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Bank of Zambia Takes Aggressive Measures Amid Economic Challenges

The Bank of Zambia’s Monetary Policy Committee (MPC), led by Governor Dr. Denny H. Kalyalya, has announced a significant 100 basis points increase in the Monetary Policy Rate, elevating it to 11.0 percent. 

The decision, reached during the November 20th-21st, 2023, MPC Meeting, reflects the Committee’s concern over the escalating inflation that has strayed further from the targeted 6-8 percent band.

Dr. Kalyalya emphasized the persistence of inflationary pressures, citing a rise from 9.9 percent in the second quarter to an average of 11.0 percent in the third quarter. October witnessed a further uptick, reaching 12.6 percent. 

Key contributors to these inflationary pressures include surges in food prices, particularly maize and its products, elevated retail fuel prices, and the depreciation of the Kwacha against the US dollar.

The Kwacha’s decline has been significant, depreciating by 5.8 percent in the third quarter and a cumulative 10.9 percent between end-September and November 21st, 2023, reaching K23.30 per US dollar. 

Sustained demand for foreign exchange, especially from the energy and manufacturing sectors, alongside low supply from mining, has been instrumental in this depreciation. 

To stabilize the volatile foreign exchange market, the Bank of Zambia had to sell a substantial proportion of foreign exchange from mining taxes and implement adjustments to the statutory reserve ratio.

Despite these challenges, there was a modest increase in gross international reserves, reaching US$2.9 billion at end-September, supported by various inflows, including the second disbursement under the IMF Extended Credit Facility.

Global economic dynamics have further impacted domestic inflation, with subdued global growth and heightened inflation in advanced economies affecting currencies in emerging economies like Zambia. 

Inflationary pressures are expected to intensify over the forecast horizon, projecting averages of 10.9 percent, 11.4 percent, and 9.6 percent in 2023, 2024, and 2025, respectively.

In response to these challenges, the MPC decided on a 100 basis points increase in the Monetary Policy Rate to 11.0 percent. 

Dr. Kalyalya stressed that unchecked inflation could anchor above the target band, posing challenges to macroeconomic stability. The Committee acknowledged brighter growth prospects and revised real GDP growth for 2023 to 4.3 percent, citing strong performance in sectors such as ICT, education, transport, and tourism.

The next MPC Meeting is scheduled for February 12th and 13th, 2024. Decisions on the Policy Rate will continue to be guided by inflation outcomes, forecasts, and identified risks, with a focus on financial stability and external debt restructuring. 

The Bank stands ready to take appropriate action should inflation persist above the 6-8 percent target band.

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