The Bank of Zambia has admitted that Zambia’s current account is almost depleted as it has reduced from $112.2 million last year to a paltry $19.4 Million.
‘Preliminary data indicate that the current account deficit narrowed to US $19.4 million from the revised figure of US $112.2 million in the fourth quarter of 2018,’ said BoZ in a statement.
The current account indicates how healthy an economy is. It is the sum of the balance of trade (goods and services exports minus imports), net income from abroad, and net current transfers.
The Central bank further revealed that ‘Non- traditional exports (NTEs) declined by 9.6% to US$489.5 million owing to a reduction in earnings from burley tobacco and maiz e exports.’
BoZ attributed the current deterioration of the Kwacha to demand for fuel and negative sentiments.
‘The Kwacha weakens against the US dollar
The Kwacha has come under severe pressure. Between April 1, and May 17 2019. the Kwacha depreciated by 14.9% to around K14.00 per US dollar. This was due elevated demand related to petroleum imports, reduced supply of foreign exchange, and negative market sentiments.’
And the Bank of Zambia has raised its key interest rate for the first time since November 2015 in a bid to stabilize the deteriorating currency and support macroeconomic stability.
The Central Bank has raised the Monetary Policy Rate to 10.25 percentage from 9.75 percent.
See full statement below:
Monetary Policy Committee Statement (Summary) – Bank of Zambia
Monetary Policy Committee raises the Policy Rate by 50 basis points to 10.25%
The Monetary Policy Committee (MPC), at its May 20-21 Meeting, decided to raise the Policy Rate by 50 basis points to 10.25%. Inflation is projected to exceed the upper bound of the 6-8% target range during the second quarter of 2019 to the first quarter of 2021 forecast period (Q2-2019 to Q1-2021). The reasons for this policy decision are:
1.Inflation declined, but upside risks persist
Annual overall inflation declined to an average of 7.7% in the first quarter of 2019 from 8.0% in the fourth quarter of 2018 due to improved supply of food items and a reduction in domestic fuel pump prices. At the end of the first quarter, inflation slowed down to 7.5% from 7.9% in December 2018. However, in April 2019, inflation rose slightly to 7.7%, due to high prices of maize grain and its products and the pass-through from the depreciation of the Kwacha against the US dollar. 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 and are exerting pressure on the exchange rate.
2. Interbank rate maintained within the Policy Rate Corridor. The open market operations conducted by Bank of Zambia maintained the average interbank rate within the Policy Rate Corridor, although it rose slightly to 9.90% from 9.79% in the previous quarter.
3.Demand for Government securities muted
Demand for Government securities at auctions remained weak during the first quarter of 2019. The subscription rate for Government bonds fell to 29% from 33% previously. The subscription rate for Treasury bills rose to 91% from 88%. The total outstanding stock of Government securities marginall y decreased by 0.2% to K58.2 billion at end of March 2019.
Government securities held by non-residents increased by 8.1% to K8.7 billion, representing 14.9% of the total stock. This was due to relatively high yield rates. At the end of March 2019, the non-resident holdings of Government securities were entirely in Government bonds.
4. Interest rates edge up Commercial banks” nominal average lending rates rose up to 24.6% in March from 23.6% in December 2018. Excluding outliers’, t he average lending rate rose to 22.8% from 21.8% in December 2018.
The savings rate for 180-day deposits for amounts exceeding K20.000 rose to 9.8% from 9.1%. The range of interest rates on Kwacha deposits widened slightly to 2.0% – 22.5% from 3.0% – 22.1% in the previous quarter.
The weighted average Treasury bills yield rate rose to 22.6% from 21.4% while that for Government bonds increased to 24.9% from 20.1%. This was due to liquidity conditions and negative market sentiments associated with Zambia’s sovereign credit rating downgrade in February 2019.
5. Credit growth picks up as money supply contracts Total domestic credit growth picked up to 2.9% in the first quarter of 2019 from the 1.3% recorded in the fourth quarter. This was due to lending to private enterprises. Credit to private enterprises grew by 5.0% against a contraction of 4.6% in the previous quarter. Growth in credit to Government decreased to1.1% from 3.3%.
Foreign currency denominated loans grew by 11.0% from 2.4% in the previous quarter. This was due to increased lending to the transport, mining, agriculture and electricity sectors.
Kwacha loans grew by 2.0%, albeit lower than the 4.7% growth in the previous quarter. This was due higher lending to households, wholesale and retail trade and electricity sectors.
Money supply contracted by 3.9% in the first quarter of 2019 against a growth of 0.9% in the previous quarter. This was due to the decline in gross international reserves and a drawdown in commercial banks’ offshore accounts. However. on an annual basis. money supply growth picked up to 17.6% in the first quarter from 16.4% in the preceding quarter.
6. Fiscal deficit remains elevated
The 2018 fiscal deficit, on cash basis, at 7.6% of GDP, was above the target of 6.1%, largely reflecting higher than programm ed spending on capital projects and debt service on external and domestic loans. However, it was slightly lower than the 2017 outturn of 7.8% of GDP.
7. Global growth prospects remain subdued
In the first quarter of 2019, preliminary data indicate that global economic activity was generally stronger than expected on account of favorable growth in some advanced economies. However, in April 2019 the IMF revised downwards global economic growth forecast for the year to 3.3% from 3.6%. due to the uncertainties associated with the trade war between the US and its key trading partners as well as delays in concluding Brexit.
8. Current account surplus narrows
Preliminary data indicate that the current account deficit narrowed to US $19.4 million from the revised figure of US $112.2 million in the fourth quarter of 2018. Non- traditional exports (NTEs) declined by 9.6% to US$489.5 million owing to a reduction in earnings from burley tobacco and maiz e exports.
9. The Kwacha weakens against the US dollar
The Kwacha has come under severe pressure. Between April 1, and May 17 2019. the Kwacha depreciated by 14.9% to around K14.00 per US dollar. This was due elevated demand related to petroleum imports, reduced supply of foreign exchange, and negative market sentiments.
10. Domestic economic growth remains subdued and downside risks heighten
Indicators of economic activity point to subdued economic growth during the first quarter of 2019, Mining output, cement production, consumer spending, and tourist arrivals registered negative year-on- year growth. For the year, real GDP growth is expected to slow down. reflecting lower agriculture production and mining output as well as constrained electricity generation.