Wednesday, November 16, 2016

Zambia holds rate, eases liquidity access as inflation falls

    Zambia's central bank left its policy rate at 15.50 percent, but made it easier for commercial banks to access liquidity due to a decline in inflation and said future rate changes "will be guided by inflation outcomes and forecasts as well as progress in fiscal consolidation."
    The Bank of Zambia, which has maintained a tight policy stance after raising its rate by a total of 575 basis points in 2014 and 2015 to curb inflation, said it was removing - with immediate effect - some the quantitative restrictions it had imposed in May to help limit volatility in the foreign exchange market and reign in inflation.
    As of now, banks can access the central bank's overnight lending facility more than once a week and roll over intra-day credit into overnight loans. In addition, bank's compliance with the reserve requirements will revert to a weekly average.
    "These measures are aimed at strengthening the current forward looking monetary policy framework on prices and enhance the ability of the financial system to play a stronger role in financial intermediation in support of economic growth," it said.
    Zambia's economy remains under stress from the fall in commodity prices - especially copper as Zambia is Africa's second largest producer - strained public finances, continued electricity shortages and subdued consumption and investment.
    But the central bank took note of the decline in inflation due to the seasonal increase in food supply and the appreciation of the kwacha against the U.S. dollar.
     Zambia's inflation rate fell to 12.5 percent in October from 18.9 percent in September as it continues to decelerate from a 2016-high of 22.9 percent in February.
    Although inflation in November and December is expected to tick up on higher fuel prices, the central bank said inflation is still forecast to decelerate further and hit single digits by the end of the year to be consistent with its target of 9.0 percent in 2017 and 6-8 percent over the medium term.
    The central bank welcomed the finance ministry's introduction of a 6-8 percent medium-term inflation target in the 2017 budget, which focuses on fiscal sustainability, economic diversification and economic growth.
    "Effective implementation of the Budget, therefore, presents a good opportunity for rebalancing fiscal and monetary policies going forward," the central bank said.
    In his address to parliament last week, Finance Minister Felix Mutati said the fiscal deficit will be cut to 7 percent of Gross Domestic Product in 2017 from a projected 10 percent this year while the economy is seen growing 3.4 percent next year from just over 3 percent this year and 2.9 percent in 2015.
   Zambia is in talks with the International Monetary Fund about a potential aid package and earlier this month the IMF said the government finances were characterized by shortfalls in revenue and spending overruns on fuel and electricity subsidies that led to payment arrears to suppliers and contractors.
    "To date, the cash deficit has been largely financed with domestic borrowing, mainly from the Bank of Zambia," the IMF said on Nov. 1, adding that while tight monetary policy has helped stabilize the exchange rate and bring down inflation, the tight liquidity has put the private sector and banking system under stress and led to higher non-performing loans.
    Zambia's kwacha has been volatile in recent years - in 2015 it depreciated by 42 percent against the U.S. dollar despite central bank intervention to support it - but has been firming since mid-June. 
    The kwacha was quoted at 9.88 to the dollar today, up 11.3 percent this year.


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