Monetary Policy Rate maintained at 9.0%

The Central Banks says  the Committee also took note of the positive efforts to implement fiscal consolidation measures, relatively weaker growth prospects over the medium-term, including the lingering vulnerabilities and risks to the financial sector. 

By Francis Maingaila 

Lusaka-18-05-2022 - (Zambia24) - he Monetary Policy Committee (MPC) has decided to maintain the Monetary Policy Rate at 9.0 percent. 

Bank of Zambia governor Dan Kalyalya told journalists at a media briefing that the decision to mantain the MPR was made at its latest meeting held on May 16 to 17.

In arriving at this decision, Dr. Kalyalya said the Committee took into account the continued deceleration in inflation and its projected further decline towards the 6-8 percent target range by the end-2023. 

According to Dr. Kalyalya, the Committee also took note of the positive efforts to implement fiscal consolidation measures, relatively weaker growth prospects over the medium-term, including the lingering vulnerabilities and risks to the financial sector. 

However, Dr. Kalyalya said the Committee was cognisant of the upside risks to the inflation outlook.        

"These include increases in global energy and food prices, exacerbated by the ongoing Russia-Ukraine conflict, outbreaks of more infectious strains of COVID-19,  tighter global financial conditions, and the projected grain deficit in some of our neighboring countries, coupled with a reduced domestic surplus."

He added that the commodity prices have risen, and there are disruptions, particularly to cross-border production networks and trade flows. 

Given this, in April, Dr. Kalyalya explained, the IMF revised downwards global growth forecasts for both 2022 and 2023 to 3.6 percent from earlier forecasts of 4.4 percent and 3.8 percent, respectively. 

He said in 2024, the growth is projected to moderate to 3.4 percent. 

He clarified that the key downside risks to the growth outlook, in addition to the effects of the Russia-Ukraine conflict.

He said this will include the emergence of more infectious variants of COVID-19 and aggressive monetary policy tightening in advanced economies. 

In the medium-term, Dr. Kalyalya suggested, the real GDP is projected to grow moderately. In 2022 the economy is expected to expand by 3.5 percent and by a further 3.6 percent and 3.9 percent in 2023 and 2024, respectively (Chart 4). 

He said the Key drivers of growth will be financial and insurance, information and communication, wholesale and retail trade, education, as well as the mining sector. 

However, Dr. Kalyalya observed, the impact of the Russia-Ukraine conflict, slow recovery in trade-in partner countries, and uncertainty surrounding the resurgence of new and more contagious COVID-19 variants, amid a low vaccination rate, remain key downside risks to the growth outlook. 

He said annual overall inflation continued to trend downward in the first quarter of 2022, declining to 14.1 percent from 18.9 percent in the last quarter of 2021.

He said the fall in inflation was driven by the dissipation of shocks to prices of meat products and fish, lagged pass-through from the appreciation of the Kwacha against the US dollar, as well an improved supply of fish and fresh maize. 

In April, Dr. Kalyalya suggested further, the annual overall inflation decelerated, for the ninth consecutive month, reducing to 11.5 percent from 13.1 percent in March.

He said the increased supply of mostly vegetables and solid fuels was key to the decline in inflation.

"Over the next eight quarters (Q2 2022 – Q1 2024), inflation is projected to continue trending downwards towards the single digits," he said

Dr. Kalyalya is of the view that in 2022, inflation is projected to average 12.5 percent and then drop to 8.9 percent in 2023.

"Underlying this projection are mostly the effects of enhanced fiscal consolidation, anchored on the resolution of the external debt overhang, supported by an IMF Extended Credit Facility."

He said these combined are expected to boost market confidence, positively impact inflation expectations, and macroeconomic stability, and ultimately contribute to growth that has remained subdued for some time.

However, Dr. Kalyalya said there are upside risks to the inflation outlook, which include:increases in global energy and food prices, exacerbated by the ongoing Russia-Ukraine conflict.

He said the outbreaks of more infectious strains of COVID-19; tighter global financial conditions arising from contractionary monetary policies in advanced economies and the projected grain deficit in some of our neighboring countries, coupled with a reduced domestic surplus, that is likely to push up food prices.

He also observed that the interest rates were broadly unchanged in Quarter 1 2022.

He said the overnight interbank rate was virtually unchanged at 8.92 percent in March and was maintained within the bounds of the Monetary Policy Rate Corridor throughout the quarter. 

"The commercial banks’ average nominal lending rate, at 26.0 percent, and the 180-day deposit rate for amounts exceeding K20,000, at 7.5 percent, remained unchanged."

He also said the preliminary data indicate an improved fiscal performance in the first quarter of 2022 largely on account of high revenue collections—particularly from the mining sector. 

However, Dr. Kalyalya said the expenditure slightly exceeded the target following a deliberate increase in spending on social programs. 

"For 2022 as a whole, the fiscal deficit as a percent of GDP is projected to narrow to 6.7 percent from a preliminary outturn of 9.0 in 2021."

Further, Dr. Kalyalya explained, the deficit is projected to reduce in 2023 and 2024 to 6.3 percent and 5.2 percent, respectively. 

He said the enhanced revenue mobilization measures and rationalization of expenditure, reinforced by the debt restructuring under the G20 Common Framework, underpin this projection.

It was his considered view that the months of import cover reduced to 3.6 from 4.4 due to the upward revision of projected imports for 2022.

He said during the quarter under review, the Kwacha depreciated by 3.7 percent against the US dollar to an average of K17.76 per US dollar.

This was on account of excess demand for foreign exchange, chiefly for the importation of petroleum products."

To moderate volatility in the exchange rate, Dr. Kalyalya indicated, the Bank of Zambia continued to provide support to the market.  

"In this regard, US$372.0 million was provided to the market.  This was mainly facilitated by foreign exchange purchases.