC DEVELOPMENTS

In SSA, growth is estimated to have declined to 3.5% from 5.0%

in 2014, mainly due to:
a) Declining oil and metal prices; and,
b) Depressed foreign direct investment induced by slowdown
in the Chinese economy and a stronger US dollar.

GLOBAL ECONOMIC DEVELOPMENTS

In global financial markets, SSA and Zambian Eurobond yields rose on
deteriorating fundamentals.

GLOBAL ECONOMIC DEVELOPMENTS

10

GLOBAL ECONOMIC DEVELOPMENTS

In 2016, global economic activity is projected to pick up to 3.4%,

reflecting :
Strong private consumption supported by growth in jobs
in advanced economies, particularly, the US.
Improvements in financial conditions, investment and
government spending.
Growth in most Sub-Saharan African countries is anticipated to
gradually pick up in 2016 as countries adjust to lower commodity
prices and higher borrowing costs.
11

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 1: Policy Rate Corridor and Interbank Rate

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Monetary Policy Operations
Monetary policy focused on the achievement of the inflation target of 7.0% for 2015.
During the fourth quarter, the Policy Rate was raised to 15.5% from 12.5%.
Increase in the Policy Rate was motivated by:
o Significant increase in inflation to 14.3% in October from 7.7% in September 2015
o Elevated inflation outlook for 2016.
Following a further tightening of monetary policy, which included restricting access to the
overnight lending facility (OLF) to once a week, the interbank rate rose sharply and exceeded
both the Policy Rate and the OLF rate towards the end of the quarter (see Figure 1 below).

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Money Markets
As a consequence of tight liquidity conditions, the overnight rate remained
above the Policy Rate throughout the quarter.
The Bank resisted bringing the interbank rate back into the Policy Rate
corridor as injecting liquidity into the market risked triggering volatility of
the exchange rate, and hence inflationary pressures.
The tight liquidity conditions, which were also partly the result of Bank of
Zambia providing of foreign exchange support to the market compelled banks
resort to the OLF and Rediscount window for liquidity.
Consequently, Treasury bill rediscounts and the amount of funds borrowed on
the OLF soared (see Figures 2 and 3).
14

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 2: Banks Access to OLF

Figure 3: T-bill Rediscounts

15

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 4: Interbank Bank Activity

Tight liquidity conditions

were also reflected in a
40% increase in interbank
trading to K26.4 billion as
banks looked to meet their
liquidity requirements
through the interbank
money market.

16

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Government Securities Market

Tight liquidity levels resulted in the decline in demand for Government

securities (see Figure 4a).
Investor subscription on Treasury bills dropped to an average of 32.5%
from an average of 83.0% in the previous quarter.

Similarly, investor participation in the bond auction significantly

declined to an average of 4% from 87% in third quarter.

Consequently, yield rates on Treasury bills generally declined, with

the composite rate falling to 20.7% from 21.7% (see Figure 5).

However, the composite yield rate on Government bonds rose to

25.9% from 23.4% as market players sought higher returns in light of
tight liquidity conditions.
17

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 4a: Performance of Government Securities Auctions

18

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 4b: Government Securities Yield Rates (%)

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Foreign portfolio investments in Government securities continued to decline from the
peak reached at the end of June 2015, falling 26% by end-December 2015.
Figure 5

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DEVELOPMENTS IN THE DOMESTIC ECONOMY

Foreign Exchange Market

The Kwacha appreciated as the foreign exchange market stabilised

Figure 6
Against the US Dollar, the
Kwacha appreciated by
8.6% to K10.98 at endDecember from the level
of
K13.7
at
endSeptember.
The Kwacha also firmed
against other major trading
partner currencies.

DEVELOPMENTS IN THE DOMESTIC ECONOMY

The appreciation of the Kwacha was due to monetary policy measures
undertaken by the Bank to curb volatility rapid depreciation of the Kwacha,
which included:

Increasing the Policy Rate to 15.5% from 12.5%;

Restricting access to the OLF window by banks to once per week;

BoZ provision of foreign exchange support to the market;

Publication of individual banks interbank rates to the public; and

Heightened monitoring of commercial banks activities, and strengthening

the market code of conduct.
23

DEVELOPMENTS IN THE DOMESTIC ECONOMY

As supply of foreign exchange in the market declined, commercial banks purchases of
foreign exchange fell
Figure 8: Commercial Banks Purchases of Foreign Exchange

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 9
Demand for foreign exchange from the public rose as reflected in an increase in
commercial banks net sales to the public

25

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Money supply and Domestic Credit

Money supply growth slowed down to 1.5% from on a quarter by quarter

basis from a growth of 26.3% in the third quarter (see Figure 11).

The slowdown largely reflects the reduction in foreign currency deposits

and the appreciation of the Kwacha.

Domestic credit contracted by 5.2% in the fourth quarter compared to a

growth of 2.7% in the third quarter.
The contraction reflected tighter credit conditions following a hike in the
Policy Rate coupled with tight liquidity (see Figure 11).

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 10: Developments in Money Supply

27

DEVELOPMENTS IN THE DOMESTIC ECONOMY

Figure 11: Credit Growth and Sectoral Contribution

Government

Non-Bank Financial Institutions (NBFI)

Households

Total Domestic Credit

Private Enterprises

Public Enterprises
-20

-10

10

Sep-15

20

30

40

Dec-15

28

50

REAL SECTOR ACTIVITY

Economic activity generally remained constrained
National Output

Real GDP growth for 2015 is projected to be 3.6% compared to the target of
7.0% on account of:
Adverse weather conditions, which affected the 2014/15 agriculture
performance;
Continued weaknesses in the global economy, reflected in a decline in
copper prices;
Subdued performance of the mining sector, which also affect growth of
services and manufacturing sectors;
Heightened power rationing in the second half of the year; and,
Exchange rate depreciation, increase in fuel prices High cost of imported
inputs and production costs.
29

FISCAL POLICY

Preliminary data indicate that fiscal deficit at 2.1% of GDP,

widened marginally in the fourth quarter

This reflects higher expenditures on account of the depreciation of

the exchange rate and higher subsidy payments

The implementation of the Treasury single account is expected to

contribute to improve fiscal management and more efficient
implementation of monetary policy

32

INFLATION
Inflation accelerated to 21.1% in December from 7.7% in September 2015..

The higher inflation was mainly as a result of:

Pass-through effects of the sharp depreciation in the exchange rate in the third
quarter;

High production costs induced by power rationing, increase in electricity tariffs,

and;

Low supply of some food items, which kept food inflation at elevated levels.

These factors caused food and non-food inflation to accelerate to 24.8% and 17.1%
in December 2015 from 8.1% and 7.3% in September 2015, respectively (see
Figure 16).

33

INFLATION
Figure 14: Developments in Inflation
30

25

20

Percent
15

10

0
41306 41365 41426 41487 41548 41609 41671 41730 41791 41852 41913 41974 42036 42095 42156 42217 42278 42339
41275 41334 41395 41456 41518 41579 41640 41699 41760 41821 41883 41944 42005 42064 42125 42186 42248 42309
Overall Inflation

Food inflation

Non-food inflation

34

MACROECONOMIC OUTLOOK
Real GDP growth is estimated to have declined to 3.6% in 2015, the lowest
level recorded over the past 10 years.
In 2016, growth is expected to marginally improve to 3.7%, and recover
gradually toward growth rates of around 6.5% in the medium-term.
The risks to the growth outlook are significantly weighed to the downside in
the short-run and include:
Poor rainfall patterns in the 2015/16 season;
Continued power rationing; and,
Low copper prices

MACROECONOMIC OUTLOOK
Inflation is expected to remain high, particularly in the first half of 2016, but
decline sharply from the third quarter and trend towards single digit levels by
the end of 2017.
The risks to the inflation outlook are skewed to the upside, and include the
following:

Low global demand for commodities, which will adversely affect copper
export earnings with consequences for exchange rate stability;

Electricity rationing, which will keep the cost of production at elevated

levels; and,

High food prices, which may be worsened by drought weather conditions in

most agriculture productive parts of the country.
36

MPC DECISION
The MPC decided to maintain the Policy Rate at 15.5%.
The Committee took the following factors into account in deciding to
maintain the Policy Rate at 15.5%:

The effects of the current monetary policy stance, which is

considered to be tight and still taking effect.

Key drivers of observed inflation, which include food prices and the
exchange rate.

growth of the economy

Financial stability
37

ank of Zambia

END OF PRESENTATION
THANK YOU!!!