THE Bank of Zambia says there is need for urgent implementation of other corrective policy measures that set the fiscal deficits, debt levels and debt service payments on a sustainable path. The Monetary Policy Committee (MPC), at its May 20-21 meeting, decided to raise the policy rate by 50 basis points to 10.25 per cent. BoZ governor Dr Denny Kalyalya said at a media briefing yesterday that inflation was projected to breach the upper bound of the 6-8 per cent target range over the forecast horizon due to heightened upside risks, some of which have materialised.
He said raising the Policy Rate was therefore, intended to counter inflationary pressures and support macroeconomic stability.
Dr Kalyalya said this was essential for sustained and higher economic growth.
“In the medium to long-term, growth prospects remain positive. However, to actualise these prospects, there is need for urgent implementation of other corrective policy measures that set the fiscal deficits, debt levels and debt service payments on a sustainable path,” he said.
“Addressing rising domestic arrears will also reduce non-performing loans and strengthen the ability of financial institutions to provide credit to the private sector.”
Dr Kalyalya said annual overall inflation declined to an average of 7.7 per cent in the first quarter of 2019 from 8.0 per cent in the fourth quarter of 2018 mainly on account of improved supply of some food items and a reduction in domestic fuel pump prices.
“In April 2019, inflation edged up slightly to 7.7 per cent, mostly due to high prices of maize grain and its products and the pass-through from the depreciation of the Kwacha against the US dollar,” Dr Kalyalya said.
“Over the next eight quarters, inflation is projected to rise above the upper bound of the 6-8 per cent target range as some of the risks to inflation outlined in previous MPC statements have begun to materialise. If not addressed, inflation is expected to remain above the target range over the reference period. Lower maize output, continued elevated fiscal deficits, high debt service payments, and the decline in gross international reserves are among the key upside risks to inflation.”
He said these risks have also contributed to heightened adverse market sentiments and were exerting pressure on the exchange rate.
Dr Kalyalya said the demand for government securities at auctions remained weak during the first quarter of 2019.
“The subscription rate for government bonds fell to 29 per cent from 33 per cent previously. However, the subscription rate for Treasury bills rose to 91 per cent from 88 per cent. Overall, the funds raised through auctions were lower than maturities. As a result, the total outstanding stock of government securities marginally decreased by 0.2 per cent to K58.2 billion at end-March 2019,” he said.
Dr Kalyalya said the government securities held by non-residents increased by 8.1 per cent to K8.7 billion, representing 14.9 per cent of the total stock.
“The rise in these holdings was mainly attributed to relatively high yield rates. As at end-March 2019, the non-resident holdings of government securities were entirely in government bonds,” he said.
“Commercial banks’ nominal average lending rates edged up to 24.6 per cent in March from 23.6 per cent in December 2018. Excluding outliers, the average lending rate rose to 22.8 per cent from 21.8 per cent in December 2018. The savings rate for 180-day deposits for amounts exceeding K20,000 rose to 9.8 per cent from 9.1 per cent. Similarly, the range of interest rates on Kwacha deposits widened slightly to 2.0 per cent – 22.5 per cent from 3.0 per cent – 22.1 per cent in the previous quarter.”
Dr Kalyalya said the increase in Kwacha denominated loans was mainly on account of higher lending to households, wholesale and retail trade, as well as electricity sectors.
“Money supply, however, contracted by 3.9 per cent in the first quarter of 2019 against a growth of 0.9 per cent in the previous quarter. The contraction in money supply was driven by the decline in gross international reserves and a drawdown in commercial banks’ offshore accounts,” said Dr Kalyalya.