F R A N C I S C H I P I M OD I R E C T O R E C O N O M I C S

B A N K O F Z A M B I A

Z A M B I A I N V E S T M E N T C O N F E R E N C EN O V E M B E R 4 , 2 0 1 5

L O N D O N

Zambia’s Economic Outlook

OUTLINE

1. Introduction

2. Recent Macroeconomic Developments

3. Monetary Policy and Inflation

4. Conclusion

Introduction

BoZ objective under the Bank of Zambia Act, is to maintain price and financial systemstability to support balanced macroeconomic development.

Price stability we understand as low (single digit) and stable inflation

BoZ is responsible for monetary policy, but we have to take into account developments inthe real economy (economic growth); fiscal policy and the budget; and external sectordevelopments.

Focus of my presentation will really be on monetary policy

Recent Economic Developments: Economic Growth

Zambia’s has had a strong record of economic growth, outperforming SAA. This has alsobeen reflected in rising per capita incomes.

We are currently experiencing a slowdown in growth, projected at 4.6% in 2015 and 5%in 2016, largely reflecting both external and domestic shocks, but growth is expected toremain above the SSA forecast of 3.8% for 2015.

Growth driven by both mining and non-mining sectors. In the non-mining sector, wehave seen growth in manufacturing, transport and communication, construction,wholesale and retail trade and energy sectors (prior to the current challenges).

Key challenges going forward include:

Growth has been driven by Prior to 1991, economic activity was controlled and dominatedby the Government through policies that were introduced between 1969 and 1972/3.Prior to this period the economy was private sector led.

Recent Economic Developments: Fiscal Policy

We have seen an expansionary fiscal policy, with the budget deficit and capitalexpenditures rising.

This has led to increased domestic and external financing, with the increases inoutstanding Government Treasury bills and bonds

The yield rates on Government securities have also risen.

The Government has recognized the need for fiscal consolidation and in hid 2016 Budgetaddress, the Hon. Minister of Finance has proposed a sharp reduction in the budgetdeficit to 3.8% of GDP from 6.9%

Recent Economic Developments: External Sector Developments

We have seen an expansionary fiscal policy, with the budget deficit and capitalexpenditures rising.

This has led to increased domestic and external financing, with the increases inoutstanding Government Treasury bills and bonds

The yield rates on Government securities have also risen.

The Government has recognized the need for fiscal consolidation and in hid 2016 Budgetaddress, the Hon. Minister of Finance has proposed a sharp reduction in the budgetdeficit to 3.8% of GDP from 6.9%

Monetary Policy and Inflation

We have seen an expansionary fiscal policy, with the budget deficit and capitalexpenditures rising.

This has led to increased domestic and external financing, with the increases inoutstanding Government Treasury bills and bonds

The yield rates on Government securities have also risen.

The Government has recognized the need for fiscal consolidation and in hid 2016 Budgetaddress, the Hon. Minister of Finance has proposed a sharp reduction in the budgetdeficit to 3.8% of GDP from 6.9%

Conclusion

We have seen an expansionary fiscal policy, with the budget deficit and capitalexpenditures rising.

This has led to increased domestic and external financing, with the increases inoutstanding Government Treasury bills and bonds

The yield rates on Government securities have also risen.

The Government has recognized the need for fiscal consolidation and in hid 2016 Budgetaddress, the Hon. Minister of Finance has proposed a sharp reduction in the budgetdeficit to 3.8% of GDP from 6.9%

Recent GDP Growth… ...Real growth (based on revised GDP) has been strong, Zambia has outperformed its peers. However, in 2015 growth is projected to fall by just under 1 percentage point and

income inequality remains high.

0

1

2

3

4

5

6

7

8

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Per capita income (current US $) (LHS) GDP Growth % (Zambia) (RHS)(2015, projected) GDP Growth % (SSA) (RHS) (2015, projected)

Fiscal Policy…Expansionary fiscal policy with higher capital expenditures related to infrastructure development.

However from 2013 increased deficit also accounted for by non-capex spending.

2.9%

0.2%

2.5% 2.6%

3.1% 3.2%

2.6%

6.8%

5.2%

6.9%

0.3%

3.4%

3.9%

5.2%

3.7%

5.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Deficit (% of GDP) (2015, the government revised fiscal deficit projection) Non-financial assets (% of GDP)

Fiscal Policy…Expansionary fiscal policy has led to higher domestic borrowing of both Treasury bills and bonds

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

31-

De

c-10

31-

Ja

n-1

12

8-F

eb

-11

31-

Ma

r-11

30

-Ap

r-11

31-

Ma

y-1

13

0-J

un

-11

31-

Ju

l-11

31-

Au

g-1

13

0-S

ep-1

13

1-O

ct-1

13

0-N

ov

-11

31-

De

c-11

31-

Ja

n-1

22

9-F

eb-1

23

1-M

ar-

123

0-A

pr-

123

1-M

ay

-12

30

-Ju

n-1

23

1-J

ul-

123

1-A

ug

-12

30

-Sep

-12

31-

Oct

-12

30

-No

v-1

23

1-D

ec-

123

1-J

an

-13

29

-Feb

-13

31-

Ma

r-13

30

-Ap

r-13

31-

Ma

y-1

33

0-J

un

-13

31-

Ju

l-13

31-

Au

g-1

33

0-S

ep-1

33

1-O

ct-1

33

0-N

ov

-13

31-

De

c-13

31-

Ja

n-1

42

8-F

eb

-14

31-

Ma

r-14

30

-Ap

r-14

31-

Ma

y-1

43

0-J

un

-14

31-

Ju

l-14

31-

Au

g-1

43

0-S

ep-1

43

1-O

ct-1

43

0-N

ov

-14

31-

De

c-14

31-

Ja

n-1

52

8-F

eb

-15

31-

Ma

r-15

30

-Ap

r-15

31-

Ma

y-1

53

0-J

un

-15

31-

Ju

l-15

31-

Au

g-1

5

T-bills outstanding (K' thousands) Govt Bonds Outstandings (K' thousands)

Fiscal Policy…Treasury bill yield rates have trended upwards from 2013 as a consequence.

0

5

10

15

20

25

07

-Ja

n-1

0

07

-Ma

r-10

07

-Ma

y-1

0

07

-Ju

l-10

07

-Sep

-10

07

-No

v-1

0

07

-Ja

n-1

1

07

-Ma

r-11

07

-Ma

y-1

1

07

-Ju

l-11

07

-Sep

-11

07

-No

v-1

1

07

-Ja

n-1

2

07

-Ma

r-12

07

-Ma

y-1

2

07

-Ju

l-12

07

-Sep

-12

07

-No

v-1

2

07

-Ja

n-1

3

07

-Ma

r-13

07

-Ma

y-1

3

07

-Ju

l-13

07

-Sep

-13

07

-No

v-1

3

07

-Ja

n-1

4

07

-Ma

r-14

07

-Ma

y-1

4

07

-Ju

l-14

07

-Sep

-14

07

-No

v-1

4

07

-Ja

n-1

5

07

-Ma

r-15

07

-Ma

y-1

5

07

-Ju

l-15

Composite T-Bills Yield Rate

Composite T-Bills Yield Rate

Fiscal Policy…Government bond yield rates have also trended upwards from 2013

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Govt. Bonds weighted average yield rate (%)

Monetary Developments...monetary policy remains focused on maintaining single digit inflation, with a flexible

exchange rate and building adequate international reserves.

3.64.0 3.8

5.14.8 4.9

5.2 5.4

6.2

7.1

706.4

1080.2 1085.0

1924.2

2093.7

2322.0

3044.0

2683.8

3072.9

2732.0

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Inflation (annual average %; 2015 average Jan-June)LHS

Exchange rate K/US $ (Annual average; 2015 Jan - June 17) LHS

Gross International Reserves (US $' million; 2015 figure end-June) (RHS)

Monetary Developments…Households (personal loans) continue to account for the largest share of private sector credit, followed

by agriculture, manufacturing and wholesale and retail trade. (annual % growth rates)

Sector 2006 2007 2008 2009 2010 2011 2012 2013 2014

1. Agriculture, forestry, Fishing and hunting 22.2 26.8 4.3 33.2 6.1 24.7 23.0 53.6 -0.9

2. Mining and quarrying 30.8 71.0 43.8 30.7 -30.1 21.5 111.7 42.2 20.0

3. Manufacturing 42.8 29.3 33.7 29.2 14.2 19.4 33.8 15.8 12.6

4. Electricity, gas, water and energy 11.6 11.6 10.6 -8.3 -21.0 8.0 84.8 13.8 24.6

5. Construction 36.3 146.1 56.1 4.2 47.3 55.0 -2.0 15.6 5.7

6. Wholesale and retail trade 36.2 27.9 17.8 13.5 18.8 15.9 4.2 24.3 35.5

7. Restaurants and hotels -7.5 9.4 84.1 33.1 -11.8 41.9 31.8 8.6 4.8

8. Transport, storage and communications 28.2 86.5 26.8 15.9 -22.2 36.1 12.1 12.0 24.4

9. Financial services 186.9 81.3 109.3 19.5 -53.7 25.0 -23.2 29.4 32.9

10. Community, social and personal services 25.3 20.6 11.4 127.7 -4.1 91.4 -26.3 38.6 23.6

11. Real estate 89.5 -28.6 128.7 148.7 -24.4 -14.5 -5.5 8.3 47.5

12. Credit/debit cards 0.0 699.5 -82.0 -34.1 198.9 -77.8 239.6 432.7 27.9

13. Other sectors -4.3 139.5 90.1 7.7 14.3 32.8 50.0 36.4 19.5

o/w Personal Loans -9.7 158.4 99.1 5.4 20.2 27.0 52.9 36.3 20.1

Other sectors 27.0 61.4 30.0 30.6 -33.9 119.8 24.9 36.6 13.9

Total 26.8 49.6 43.7 24.1 -0.3 26.8 27.9 32.1 16.4

Monetary Developments…downward trend in interest rates from 2009, but interest rates generally on the increase

since 2012

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Average Lending rate (%) (end-period; 2015 avg in month of June)

External Sector Developments…...Current account and trade balance remain positive between 2009 and 2012. Current

account has turned to a deficit from 2013, whilst the trade balance has narrowed.

-1000

-500

0

500

1000

1500

0

500

1000

1500

2000

2500

3000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Current account in US $ mn (RHS; 2015 projection)

Balance on goods and services in US $' mn (LHS; 2015 projection)

External Sector Developments…FDI inflows remain strong and have been an important driver of growth. However, FDI

flows have slowed since 2012 and are expected to drop further in 2015

615.8

1323.9

939

695

1729

1109

2433

16301507.8

1814.4

0

500

1000

1500

2000

2500

3000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

FDI flows (US $ Mn; 2015 projection)

External Sector Developments...external sector performance has been strong in recent years, but recently deteriorated given global economic developments.

Export and import growth has been negative from 2014

-40

-20

0

20

40

60

80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rc

en

t (%

)

Export growth annual Import growth annual

External Sector Developments…Some diversification has taken place with NTEs growing strongly through to 2013. From 2014 NTEs have

dropped sharply.

0

500

1000

1500

2000

2500

3000

3500

4000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NTE's (US $' millions; 2015 projection)

External Sector Developments...recent deterioration experience given global economic developments reflected in the worsening terms of trade from 2012

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Terms of Trade (Copper price/Oil price)

External Sector Development(Exchange Rate and Copper Prices)

0.0

2.0

4.0

6.0

8.0

10.0

12.00.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

Copper Price (LHS) (Sept. up to ZMW/USD (Right Axis)(inverted)

Demand and Supply in the Foreign Exchange Market...Forex supply from the mining sector has fallen sharply

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

100000

200000

300000

400000

500000

600000

Ja

n-0

9

Ma

r-0

9

Ma

y-0

9

Ju

l-0

9

Sep

-09

No

v-0

9

Ja

n-1

0

Ma

r-10

Ma

y-1

0

Ju

l-10

Sep

-10

No

v-1

0

Ja

n-1

1

Ma

r-11

Ma

y-1

1

Ju

l-11

Sep

-11

No

v-1

1

Ja

n-1

2

Ma

r-12

Ma

y-1

2

Ju

l-12

Sep

-12

No

v-1

2

Ja

n-1

3

Ma

r-13

Ma

y-1

3

Ju

l-13

Sep

-13

No

v-1

3

Ja

n-1

4

Ma

r-14

Ma

y-1

4

Ju

l-14

Sep

-14

No

v-1

4

Ja

n-1

5

Ma

r-15

Ma

y-1

5

Ju

l-15

Sep

-15

Net Mining Supply (US $ '000) (sep up to 25) Net Mining Supply (% of Total Supply) (Sept. up to 25) (RHS)

DEVELOPMENTS IN THE ZMW/USD EXCHANGE RATE…the ZMW has exhibited a faster year on year depreciation against USD Since May with a rapid acceleration in August

0

10

20

30

40

50

60

70

0.00

2.00

4.00

6.00

8.00

10.00

12.00

ZMW/USD ZMW/USD (y-o-y % depreciation (RHS))

USD DEMAND BY ALL SECTORS FROM COMMERCIAL BANKS IN 2015… Foreign financials are the highest demanders of USD from the Commercial banks

-

200,000,000.00

400,000,000.00

600,000,000.00

800,000,000.00

1,000,000,000.00

1,200,000,000.00

USD SUPPLY BY THE REAL SECTOR TO COMMERCIAL BANKS IN 2015… The mining sector is the highest supplier of USD to the commercial banks

-

200,000,000.00

400,000,000.00

600,000,000.00

800,000,000.00

1,000,000,000.00

1,200,000,000.00

1,400,000,000.00

1,600,000,000.00

1,800,000,000.00