Economic growth remains subdued, says Dr Kalyalya

The Bank of Zambia says indicators of economic activity suggest that economic growth remains subdued with heightened downside risks.

Briefing the media yesterday, BoZ governor Dr Denny Kalyalya said the monetary policy committee at its November 19 to 20 meeting said although inflation was projected to exceed the upper bound of the six to eight per cent target range during the first three quarters of the forecast period, it was expected to return to the target range thereafter.

“As some of the upside risks identified in the August MPC meeting materialised, inflation continued to rise and ended the third quarter just below the upper bound of the target range. Annual overall inflation rose to 7.9 per cent in September 2018 from 7.4 per cent in June 2018, largely reflecting higher prices of some food items and the depreciation of the kwacha against the US dollar,” he said. “Indicators of economic activity suggest that economic growth remains subdued with heightened downside risks. Credit to the private sector continued to recover albeit at too low a pace to stimulate significant economic activity.”

He said the El Nino forecast in the 2018/2019 farming season delayed implementation of fiscal adjustment measures as well as rising debt and debt service payments continued to pose downside risks to economic growth.

Dr Kalyalya said although the non-performing loans ratio declined to 11. 3 per cent from 12. 4 per cent, it remained above the 10 per cent prudential threshold, thereby posing a threat to the stability of the financial system.

He said the fiscal deficit for 2018 was now projected at around 7.0 per cent against a target of 6.1 per cent in the 2018 budget address.

Dr Kalyalya said fiscal consolidation therefore continued to be a critical requirement for macroeconomic stability.

“Should the rising risk to inflation materialise, an upward adjustment in the policy rate may be necessary to prevent inflation from persistently staying above the target range,” he said.

Dr Kalyalya said annual overall inflation rose for the third consecutive quarter, rising to 7.9 per cent in September from 7.4 per cent in June 2018.

He said food prices increased further, thereby contributing to the rise in inflation.

Dr Kalyalya said in addition, the 19.5 depreciation of the kwacha against the US dollar in September added upward pressure to the price of some food and non-food items.

He said should inflation in the fourth quarter of 2018 turn out to be lower than was currently projected, it might return to the target range faster than anticipated.

Dr Kalyalya said the overnight interbank rate was maintained within the policy rate corridor through appropriate open market operations.

He also said demand for government securities generally declined in the third quarter of 2018, weighed down by low liquidity levels and reduced participation by offshore investors.

Dr Kalyalya said subscription rates for government bonds fell significantly to 32 per cent from 124 per cent the previous quarter.

“On the other hand, subscription rate for treasury bills picked up to 68 per cent from 43.3 per cent. The stock of outstanding government securities, at K54.6 billion at end of September 2018, was 5.4 per cent higher than recorded at end June 2018. Of the total outstanding government securities, non-residents held K8.5 billion representing 15.6 per cent of the total stock, down from 17.0 per cent at end June 2018. Almost all the government securities held by non-residents are in government bonds,” Dr Kalyalya.

He said lending rates remained elevated and yield rates edged up.

Dr Kalyalya also said credit to private enterprises and households continued to recover and money supply expanded further.

He said fiscal deficit was projected to narrow.

Dr Kalyalya said speedy and effective implementation of the austerity measure as outlined by the government as well as strict adherence to the 2019 budget were necessary to moderate the pressures on government financing, private sector liquidity challenges, debt distress, inflationary pressures and threats to the stability of the financial sector.

He said the global economy continued to register positive growth anchored on strong growth in the US and was projected to grow by 3. 7 per cent in both 2018 and 2019 from 3.9 per cent in 2017.

Dr Kalyalya said this growth momentum and in particular the continued growth of the Chinese economy was expected to support copper prices and Zambia’s copper export earnings.

However, Dr Kalyalya said downside risks associated with trade wars and uncertainties surrounding Brexit had heightened over the medium-term.

He said domestic economic growth remained low with heightened downside risks.

Source: The Mast