5/21/20201

MONETARY POLICY COMMITTEE STATEMENT FOR THEFIRST QUARTER OF 2020

Governor’s Presentation to the Media

May 20, 2020

OUTLINE OF PRESENTATION

1. Decision of the Monetary Policy Committee

2. Global Economic Growth

3. Domestic Economic Activity and Outlook

4. Inflation Outturn and Outlook

5. Monetary Operations

6. Government Securities Market

7. Interest Rates

8. Domestic Credit

9. Money Supply

10. Fiscal Policy

11. Foreign Exchange Market

12. Selected Commodity Prices

13. Current Account

14. Gross International Reserves

15. Conclusion

5/21/20202

DECISION OF THE MONETARY POLICY COMMITTEE

At its Meeting held on May 18–19, 2020, the Monetary Policy Committee decided toreduce the Policy Rate by 225 basis points to 9.25%.

Key factors the Committee took into account in arriving at its decision were asfollows:

the need to mitigate the adverse effects of the COVID-19 pandemic on financialsector stability, economic activity and ultimately on people’s lives andlivelihoods;

a significant deterioration in economic activity, with the economy projected torecord the first contraction in 2020 since 1999 on account of the COVID-19pandemic;

moderation in inflation on account of expected improvement in maize outputand subdued domestic consumer demand. This is despite the projectedinflation path being higher than the upper bound of the 6-8% target range;and

the need to compliment the measures already taken by the Bank aimed atsupporting economic activity.

5/21/20203

GLOBAL ECONOMIC GROWTH

The outbreak of COVID-19 pandemic is having an unprecedented impact on humanlife and livelihoods as well as economic activity across the world.

In an effort to curb the spread of the virus, governments have responded byimplementing several measures, including widespread lockdowns. These haveresulted in the disruption of global supply chains and induced economiccontraction.

Due to COVID-19, the global economy is projected to contract sharply to -3.0% in2020, but recover to 5.8% in 2021.

Downside risks to global growth outlook include:

possibility of an extended period of the COVID-19 pandemic; prolonged supply chain disruptions; a resurgence in the US-China trade war; and uncertainty about the future of the UK-EU trade relationship.

5/21/2020

4Source: IMF World Economic Outlook for January and April 2020 Update, Focus

Economics

GLOBAL ECONOMIC GROWTH

5/21/2020

5Source: IMF World Economic Outlook for January and April 2020 Update, Focus

Economics

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

f

20

21

f

Pre-COVID With-COVID

Figure 1: Pre and With-COVID-19 Global GDP Growth Projections (annual, percent)

• Economic conditions worsened in the first quarter of 2020, with the volume of services, new orders and profitability all registering historic lows (First Quarter 2020 Bank of Zambia Quarterly Survey of Business Opinion and Expectations);

Business conditions in the private sector are reported to have deteriorated as output and new orders sharply declined on account of falling consumer spending and company shutdowns associated with COVID-19 (Stanbic Bank Zambia Purchasing Managers Index );

With the COVID-19 pandemic, the already challenged domestic macroeconomic environment has worsened. Economy is projected to contract by 2.6% in 2020, the lowest in 20 years, from a growth of 1.9% in 2019; and

Underlying this outlook is the projected contraction of output in tourism, wholesale and retail trade, construction, manufacturing, mining as well as electricity sectors.

DOMESTIC ECONOMIC ACTIVITY AND OUTLOOK

5/21/20206

Figure 2: Annual Real GDP – Actual and Forecast (%), 2010-2020

DOMESTIC ECONOMIC ACTIVITY AND OUTLOOK

5/21/20207

5.6

7.6

5.14.7

2.9

3.84.0

1.9

-2.6

-4

-2

0

2

4

6

82

01

0

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

p

20

20

f

MoF Estimate and Projection, April 2020

5/21/20208

INFLATION OUTTURN AND OUTLOOK

Inflationary pressures persisted in the first quarter of 2020 driven by increasesin retail fuel pump prices and electricity tariffs, the pass-through from thesharp depreciation of the Kwacha against the US dollar, and the rise in foodprices.

Figure 3: Inflation projections and outcomes (%)

In April 2020, annual inflation rose to 15.7% largely due to the lagged pass-throughfrom the sharp depreciation of the Kwacha against the US dollar that led to theincrease in prices of especially imported goods.

Q1 2020

Projections

Q1 2020

Outcomes

Q4 2019

Outcomes

Q1 2020

End-period

Q4 2019

End-period

Overall Inflation 12.2 13.5 11.1 14.0 11.7

Food Inflation 15.9 15.5 14.0 15.2 15.2

Non-food Inflation 8.2 11.2 7.8 12.7 7.8

5/21/2020 9

INFLATION OUTTURN AND OUTLOOK

Figure 3: Inflation Developments, y-o-y (%)

Source: Zambia Statistics Agency (ZSA)

15.7

17.0

14.2

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0D

ec-1

8

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

Overall Inflation Food inflation Non-food inflation

5/21/2020 10

INFLATION OUTTURN AND OUTLOOK

Although the projected inflation path is higher than the February2020 MPC forecast, it will trend towards the upper bound of the 6-8%medium-term target range at the end of the forecast horizon.

Underlying this projection are:

persistently high fiscal deficits;

rising external debt service payments;

high production costs; and

deterioration in the global economy, which is likely to dampen copperprices and export earnings.

Inflation could, however, decline faster than anticipated premised on theexpected improvements in maize output and subdued domestic consumerdemand in light of the COVID-19 pandemic.

MONETARY OPERATIONS

The overnight interbank rate edged up to a quarterly average of 12.61% inthe first quarter of 2020 from 11.44% in the fourth quarter of 2019.

Despite the elevated interbank rate, offsetting open market operations werenot conducted in order to help stem extreme exchange rate pressures thatemerged during the period.

As a result, the interbank rate was maintained above the upper bound of thePolicy Rate Corridor of 10.50% to 12.50% throughout the quarter.

5/21/202011

MONETARY OPERATIONS

5/21/202012

Figure 4: Interbank Rate and BoZ Policy Rate (%)

7.00

8.00

9.00

10.00

11.00

12.00

13.00

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

Jul-

18

Sep

-18

No

v-1

8

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Percen

tage

Policy Band Daily Average O/N Interbank Rate BOZ Monetary Policy Rate (Target)

MONETARY OPERATIONS

5/21/202013

Figure 5: Liquidity Influences (K’ billion)

The banks’ aggregate current account balance declined mainly due to net Government spending and Government securities.

2019

Q2

2019

Q3

2019

Q4

2020

Q1

Opening balance 2.2 0.9 1.8 2.0

Net Govt. spending -4.2 -2.7 -1.1 -2.3

BoZ FX influence 1.9 4.1 0.1 1.6

CIC -1.2 0.0* -0.3 0.4

Change in SR deposits 0.2 -0.5 -1.0 0.0

OLF 0.0 0.6 0.1 -0.3

Net Government securities influence 0.0 1.0 2.4 -0.4

Open market operations 1.5 -1.5 0.0 0.2

Miscellaneous 0.4 0.2 0.0 0.3

Closing balance 0.9 1.8 2.0 1.2

GOVERNMENT SECURITIES

Demand for Government securities remained low largely due to tight liquidityconditions.

5/21/202014

Table 6: Demand for Govt. Securities (K’ billion) Chart 7: Non-Resident holdings of Government Securities as percent of GIR

Amount

on Offer

Amount

Received

Subscription

Rate (%)

T-bills

2019Q4 5.7 5.2 91

2020Q1 6.7 5.6 84

Bonds

2019Q4 3.3 1.4 42

2020Q1 3.3 0.9 27

0%

10%

20%

30%

40%

50%

60%

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Jun

'18

Sep

'18

Dec

'18

Mar

'19

Jun

'19

Sep

'19

Dec

'19

Mar

'20

US

$ B

illi

on

s

GIR (USD) (LHS)

Non-resident (USD) (LHS)

Source: Bank of ZambiaSource: Bank of Zambia

GOVERNMENT SECURITIES MARKET

The stock of Government securities (at face value) rose to K86.9 billion from K80.2 billion,reflecting rising Government financing needs.

Non-resident investors holdings increased to K12.9 billion from K8.8 billion in part due tosecondary market purchases.

5/21/202015

Figure 9: Holdings of Government Securities by Non-Residents (K’ bln)

Figure 8: Govt Securities Holdings (K ’bln)

20.3 19.2 17.5 18.6 18.2 20.1 20.4 20.9 21.4

30.6 32.6 37.2 39.8 40.0 40.251.9

59.465.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Mar

-20

K' B

illl

ion

T-bills Bonds

0.1 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0

2.8

6.6 6.9 7.5 7.68.4 8.5 8.8 8.5 8.0 8.7 8.2 7.4

8.8

12.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Mar

-20

K' B

illi

on

T-bills Bonds

Interest rates rose, reflecting sustained tight liquidity conditions, high domestic financing requirements by the Government and rise in inflation.

The composite Treasury bill yield rate rose to 26.2% from 25.7% while that for Government bonds marginally declined to 30.8% from 31.1%.

Commercial banks’ nominal average lending rate rose to 28.8% in March 2020 from 28.0% in December 2019.

Savings rates for 180-day deposits rose to 10.7% from 10.1%.

Figure 10: Nominal Interest Rates (%)

INTEREST RATES

5/21/202016

Figure 11: Contribution to Y/Y Domestic Credit growth Credit to the private sector grew by19.5% year-on-year in March 2020from 17.2% in December 2019 onaccount of increased demand forworking capital by corporates forbridge financing occasioned by thebuild-up in Government arrears.

Credit to Government, mainly inform of Government securities,expanded at a faster rate, growingby 28.6% year-on-year comparedto 17.2% in December 2019.

DOMESTIC CREDIT

5/21/202017

-12.0

-6.0

0.0

6.0

12.0

18.0

24.0

30.0

36.0

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Jan

-20

Mar

-20

Public enterprises

Gross Claims on Central Government

NBFIs

Households

Private enterprises

Gross Domestic Credit Growth

EXR_Adj Gross Domestic Credit

Figure 12: Money Supply Growth In March 2020, money supplygrew by 31.3%, year-on-year,compared to a y-o-y growth rateof 12.5% in December 2019.

The growth in money supplylargely reflected the expansion indomestic credit and valuationeffects following the sharpdepreciation of the Kwachaagainst the US dollar.

MONEY SUPPLY

5/21/202018

-10

-5

0

5

10

15

20

25

30

35

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7Ja

n-1

8M

ar-1

8M

ay-1

8Ju

l-1

8Se

p-1

8N

ov

-18

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9Ja

n-2

0M

ar-2

0

Y/Y Growth Rate (RHS) Q/Q Growth rate

Fiscal pressures are expected to heighten in 2020 as revenue performance is adversely affected by COVID-19 while spending to combat the unprecedented virus rises.

Ministry of Finance estimates revenue reduction of K14.8 billion as a result of the COVIDE-19.

Additional spending pressures relating to external debt service which have been exacerbated by the recent sharp depreciation of the Kwacha against the US dollar.

In this regard, the fiscal deficit in 2020 is bound to exceed the 5.5% Budget target.

FISCAL POLICY

5/21/202019

FOREIGN EXCHANGE MARKET

5/21/202020

Period ZMW/USD ZMW/GBP ZMW/EUR ZMW/ZARQ4 2019 Average 13.85 17.84 15.34 0.94End of period (Dec 2019) 14.05 18.55 15.78 1.00Q1 2020 Average 15.18 19.39 16.71 0.99End of period (March 2020) 18.11 22.44 19.86 1.01Quarterly average % change 9.6 8.7 8.9 5.1

End of period % Change 28.8 20.9 25.8 1.5

Figure 13: Exchange Rates

The Kwacha was relatively stable over the first two months of the year following thetightening of monetary policy in November and December 2019.

However, in March 2020, the Kwacha came under intense pressure, reflecting theunresolved macroeconomic challenges associated with high debt service and debtlevels, rising fiscal deficits as well as declining foreign reserves.

The sovereign credit rating downgrade further weighed on the Kwacha.

The COVID-19 outbreak compounded these exchange rate pressures.

During the period, the Kwacha depreciated by 9.6% against the US dollar to a quarterlyaverage of K15.18/US dollar, and ended the quarter with a year-to-date rate ofdepreciation of 28.9%.

FOREIGN EXCHANGE MARKET

5/21/202021

Figure 14: Nominal Exchange Rates

0.40

0.60

0.80

1.00

1.20

1.40

1.60

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

20

-Ap

r-1

8

20

-May

-18

19

-Ju

n-1

8

19

-Ju

l-1

8

18

-Au

g-1

8

17

-Sep

-18

17

-Oct

-18

16

-No

v-1

8

16

-Dec

-18

15

-Jan

-19

14

-Feb

-19

16

-Mar

-19

15

-Ap

r-1

9

15

-May

-19

14

-Ju

n-1

9

14

-Ju

l-1

9

13

-Au

g-1

9

12

-Sep

-19

12

-Oct

-19

11

-No

v-1

9

11

-Dec

-19

10

-Jan

-20

9-F

eb-2

0

10

-Mar

-20

9-A

pr-

20

9-M

ay-2

0

ZMW/USD ZMW/GBP ZMW/EUR ZMW/ZAR(RHS)

FOREIGN EXCHANGE MARKET

5/21/202022

Figure 15: Foreign Exchange Net Supply by Sector (US$’)

The mining and foreign financials sectors continued to dominate the supply side while public administration and wholesale and trade sectors accounted for a larger share on the demand side.

-500.00 -300.00 -100.00 100.00 300.00 500.00

Other Businesses

Foreign Financials

Mining and quarrying

Agric, hunting and forestry

Construction

Households

Manufacturing

Wholesale and retail trade

Public administration

Bureaux

2019 Q4 2020 Q1

SELECTED COMMODITY PRICES

5/21/202023

Figure 17: Commodity Prices

Copper and crude oil prices declined while selected agriculture commodity prices increased due to supply chain disruptions as a result of trade restrictions.

2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1

Copper Price

(US$/ton) 6,164.0 6,226.0 6,113.0 5,803.0 5,898.0 5,634.0

Oil Price (Dubai)

(US$/barrel) 66.8 63.4 67.0 60.9 61.4 50.7

Wheat (US$/ton) 209.4 211.5 201.7 189.0 204.5 216.3

Maize Price

(US$/ton) 162.8 167.5 175.9 170.1 166.8 167.6

Cotton (US$/kg) 1.9 1.8 1.8 1.6 1.7 1.6

Sugar (US$/kg) 0.29 0.28 0.28 0.27 0.28 0.30

Soya beans

(US$/ton) 374 377 353 366 380 378

The current account surplus expanded by US$122.3 million (0.5% of GDP) in the first quarter of 2020 from US$78.2 million (0.3% of GDP) in the fourth quarter of 2019.

The rise in the surplus was due to significant improvements in net exports as import compression gained momentum.

Figure 18: Balance of Payments (Quarterly Change - US$ million)

CURRENT ACCOUNT DEVELOPMENTS

5/21/202024

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

Current Account Balance 112.2 -7.2 2.2 73.5 78.2 122.3

Balance on Goods -98.7 288.2 206.0 -4.1 254.3 342.8

Total Goods Exports 2,094.6 1,926.6 1,885.1 1,612.3 1,822.0 1,652.5

Copper 1,480.9 1,431.9 1,320.3 1,013.8 1,228.6 1,187.3

Cobalt 17.5 3.3 0.0 0.0 39.4 1.0

Gold 36.9 43.2 46.0 50.1 57.1 49.5

NTEs 541.7 429.4 500.1 529.6 478.2 395.9

Total Imports 2,193.3 1,638.4 1,679.2 1,616.4 1,567.8 1,309.7

Primary Income 309.3 -225.2 -131.8 100.3 -143.3 -158.5

Secondary Income 70.2 77.0 81.4 82.9 81.1 33.6

Services Account -168.7 -147.2 -153.4 -105.7 -113.9 -95.5

Capital Account 16.3 17.9 39.9 19.5 19.3 23.1

Financial Account 112.5 188.4 -46.1 -82.4 173.5 176.8

Net Errors/Omissions -59.5 16.3 -17.2 -110.7 2.3 -87.2

Overall Balance 43.5 161.3 -70.9 -64.7 73.8 118.6

Change in Reserve Assets -72.0 -163.9 44.0 62.1 -85.9 -116.0

Figure 19: Gross International Reserves (US$ mln) At end-March 2020, GrossInternational Reserves declined toUS$1.40 billion (equivalent to 2.0months of import cover) fromUS$1.45 billion (equivalent to 2.1months of import cover) at end-December 2019.

The decline in reserves wasmoderated by net foreign exchangepurchases amounting to US$144.2million, of which US$49.7 million wasmineral royalty.

GROSS INTERNATIONAL RESERVES

5/21/202025

0

0.5

1

1.5

2

2.5

3

3.5

4

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

May

-19

Jun

-19

Jul-

19

Au

g-1

9Se

p-1

9O

ct-1

9N

ov

-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Mo

nth

s o

f im

po

rts

US

$ m

illi

on

Gross International Reserves(LHS) US $ millions

Months of import cover for GIR (RHS)

CONCLUSION

5/21/202026

The MPC decided to lower the Policy Rate by 225 basis points to 9.25%. In arriving atthe decision, the Committee took into account:

• the need to mitigate the adverse effects of the COVID-19 pandemic on financialsector stability, economic activity and ultimately on people’s lives and livelihoodsdespite projected inflation being higher than the medium-term target range;

• Significant deterioration in economic activity, with the economy projected to bein a recession in 2020 on account of the COVID-19 virus; and

• the need to compliment the broad measures taken by the Bank to supporteconomic activity.

The Committee calls for strengthened collaboration and concerted efforts by allstakeholders to effectively deal with the COVID-19 shock and its effects. In thiscontext, implementation of fiscal and structural reforms that deliver inclusive andsustainable growth remains an urgent imperative.

THANK YOU

GOD BLESS…

5/21/202027