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Bank of Zambia Implications of Recent Trade Tensions on Macroeconomic Policy May 6, 2019

Bank of Zambia Implications of Recent Trade Tensions on Macroeconomic Policy May 6, 2019. Outline of Presentation. Key Messages Economic Overview Monetary Policy Framework Trade Tensions and Macroeconomic Policy. Key Messages.

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Bank of Zambia Implications of Recent Trade Tensions on Macroeconomic Policy May 6, 2019

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  1. Bank of Zambia Implications of Recent Trade Tensions on Macroeconomic Policy May 6, 2019

  2. Outline of Presentation Key Messages Economic Overview Monetary Policy Framework Trade Tensions and Macroeconomic Policy

  3. Key Messages Trade Tensions between USA and China impact the economy through trade and financial flows channels Impact muted for now, but is potentially significant Trade channel impact reflects impact on commodity prices and copper prices in particular. Copper price changes have implications for growth and inflation (through the exchange rate channel) given the dominance of the copper mining industry in Zambia Financial flows channel reflects impact though FDI and Portfolio flows Forward looking monetary policy framework if credible can help mitigate uncertainty arising from trade disputes. BoZ also has economic advisory role which provides an opportunity to influence growth policies of the Government Price and financial system stability remain indispensable objectives

  4. Economic Overview Land Surface Area: 752,614 sq km Population Estimate:16.8 million Major sectors: Mining, Agriculture, Energy, Manufacturing, Tourism Major traditional and non-traditional (non-copper) exports: Copper, copper wire, gemstones, Cane sugar, tobacco, maize and maize seed, cement GDP growth rate – 3.7% (2018) (4.0% - 5 year average; 6.0% - 10 year average) GDP:US $26,733.8 m (2018 preliminary) GDP per Capita: US $1,583.8 (2018 preliminary)

  5. Economic Overview Real GDP Growth(Percent) Source: Central Statistical Office

  6. Economic OverviewThe fiscal deficit is projected to narrow to 5.1% in 2021 from 7.6% in 2018 (7.8% in 2017) Fiscal Balance (Percent of GDP)

  7. Economic Overview Inflation reverted to the target band and closed the year at 7.9%. As of March 2019, inflation stood at 7.5%). Year-on-year Inflation rate Source: Bank of Zambia

  8. Current Monetary Policy Framework • In April 2012, the Bank changed its monetary policy framework from targeting quantities to prices. The operational target of monetary policy changed from monetary aggregates to the overnight interbank rate. • The Policy Rate was introduced as a key interest rate to signal the monetary policy stance in line with attainment of inflation target. • Policy Rate is linked to the interbank rate, with defined upper and lower limits (corridor) within which the overnight interbank rate is allowed to fluctuate in line with the inflation target • Once Policy Rate is set, the Bank manages liquidity in the market through Open market operations to ensure that the average interbank rate remains within the corridor (see Chart on next slide). • Currently the corridor is +/- one percentage points of the Policy Rate for the upper and lower bounds, respectively.

  9. Current Monetary Policy Framework (cont’d) • Adjustments to the Policy Rate depend on prevailing conditions, and should be consistent with achieving the inflation objective. • Increase suggests tightening of monetary policy • Decrease indicates loosening of monetary policy • Changes in the policy rate are guided by inflation forecasts and a comprehensive set of economic indicators that inform short and medium-term risks to price stability. These include expected inflation, output gap, money supply, interest rates, exchange rate, foreign prices, and commodity prices. • The BoZ Inflation Forecasting Group (IFG) undertakes the forecasts. • This ensures that monetary policy does not overlook important information relevant for assessing future inflation trends.

  10. Current Monetary Policy Framework (cont’d) Money Market Liquidity and Interbank Rate Source: Bank of Zambia

  11. Current monetary Policy Framework Nominal Interest Rates (%) Source: Bank of Zambia

  12. Current Monetary Policy Framework (cont’d)

  13. Trade Tensions and Macroeconomic Policy Balance of Payments (US$’million) Source: Bank of Zambia

  14. Trade Tensions and Macroeconomic Policy Source: Bank of Zambia

  15. Trade Tensions and Macroeconomic Policy Source: Bank of Zambia

  16. Trade Tensions and Macroeconomic Policy Source: Bank of Zambia

  17. Trade Tensions and Macroeconomic Policy Supply and Demand, 2017-2018 (US$’million) Source: Bank of Zambia

  18. Trade Tensions and Macroeconomic Policy Source: Bank of Zambia

  19. THANK YOU AND GOD BLESS…

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