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MONETARY POLICY COMMITTEE STATEMENT FOR
FOURTH QUARTER 2016
Governor’s Presentation to the Media
22nd February, 2017
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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
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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,
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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
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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
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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
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The Kwacha appreciated in Q4, drawing support from rising copper prices and renewed non-resident investors interest in Government securities.
OVERVIEW
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D,
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K/USD K/GBP K/EUR K/ZAR(RHS)
Figure 2: Exchange rate developments
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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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Per
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Overall Inflation Food inflation Non-food inflation
Figure 3: Inflation developments
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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
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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
GLOBAL ECONOMIC DEVELOPMENTS
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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.
GLOBAL ECONOMIC DEVELOPMENTS
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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).
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DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy Operations
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)
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3.7
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Q4'15 Q1'16 Q2'16 Q3'16 Q4'16
Maturing Term Deposits/Repos Term Deposits borrowed/ Repos entered into Net
DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy Operations
Figure 4: OMO Withdrawals, Quarterly (K’billion)
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DOMESTIC ECONOMIC DEVELOPMENTSMoney Market
32.6
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Figure 5: Interbank Trading Activity (K’billion)
Interbank trading reduced further…
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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
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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
DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market
2.1
3.83.3
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K’Billion
Funds Raised Maturities Surplus/Deficit
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DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market
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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Figure 8: Non-resident Holdings of Government Securities
DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market
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
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T-bills Bonds
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DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market
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%.
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DOMESTIC ECONOMIC DEVELOPMENTSGovernment securities market
Figure 9: Government securities yield rates (%)
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Average Composite Rate T-bills Average Composite rate Bonds
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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 (%)
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Average lending rate Policy Rate
Interbank Rate 180-day deposit rate
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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
Per
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Figure 11: Money Supply
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DOMESTIC ECONOMIC DEVELOPMENTSMoney supply and credit
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.
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Table 4: Credit growth
DOMESTIC ECONOMIC DEVELOPMENTSMoney supply and credit
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
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Figure 12: Exchange rate developments
DOMESTIC ECONOMIC DEVELOPMENTSForeign Exchange Market
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ZA
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P,
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K/USD K/GBP K/EUR K/ZAR(RHS)
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)
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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
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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
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Figure 14: Mining Sector Output
DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity
-
5,000
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0
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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
170,000
190,000
210,000
230,000
250,000
270,000
290,000
2,000,000
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3,000,000
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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
DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity
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Consumer spending rebounded in Q4 as retail sales rose by 9.5% compared to a decline of 6% in Q3.
DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity
-10.0
-5.0
0.0
5.0
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20.0
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
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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
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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
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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
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DOMESTIC ECONOMIC DEVELOPMENTSInflation
5
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-15
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r-15
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n-1
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g-1
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Per
cen
t
Overall Inflation Food inflation Non-food inflation
Figure 17: Year-on-year Inflation rate
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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.
DOMESTIC ECONOMIC DEVELOPMENTSInflation
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(1.0)
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Per
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Overall Food Non-food
DOMESTIC ECONOMIC DEVELOPMENTSInflation
Figure 18: Month-on-month Inflation rate
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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.
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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 (%)
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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
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THANK YOU AND GOD BLESS…
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