BoZ projects inflation to remain above 7.5%

Bank of Zambia governor Dr Denny Kalyalya speaks to journalist - picture by Tenson Mkhala

The Bank of Zambia (BoZ) says inflation for the remaining period of this year will remain above 7.5 per cent in view of the upside risks that include higher than anticipated food prices.

And BoZ governor Dr Denny Kalyalya says efforts at fiscal consolidation will not be realised this year if Zambia exceeds a budget deficit of more than 7.8 per cent.

Meanwhile, Dr Kalyalya said the deteriorating Turkish economy should not be expected to have any negative impact on Zambia’s prospects to refinance the US$750 million Eurobond.

Speaking during the BoZ Monetary Policy Rate (MPR) announcement in Lusaka yesterday, Dr Kalyalya said the annual rate of inflation for the remaining period of this year will remain above 7.5 per cent in view of the upside risks that include higher than anticipated food prices as well as a likely hike in fuel prices.

“Inflation is projected to remain above 7.5 per cent in the second half of 2018, and to be anchored around seven per cent, the midpoint of the 6-8 per cent target range, for the remainder of the forecast horizon. There are, however, elevated upside risks to the projected inflation over the near-term,” Dr Kalyalya told journalists at the Bank’s headquarters.

“These include higher than anticipated food prices and fiscal deficits as well as a possible rise in domestic fuel prices, owing to the upward movement in the international crude oil prices. In addition, higher than programmed external debt service payments could have an adverse impact on inflation through the exchange rate channel.”

He did, however, add that inflationary pressures are likely to ease in the medium-term.

“It is, however, projected to slowdown and remain anchored around the mid-point of the 6-8 per cent target range over the remainder of the forecast horizon. The forecast horizon is the third quarter of 2018 to the second quarter of 2020,” Dr Kalyalya added.

And asked what impact the approval of government’s K7.2 billion supplementary budget will have on widening the fiscal deficit even further, he noted that it is likely to remain above seven per cent.

Dr Kalyalya said that efforts to achieve fiscal consolidation will not be realised this year if Zambia exceeds a budget deficit of more than 7.8 per cent.

Government’s supplementary budget approved last month will see around K3.6 billion diverted for domestic and external debt obligations; K1.3 billion to be spent on completing infrastructure projects and K2.3 billion will cover shortfalls on government-support programmes, by-elections and the recruitment of a further 3,700 medical personnel.

“On the supplementary budget, the revision that we are talking about in the [fiscal] deficit has to do with that also. The deficit is likely to be above seven per cent. What we are really concerned about is that, if we are really to demonstrate fiscal consolidation, our deficit for 2018 has to be less than the 2017 deficit. So, the magic number is 7.8 per cent. If we exceed that, then, really, our efforts are not bearing as much fruit,” Dr Kalyalya replied.

When asked whether the efforts to refinance the US $750 million Eurobond will be achievable given the deteriorating state of the Turkish economy, he said the state of that country’s economy should not be expected to have any negative impact on Zambia’s prospects to seek refinancing.

According to Bloomberg, some Turkish companies operating in that country are saddled with hundreds of billions of dollars in foreign debt amidst a fresh economic downturn that has seen the Turkish lira plunge as much as 42 per cent this year, and raising the spectre of contagion into Europe and across other emerging markets .

“Refinancing is a tool, it’s there. It is a question of ‘will you be able to gain it at a price cheaper than you borrowed?’ What has to be looked at in our current case is where is the Eurobond trading? I think the Eurobond is trading around 13 per cent so that is the real price at which one will be negotiating. You have to take into account that, although they [Turkey] are having problems, it’s not government per se, which is being brought into the picture; it’s the investors, the business people. So, there is still a possibility that you will find some people who would want to invest somewhere else to get their money,” Dr Kalyalya explained.

“So, [if] that country has got a problem, it doesn’t preclude it to invest. So, that shouldn’t be the concern; the concern is, do you find somebody who has got the capacity and would be able to offer you at a cheaper price than what is happening at the moment.”

Earlier, Dr Kalyalya announced that the BoZ’s Monetary Policy Committee (MPC) decided to maintain the Monetary Policy Rate (MPR) at 9.75 per cent, while also keeping the Statutory Reserve Ratio (SRR) at five per cent in a bid to induce lower interest rates and revive economic growth.

According to Dr Kalyalya, commercial banks’ nominal average lending rates, which had previously been declining, inched up to 24.3 per cent in June this year, up from 24.1 per cent in March.

“The lending rates, the trend of declining has stalled,” said Dr Kalyalya.

         

Stuart Lisulo

About Stuart Lisulo

Stuart Lisulo is an experienced Zambian journalist with a focus on business news.
Email: stuart [at] diggers [dot] news

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