2017 FIRST QUARTER ECONOMIC REVIEW

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1 2017 FIRST QUARTER ECONOMIC REVIEW MAY P a g e

2 Overview The performance of the economy in the first quarter of 2017 was on a positive trajectory with annual growth projected to be about 3.9 % from 3.4 % in The macroeconomic environment continued to stabilize in the first quarter aided by continued fiscal consolidation, easing of monetary policy and continued implementation of structural reforms. Inflation declined to 6.7% as at end March 2017 from 7.5% in December, 2016 mainly driven by relatively tight monetary policy and the appreciation of the Kwacha. During the quarter the Central Bank reduced the policy rate to 14.0% from 15.5%, statutory reserve ratio to 15.5% from 18.0 and overnight lending facility to 600 from 1,000 basis points. Exchange rate relatively stabilized against major trading currencies posting an average of K9.69/US$ compared to an average of K10.2 in 2016, improved market confidence and increased participation by non-resident investors in Government securities. Lending rates however, remained elevated in the first quarter averaging 28.9 % from average of % in the last quarter of High lending rates was a reflection of tight monetary policy and high government borrowing which pushed up the wholesale cost of funds for banks who passed this onto clients. Related to this, domestic credit to the private sector remained subdued in the quarter. Budget performance was relatively in line with the projections, despite revenue collections being lower at K9.13 billion than target of K10.5 billion. The challenges in the revenue collection in the quarter related to the delayed implementation of budget pronouncement measures such as electronic fiscal devices and also low tax compliance. Total expenditure at K13.6 billion was also below quarter target of K14.7 billion. Key expenditure items for the quarter was the front loading of payments of K1.95 billion against year target of K8.3 billion towards clearance of domestic arrears owed to different suppliers of goods and services (FISP, FRA, Electricity, Fuel, Liabilities and Infrastructure). As at end March, 2017 the fiscal balance stood at 1.5% of GDP. Improved performance was also recorded in the electricity generation which increased by 25.2% in the first quarter, while agricultural output is expected to increase to above 3 million tons of maize aided by good rainfall. Copper production however declined to 171,912 Mt compared to 183,321 Mt produced in Q1 of This was on account of low ore grade at one of the major copper producing mines compounded by inadequate technology for effective treatment of lowgrade ores. A relative rebound in the copper prices on the international market was recorded averaging US$5,840 per ton in Q1 of 2017 from US$5,280 in Q4 of Crude oil prices continued to be on an upward trajectory from an average of US$50.08 in q4 of 2016 to US$54.12 in Q1 of Exports of goods and services increased to K7.6 billion in February compared to K5.9 billion in December Similarly, imports of goods and services increased to K8.7 billion in February 2017 from K6.6 billion in December However, the trade deficit widened to K1, million in February 2017 from K227.3 million in January The widening of the trade deficit was 1 P a g e

3 explained by increase in importation of capital and consumer goods. The stock of Government securities increased to K37.0 billion from K33.0 billion at end December The rise was explained by increased demand attributed to the participation of non-resident investors and upward adjustment in the tender side. External debt stock increased to US$7,238 million as at end March from US$6,946 million as at end December This supported the increase in market confidence and relative stability of the exchange rate. In an effort to enhance cash management in the public sector, government rolled out the Treasury Single Account (TSA) to 13 sites of government institutions bringing the number on TSA to 23. Performance of the Zambian Sovereign bonds on the secondary market in the recent past bonds have returned to a favourable trajectory. This was despite the uncertainties arising from the uptick in yields post Brexit and the US presidential elections. The market assessment of 21 st March 2017 indicates that investors generally perceived the Zambian Eurobonds to be attractive. Consequently, investors were offering US$93.8 for the US$750 million bond, US $ for the US $1 million and US$ US $1.25 billion bond from US$92.5, US$ and US$ as at 28 th February respectively. Over the same period, the yield rates also improved to 6.73%, 7.53% and 8.14% for the US$750 million, US$ 1 billion and US$1.25 billion, respectively. The yields for the US $1 billion and US $1.25 billion bonds, therefore, were below their levels at the time of issuance. The outlook of the economic performance is positive, to be aided by Government s commitment to the implementation of Economic Stabilization and Growth Programme aimed restoring fiscal fitness. Stability in the supply of electricity, expected improved output of the agriculture sector supported by good rainfall will aid economic growth. Copper production in expected to pick up to above 800,000 Mt by end of 2017 with the completion of expansionary projects by some mines, ramping up and continue anticipated rise in copper prices. The relatively easing of monetary policy is expected to support the liquidity conditions, lower of lending rates, continued increased in foreign participation on government securities, stability of the exchange rate and downward trend in inflation. Further, fiscal consolidation which lowers Government borrowing is expected to further lower yield rates and put downward pressure on prices. If inflation remains low, the Central Bank continue to ease monetary policy in support of growth. The continued dismantling domestic arrears is expected to aid the increase in the economic activities. Further, the expected impact from the implementation of revenues measures such as tax amnesty and electronic fiscal devices will provide impetus to the economy. The downside risk to the economic trajectory include the impact of increase in electricity tariffs may lead to high cost of production which may impede price stability and general productivity in the economy. Continued high cost of borrowing may limit access to credit by the productive sectors. 2 P a g e

4 Economic Review Key Economic Fundamentals GDP Growth Growth Projections and Actual Projection Actual Source: Ministry of Finance Percentage share to GDP Agriculture, forestry, and fishing Mining and quarrying Manufacturing Construction Wholesale and retail trade Source: Ministry of Finance Inflation Trends 30.0 Year to date Inflation, April 2016 to April Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 Total Food Non-food Source: Central Statistical Office 3 P a g e

5 58,138 62,024 69,020 69,998 66,217 66,356 62,608 69,369 63,547 57,157 53,390 56, FIRST QUARTER ECONOMIC REVIEW Lending Rates Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Source: Bank of Zambia Trend in Exchange rates Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 K/USD K/GBP K/ZAR Source: Bank of Zambia Copper Production Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Source: Ministry of Mines and Minerals Development 4 P a g e

6 1,365 1, ,159 2, (3,674) (3,704) 2,409 2,476 2,773 11,569 11, ,151 1,826 2,268 4,244 10,497 8,248 3-Jan-17 5-Jan-17 7-Jan-17 9-Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan-17 2-Feb-17 4-Feb-17 6-Feb-17 8-Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb-17 2-Mar-17 4-Mar-17 6-Mar-17 8-Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar FIRST QUARTER ECONOMIC REVIEW Copper Prices and Oil Prices Crude Oil (US$/Bl) Copper (US$/Ton) ,400 6,200 6,000 5,800 5,600 5,400 5,200 5,000 Source: IMF, LME, Index Mundi. Oil prices- average of Brent, Dubai & WTI. Budget Performance Revenue Performance 2017 Q1 (Target Vs Actual K Billion) 9,131 7,548 3,792 2,308 1,419 1, Domestic Revenue Tax Revenue Income Tax Value Added Tax (VAT) TARGET Customs and Non Tax Revenue Mineral Royalty Excise Duties ACTUAL Grants Source: Ministry of Finance Expenditure Performance 2017 Q1 (Target Vs Actual K Billion) TARGET ACTUAL EXPENSES Use of Goods and Services Interest Payments Grants and Social Benefits ASSETS LIABILITIES FISCAL Other Payments BALANCE Source: Ministry of Finance 5 P a g e

7 Electricity Generation Vs Consumption Q Mwh 1,043, , , ,723 1,202, ,671 Jan-17 Feb-17 Mar-17 Generation Consumption Source: ZESCO Imports Vs Exports Q Mwh 146,673 57,395 46,317 83,593 59,926 56,289 Jan-17 Feb-17 Mar-17 Exports Imports Trade Performance (K Million) Exports Imports Trade Deficit Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 6 P a g e

8 Source: Central Statistical Office Yield Rate Trends for Zambia s Euro Bonds 15 Coupon rates US$750 mn-5.375% US$ 1Bn- 8.5% US$1.25Bn th Jul nd Aug nd Sep th Sep 1st Nov st Nov th Nov 1st Feb US$ 750 Million US$ 1.0 Billion US$ 1.25 Billion 28th Feb st Mar P a g e