SECOND QUARTER 2017 Governors Presentation to the Media 10 th - - PowerPoint PPT Presentation

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MONETARY POLICY COMMITTEE STATEMENT FOR SECOND QUARTER 2017 Governor’s Presentation to the Media 10th August, 2017

INTRODUCTION

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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

MONETARY POLICY DECISION

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At the Meeting held on 8 – 9 August 2017, Monetary Policy Committee decided to: 1. Lower the Policy Rate by 150 basis points to 11.0% from 12.5%; and 2. Reduce the Statutory Reserve Ratio by 300 basis points to 9.5% from 12.5%.

MONETARY POLICY DECISION

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The Committee took into account the following factors in arriving at its decisions:

• Sustained decline in inflation over the last seven months, with inflation

being firmly anchored in single digit levels;

• Inflation projections, which suggest that inflation will remain within

the medium-term target range of 6-8% over the next 8 quarters;

• The prevailing high cost of credit, particularly to the productive sectors
• f the economy;
• Sluggish growth in credit to the private sector;
• Deterioration in commercial banks’ asset quality as reflected rising

non-performing loans; and,

• Weak economic growth.

OVERVIEW

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Following further easing of monetary policy stance, the overnight interbank rate declined to 12.2% at end-Q2 from 13.0% at end-Q1 2017.

Figure 1: Interest Rates and Excess Reserves

• 0.50

1.00 1.50 2.00 2.50 3.00 6.00 11.00 16.00 21.00 26.00 3-Mar-16 3-Apr-16 3-May-16 3-Jun-16 3-Jul-16 3-Aug-16 3-Sep-16 3-Oct-16 3-Nov-16 3-Dec-16 3-Jan-17 3-Feb-17 3-Mar-17 3-Apr-17 3-May-17 3-Jun-17 3-Jul-17 3-Aug-17 Excess Reserves, K'billion Policy, Interbank, OLF Rate (%) Excess Reserves BOZ Policy Rate Interbank Rate Upper-Bound OLF Rate Lower Bound

The Kwacha appreciated against major foreign currencies, supported by improved supply of foreign exchange and higher copper prices.

OVERVIEW

6 Figure 2: Exchange rate developments

0.0000 0.2000 0.4000 0.6000 0.8000 1.0000 1.2000 5.0000 7.0000 9.0000 11.0000 13.0000 15.0000 17.0000 19.0000 21.0000 23.0000 30-Jun-14 31-Aug-14 31-Oct-14 31-Dec-14 28-Feb-15 30-Apr-15 30-Jun-15 31-Aug-15 31-Oct-15 31-Dec-15 29-Feb-16 30-Apr-16 30-Jun-16 31-Aug-16 31-Oct-16 31-Dec-16 28-Feb-17 30-Apr-17 30-Jun-17 USD/ZMW GBP/ZMW EUR/ZMW ZAR/ZMW(RHS)

OVERVIEW

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Annual inflation rose marginally to 6.8% in June from 6.7% in March 2017 following a hike in electricity tariffs. In July 2017, inflation declined to 6.6%

Figure 3: Inflation developments

5 10 15 20 25 30 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Percent Overall Inflation Food inflation Non-food inflation

GLOBAL ECONOMIC DEVELOPMENTS

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The global economy is projected to grow by 3.5% in 2017 from 3.1% in 2016, premised on strong growth

• utlook in emerging

markets and developing economies (EMDEs).

Growth in EMDEs is projected at 4.6% in 2017 and 4.8% in 2018, reflecting;

• Projected increase in commodity prices
• Stronger demand in China - supported by fiscal policy stimulus

measures.

Global commodity prices generally declined in Q2, 2017 (Table 1).

GLOBAL ECONOMIC DEVELOPMENTS

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• Copper prices declined as LME copper stocks increased and imports from

China sharply dropped. However, realised copper prices rose.

• Oil prices declined, reflecting strong inventory levels in the United States and

Iran, and a pick-up in supply. 2017 Q1 2017 Q2 Copper Price (US$/ton) 5,840.0 5,668.0 Oil Price (Dubai) (US$/barrel) 52.9 49.7 Wheat (US$/ton) 177.0 176.0 Maize Price (US$/ton) 160.6 157.7 Cotton (US$/kg) 1.9 1.9 Sugar (US$/kg) 0.4 0.3 Soya beans (US$/ton) 419.0 386.0

Table 1: Selected Global Commodity Prices

DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations

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• Monetary policy operations continued to focus on containing the
• vernight interbank rate within the Policy Rate corridor and

anchoring inflationary expectations.

• Market liquidity increased further following the reduction in the

statutory reserve ratio, net Government spending and purchase of foreign exchange by BoZ for international reserves build-up (Table 2).

• With the further easing of monetary policy in May 2017, the

interbank rate declined to 12.2% at end-Q2 from 13.0% at end-Q1 (Figure 1).

• To keep the interbank rate within the Policy Rate corridor, the

Bank withdrew K10.8 billion through OMO, up from K4.0 billion in Q1 (Figure 4).

DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations

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Table 2: Key Liquidity Influences (K’ billion) 2017Q1 2017Q2 Opening balance 2.7 0.8 Net Govt. spending 1.3 1.3 BoZ FX influence 0.6 1.8 Change in CIC 0.9

• 0.7

Change in SR deposits

• 0.4
• 0.4

Overnight Lending Facility

• 0.1

0.03 Net Govt securities influence

• 3.1
• 2.4

Open market operations

• 1.4
• 0.3

Miscellaneous 0.3 0.0 Closing balance 0.8 0.3

DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations

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Figure 4: OMO Withdrawals, Quarterly (K’ billion)

17.4 12.9 2.3 2.6 10.5 (17.7) (13.5) (1.4) (4.0) (10.8) (0.3) 0.9 (1.4) (0.3) (20.0) (15.0) (10.0) (5.0) 0.0 5.0 10.0 15.0 20.0 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 K' Billion Maturing Term Deposits/Repos Term Deposits borrowed/ Repos entered into Net

DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations

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Figure 5: Interbank Trading Activity (K’ billion)

46.2 33.2 26.4 17.2 10.2 10.6 19.6

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17

Volume of interbank trading rose despite higher market liquidity

DOMESTIC ECONOMIC DEVELOPMENTS Government securities market

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Table 3: Government Securities Auctions

Demand for Government securities remained elevated, though subscription rates declined. Amount on offer (K’Billion) Amount Received (K’Billion) Subscription rate (%) T-bills 2017Q1

5.4 7.1 131

2017Q2

6.3* 7.7 122

Bonds 2017Q1

1.0 5.5 550

2017Q2

1.0 1.7 170

* More Tbill auctions were conducted in Q2, but auction size remained the same.

A total of K7.1 billion was raised from auctions against the maturity of K3.9 billion, resulting in a surplus of K3.2 billion.

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Figure 6: Government Securities

DOMESTIC ECONOMIC DEVELOPMENTS Government securities market

3.8 3.3 7.0 7.3 7.1 3.4 2.3 3.4 2.8 3.9 0.4 1.0 3.6 4.5 3.2

• 1.00

2.00 3.00 4.00 5.00 6.00 7.00 8.00 Q'2 2016 Q'3 2016 Q'4 2016 Q'1 2017 Q'2 2017 K' Billion Funds Raised Maturities Surplus/Deficit

DOMESTIC ECONOMIC DEVELOPMENTS Government securities market

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The total outstanding stock of Government securities increased by 9.7% to K42.0 billion. The increase reflects the switch in financing from foreign to domestic.

Figure 7: Total Outstanding Government Securities 10.9 12.9 13.4 12.8 12.1 10.9 10.9 10.5 13.2 17.4 19.8 11.6 11.9 12.7 12.8 12.6 12.7 13.5 14.8 19.8 20.9 22.2 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 K' Billlion

T-bills Bonds

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Figure 8: Non-resident Holdings of Government Securities

DOMESTIC ECONOMIC DEVELOPMENTS Government securities market

Non-resident investors’ holdings of Government securities increased to K7.5 billion in Q2 from K6.9 billion in Q1 2017.

1.2 1.4 0.8 0.7 0.5 0.0 0.0 0.0 1.4 2.1 1.9 1.8 1.7 1.8 2.8 6.6 6.9 7.5 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 K' Billion T-bills Bonds

DOMESTIC ECONOMIC DEVELOPMENTS Government securities market

18  Yield rates on Government securities continued to trend

downwards in Q2 on the back of easing liquidity conditions (Figure 9).

• The weighted average Treasury bills yield rate fell to 15.7% in June

2017 from 20.8% in March 2017.

• The weighted average Government bond yield rate declined to

19.3% from 20.4%.

DOMESTIC ECONOMIC DEVELOPMENTS Government securities market

19 Figure 9: Government securities yield rates (%)

5 10 15 20 25 30 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Composite T- Bill Composite Bond rate

DOMESTIC ECONOMIC DEVELOPMENTS Banks’ Nominal Interest Rates

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 The average lending

rate declined to 26.6% in June from 28.8% in March 2017.

 Lending rates ranged

from 8 – 37% (10% – 38.5% in Q1).

 Savings rates on

negotiated deposits declined to a range of 6 – 29.6% (11.0%-31.0% in Q1).

Figure 10: Nominal Interest Rates (%)

5 10 15 20 25 30 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Lending Rate Policy Rate Interbank Rate 180-day deposit rate

DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit

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

Money supply grew by 2.0%

• n a quarterly basis compared

with a growth rate of 5.1% in Q1.



Growth mainly driven by lending to Government and up tick in credit to the private sector.



On a year-on-year basis, money supply grew by 8.3% in June 2017, up from a growth

• f 4.2% in March 2017.



Year-on-year growth in money supply remains low to support strong economic activity. Figure 11: Money Supply

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• 5

5 10 15 20 25 30 35 40 45 10 20 30 40 50 60 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Dec-16 Mar-17 Jun-17 K Billion M3 (K billion) LHS M3 Growth (Q/Q, %) RHS M3 Growth (Y/Y, %) RHS Percent

DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit

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 In Q2, total credit grew by 6.5%, same magnitude as recorded in

Q1 2017 (Table 4).

 Credit to Government expanded at a slower pace of 11.3%

compared with a growth of 18.1% in Q1 2017.

 Credit to private enterprises grew by 1.6%, partially reversing a

contraction of 4.8% in Q1.

 Recovery in credit growth to the private sector was mainly due

to improved liquidity conditions, decline in lending rates and banks’ willingness to take on more risk as growth prospects brightened.

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Table 4: Credit growth

DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit

Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Total Credit (Incl. Govt) 0.7 4.9 1.1 6.5 6.5 Total -(Excl. Govt)

• 3.7
• 1.7
• 5.4
• 3.2

1.6 Public Enterprises

• 0.3
• 3.1
• 9.2
• 10.0

28.9 Government 9.0 15.7 10.2 18.1 11.3 Private Enterprises

• 5.2
• 1.3
• 4.6
• 4.8

1.6 Households

• 2.1
• 0.9
• 7.1
• 0.3

1.3 NBFIs 10.3

• 0.1

17.6

• 7.9

5.9

The Kwacha appreciated further in Q2 due to increased supply of foreign exchange and higher copper prices (Figure 12). Against the US dollar, the Kwacha gained by 5.0% to an average of K9.31 in June 2017. Foreign financials and mining companies’ remained the major suppliers, while the Government continued to be the lead buyer (Figure 13)

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Figure 12: Exchange rate developments

DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market

0.0000 0.2000 0.4000 0.6000 0.8000 1.0000 1.2000 5.0000 7.0000 9.0000 11.0000 13.0000 15.0000 17.0000 19.0000 21.0000 23.0000 30-Jun-14 30-Sep-14 31-Dec-14 31-Mar-15 30-Jun-15 30-Sep-15 31-Dec-15 31-Mar-16 30-Jun-16 30-Sep-16 31-Dec-16 31-Mar-17 30-Jun-17 USD/ZMW GBP/ZMW EUR/ZMW ZAR/ZMW(RHS)

DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market

25 Figure 13: Supply and Demand (US$’million) (900.00) (400.00) 100.00 600.00 Other Foreign Financials Mining and quarrying Agric, hunting and forestry Construction Households Manufacturing Wholesale and retail trade Public administration 2017 Q1 2017 Q2

DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity

26  Available

real sector data indicate that

• utput

in mining, manufacturing, and energy sectors picked up in Q2. Retail sales also picked up.

 copper production rose by 18.2% in Q2 to 197,015.2mt, driven by

rebound in prices, continued ramp-up of production, and the resumption of operations at Nchanga mine (Figure 14).

 However, electricity generation picked up as water levels in

reservoirs improved following above normal rainfall during the 2016/17 rainy season.

• production of cement increased by 16.2% to 451,529 mt in Q2 on

account of the rise in demand occasioned by favourable conditions for construction activities.

DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity

27 Figure 14: Mining Sector Output

• 5,000

10,000 15,000 20,000 25,000 50,000 100,000 150,000 200,000 250,000 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 Copper (MT) Gemstones (KG)- RHS

DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity

28 Electricity generation rose further by 9.0% to 3.1 million Mwh due to rise in water levels in reservoirs; imports declined further but diesel consumption increased, attributed to electricity tariff hike Figure 15: Electricity Generation and Diesel Consumption

160,000 180,000 200,000 220,000 240,000 260,000 280,000 2,000,000 2,250,000 2,500,000 2,750,000 3,000,000 3,250,000 3,500,000

2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2

Electricity Generation (MWh) Diesel Consumption (Litres '000)-RHS

DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity

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Production of food and beverages increased as electricity supply improved after an extended period of power rationing

Figure 16: Manufacturing Activity

• 100,000

200,000 300,000 400,000 500,000 600,000 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 Opaque beer Soft Drinks Clear beer Fresh Milk

Current account deficit widened to US $274.0 million from US$146.0 million as export earnings fell while imports expanded.

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Table 5: Balance of Payments (US$’million)

DOMESTIC ECONOMIC DEVELOPMENTS External Sector

Q1 2017 Q2 2017

Current Account Bal

• 146.3
• 274.4

Balance on Goods

298.1 90.1

Total Exports

1,997.9 1,934.5

Copper

1,469.1 1,474.5

Cobalt

36.1 24.9

Gold

45.5 38.9

NTEs

431.3 380.4

Total Imports

1,699.7 1,844.4

Primary Income

• 353.6
• 285.6

Secondary Income

59.6 66.9

Services Account

• 150.4
• 145.8

Capital Acc

14.8 14.8

Financial Acc

• 111.5
• 444.9

Net Errors/Omissions

• 1.2

3.5

Overall Balance

21.1

• 188.8

Change in Reserve Assets and Related items

• 30.5

174.1

DOMESTIC ECONOMIC DEVELOPMENTS Fiscal performance

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Preliminary data indicate that the fiscal deficit, on a cash basis, at 0.8% of GDP, was lower than the target 2.0% of GDP in Q2. The shortfall in external financing led to a greater reliance on domestic financing, which rose to K3.8 billion in Q2 from K3.2 billion in Q1 2017.

DOMESTIC ECONOMIC DEVELOPMENTS Inflation

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 Inflation declined marginally to an average of 6.7% from 6.8%

in Q1 2017.

 At end-Q1, inflation was 6.8%, 0.1 percentage points higher

than the end-Q1 2017 outturn of 6.7% (Figure 17).

 Food inflation decelerated to 5.8% from 6.7% while non-food

inflation rose to 8.0% from 6.6%.

 In July 2017, overall inflation declined to 6.6% from 6.8% in

June; food inflation fell to 5.3% from 5.8% while non-food inflation rose marginally to 8.1% from 8.0% over the same period.

DOMESTIC ECONOMIC DEVELOPMENTS Inflation

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• slowdown in overall inflation in Q2 was largely the result of

the increase in the supply of food items and the appreciation of the exchange rate.

 However, month-on-month inflation rose to 0.6% at end-Q2

from 0.3% at end-Q1 2017, reflecting the increase in electricity tariffs (Figure 18).

 In July 2017, month-on-month inflation declined to 0.1% from

0.6% in June.

 Inflation is projected to remain within the target range of 6-8%

• ver the medium-term.

DOMESTIC ECONOMIC DEVELOPMENTS Inflation

34 Figure 17: Year-on-year Inflation rate

5 10 15 20 25 30 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Percent Overall Inflation Food inflation Non-food inflation

DOMESTIC ECONOMIC DEVELOPMENTS Inflation

35 Figure 18: Month-on-month Inflation rate

(1.0)

• 1.0

2.0 3.0 4.0 5.0 6.0 7.0 8.0 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Percent Overall Food Non-food

GDP growth for 2016 revised to 3.6% . For 2017 and 2018, GDP growth has been revised upward to 4.3% (3.9%) and 5.1% (4.6%).

36 Figure 19: GDP Growth

MACROECONOMIC OUTLOOK GDP growth

7.6 5.1 4.7 2.9 3.6 3.6 4.3 5.1 5.1 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

2012 2013 2014 2015 2016 2017f 2018f 2019f Real GDP Growth (%) GDP Growth Projection (%)

MACROECONOMIC OUTLOOK GDP growth

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Growth is expected to emanate from:

 increased agricultural output  increased generation of electricity  higher mining output  construction activities  manufacturing activity

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THANK YOU AND GOD BLESS…