Zambia's central bank continued to ease its monetary policy stance by cutting its policy rate and the reserve requirement to support economic growth and promote a stable financial system, and forecast inflation in the lower bound of its inflation target over the next eight quarters.
The Bank of Zambia (BOZ) cut its policy rate by another 50 basis points to 9.75 percent and has now cut it by 575 points since embarking on an easing cycle in February 2017.
The statutory reserve ratio was also cut by another 300 basis points to 5.0 percent, bringing the total reduction in the ratio to 13.50 percentage points since February 2017.
"Changes in the Policy Rate will continue to be guided by inflation outcomes and forecasts as well as progress in fiscal consolidation," the BOZ said.
The rate cut comes at a time of uncertainty over whether Zambia - whose economy is starting to rebound after the rise in copper prices and good rains - will obtain a $1.3 billion extended credit facility from the International Monetary Fund (IMF).
In August 2017 discussions between the IMF and Zambia were put on hold after the IMF said the government's borrowing plans threatened debt sustainability, requesting "credible borrowing plans."
But on Feb. 16 the IMF again rejected the government's borrowing plan.
"Against this background, future program discussions can only take place once the Zambian authorities implement credible measures that ensure debt contraction is consistent with a key program objective of stabilizing debt dynamics and putting them on a declining trend in the medium term," the IMF said last week.
Meanwhile, Zambia said on Saturday that it aimed to borrow directly from China's government and rearrange its loans from Chinese companies.
Zambia's total public debt at the end of August 2017 was US$12.45 billion - including $7.5 billion in external debt - and has said it wants to refinance $2.8 billion of Eurobonds issued between 2012 and 2015 to cut the cost of debt service. Zambia's president also replaced the finance and mining ministers last week.
Despite uncertainty over Zambia's relations with the IMF, the exchange rate of the kwacha has remained firm and was trading at 9.89 to the U.S. dollar today, up 1.9 percent this year. However, its dollar-denominated bonds have been hit, with yields up 170 basis points to 7.94 percent, according to Bloomberg.
Zambia's inflation rate rose slightly to 6.2 percent in January from 6.1 percent in December with inflation in recent months easing on a sustained supply of food.
Over the next eight quarters BOZ expects inflation to trend around the lower bound of its 6-8 percent target range, with higher crude oil prices and lower agricultural output posing upside risks.
"Economic activity has continued to improve, but growth remains below potential," the BOZ said, adding the economic outlook remains positive, with output in mining and energy continuing to expand as overall business conditions improved.
For 2018 and 2019 the BOZ forecast economic growth of 5.0 percent and 5.4 percent, respectively, with higher electricity generation expected to support increase production. For 2017 the BOZ has estimated growth of 4.2 percent after 2016 growth of 3.4 percent. Preliminary data for 2017 indicate a government fiscal deficit of 6.1 percent of Gross Domestic Product, below the 7.0 percent target.
"Containing the budget deficit and the overall debt, including domestic arrears, to sustainable levels remain critical to consolidating macroeconomic stability," BOZ said.
-African markets
