The governor, speaking today during the press briefing gave a statement on the monetary policy committees (MPC) decision, during the meeting held yesterday. He gave an insight on what inflation is like, what the projections are going forward, the foreign exchange market and relatedly the current account, where it is and the projections going forward, which was followed by domestic credit and money supply, the situation in the economy as well as how the economy is fairing, and what the growth is expected to be.
The governor said, at it’s meeting held on 15-16, may, 2023, the MPC decided to raise the monetary policy rate by 25 basis points to 9.5%. In arrival to this decision the MPC took into account a number of factors, however the key ones where that, actual inflation averaged 9.6%, in the first quarter of this year. He said although declined the projections are that inflation will continue to be above the target range which is 6–8% over the forecast horizon, in addition to this the committee also took into account other factors such as the fragile growth that the economy is growing at, “the economy last year is said to have grown to 4,7%, however if you look at the inflation growth rate, that still is not sufficient enough to say we are growing robustly”, he said they are also mindful of the vulnerabilities andrisks seen in the financial sectors, the financial sector is susceptible to a number of things, such as concentration ratio in the market, credit risk and issues to do with capital.
Some benefits that will follow inflation will be that inflation willactually come down should we manage to get the long outstanding debt restructuring and negotiations and we see this already on its way through the exchange rate channel, he said. “Inflation has continued to come down as was observed in the first quarter of 2023, inflation was averaged at 9.6% compared to 9.8% in the fourth quarter of 2022. However when considering inflation factors dissipation factors are considered and these are of base effects in a broad range of items in the consumer basket and sustained reduction in the prices of oils and fats, due to lower costs of imported inputs, were the key drivers”. Notable items in the consumer basket in which the base effect dissipated were road passenger transport, fish, fuel, bread and cereals as well as rent. in April 2023, inflation rose to 10.2% from 9.9% in March. Hence inflation was driven strongly by regional demand for maize and maize meal and the lagged pass-through from the depreciation of the Kwacha against the US dollar. He further noted that the pressure seen building up in April are likely to persist over the forecast horizon. In the current forecast, he said, it is projected that inflation will average 10.5% 8.4% in 2023 and 2024.
Speaking further, the governor noted that if the debt restructuring is delayed further it has adverse implications to other factors in the economy. He also said the tighter financial global conditions are happening in many countries, and by tightening their monetary policies interest rates are rising and this is causing pressure on capital flows for us here, “we have seen some of the domestic players diverting because they’re searching for better yields, and to the extent that this continues we’re going to continue having those kind of challenges”, he said, it has also been noted that the high price in maize going up has been due to low production rate in the previous season gone by. He further added that the Russia Eukrain war has also added to the pressure faced in a number of areas in many economies, and economies are responding to that as is with the case in Zambia, as that matter remains unresolved.
Speaking on the foreign exchange market, he said, the Kwacha depreciated in the first quarter for this year by 16.8%, the drivers for this are that there has been a excess demand which conceded with low supply on the market, and all this combined to put pressure on the Kwacha. This has also been attributed to the dependency on the mines for too long, and he emphasized that there is need to export more. He noted that at the end of March there was some improvement with supply which was accompanied by good news that the nation was able to reach a staff level agreement with the IMF which was doing a firstreview of The ECF which is the Extended Credit Facility of the program which resulted in the exchange rate responding in the manner that it did. He also said that terms of trade are expected to improve which will have positive posture for the economy.
There has been a slowdown of credit to the government but a robust turn out to private sectors. Currently it is seen that a lot of credit is going to , as personal loans as many financial institutions having been advertising personal loans. There is therefore need for people to borrow directly in order for money to go towards projects. He said, domestic economic activity had gone down, in terms of volume of services, as most economic activities are performing badly.
In conclusion, he said, decisions on the Policy Rate will continue to be guided by inflation outcomes, forecasts, and identified risks, including those associated with financial stability and external debt restructuring.