BANK Of ZAMBIA

1
(No Transcript)
2
BANK Of ZAMBIA

• QUARTERLY MEDIA BRIEFING
• BY
• DR. CALEB FUNDANGA
• GOVERNOR
• Bank of Zambia Boardroom
• February 2006

3
1.0 Introduction

• This brief reviews monetary, economic and
  financial sector developments in the fourth
  quarter of 2005 and
• Gives an inflation outlook for the first quarter
  of 2006.

4
2.0 Monetary Policy

• Monetary policy stance during the fourth quarter
  remained tight.
• Aim was to restrain money supply growth to
  achieve projected end-December 2005 annual
  inflation rate of 15.0.
• The BoZ employed Open Market Operations.
• Reinforced by the appreciation of the Kwacha.

5
3.0 Overall Inflation Outturn

• Annual overall inflation rate declined to 15.9
  at end-December 2005 from 19.5 at end-September
  2005.
• Outturn was broadly in line with end-December
  2005 inflation target of 15.0.
• This decline was due to a drop in non-food and
  food inflation (see Chart 1).

6

• Chart 1 Annual Overall Inflation

7
3.1 Annual Non-Food Inflation outturn

• Annual non-food inflation declined to 14.0 at
  end-December 2005 from 18.2 at end-September
  2005 (see Chart 2).
• Outturn was below the projection of 16.0.
• Attributed to the decline in broad money growth
  and the pass-through effects of the appreciation
  of the Kwacha against major currencies.

8

• Chart 2 Annual Non-Food Inflation

9
3.2 Annual Food Inflation Outturn

• Similarly, annual food inflation fell to 17.5 at
  end-December 2005 from 20.7 in September 2005
  (see Chart 3).
• The decline was due to the improved maize supply
  following the importation of maize duty free and
  FRA maize sales to registered Millers.

10

• Chart 3 Annual Food Inflation

11
4.0 Money Supply and Domestic Credit

• Preliminary data indicate that broad money(M3)
  growth continued to be below programmed levels.
• Broad money growth decelerated by negative 6.7
  in November from September 2005 level.
• This contraction was due to the decline in net
  domestic assets owing to the revaluation effects
  of the Kwacha appreciation and the 10.9 decline
  in domestic credit.
• On an annual basis, broad money grew at negative
  4.1 (see Chart 4).

12

• Chart 4 Annual Change in Broad Money

13
5.0 Nominal Yield Rates on Government Securities

• Yield rates on Government securities were
  generally stable despite increasing slightly.
• The composite Treasury bill yield rate rose to
  16.4 at end-December 2005 from 15.8 in
  September 2005.
• The composite Government bond yield rate rose to
  22.4 at end-December 2005 from 20.4 in
  September 2005 (see Charts 5 and 6).

14
(No Transcript)
15

• Chart 6 Government Bonds yield rate, pa

16
6.0 Commercial Banks Nominal Interest Rates

• Commercial banks weighted average lending base
  rate and average lending rate fell to 27.6 and
  33.9 from 28.2 and 34.9 in September 2005,
  respectively.
• The decline reflected a drop in inflation during
  the quarter under review.
• However, the average savings rate for amounts
  above K100,000 rose to 6.1 in December 2005 from
  5.7 in September 2005.
• The 30-day deposit rate for amounts above K20
  million declined to 8.4 from 8.9 (see Chart 7).

17

• Chart 7 Nominal Interest Rates, pa

18
7.0 Foreign Exchange Market

• The Kwacha appreciated against major
  international currencies.
• Kwacha strengthened by 22.9 against the US
  dollar in the fourth quarter compared to 4.3
  appreciation in the third quarter of 2005.
• Likewise, the Kwacha appreciated against the
  British pound sterling, Euro and South African
  Rand (see Table 1 and Chart 8).

19
Table1 Period Average Inter-bank Exchange Rate,
Kwacha per Currency
20
Chart 8 Interbank Exchange Rates (Kwacha per
Currency)
21
Foreign Exchange Markets continued..

• The continued strong performance of the Kwacha
  was a reflection of the -
• -continued favourable external sector
  performance.
• -the consolidation of the positive sentiments
  following attainment of Enhanced HIPC Initiative
  Completion Point in April 2005.
• These factors have resulted in increased supply
  of foreign exchange on the market.

22
8.0 Trade Balance Developments

• Preliminary data show that trade balance narrowed
  to minus US 6.6 million in the fourth quarter
  from minus US 72.6 million during the third
  quarter of 2005.
• Merchandise imports decreased to US 583.8
  million in the period under review from US 672.7
  million in the third quarter.
• Merchandise export receipts declined by 3.8 to
  US 577.2 million on account of a drop in cobalt
  and NTE proceeds (see Chart 9).

23

• Chart 9 Export Earnings US millions

24
9.0 Real Sector - Copper Output

• Copper output increased by 12.9 to 125,331 mt
  from 111,017.6 mt in the third quarter of 2005
  (see Chart 10).
• On an annual basis, copper production rose by
  7.9 to 441,963.3 mt from 409,543.30 mt produced
  during the same period in 2004.
• Factors for higher output include
• -Recapitalisation of the mines and subsequent
  improvement in the operations and productivity
  and
• -Production from new mines such as Kansanshi
  mines.

25
9.0 Real Sector - Cobalt Output

• Cobalt output, however, declined by 6.4 to
  1,272.6 mt from 1,359.75 mt.
• On a cumulative basis, cobalt output fell by 8.9
  to 5,539.1 mt from 6,081.6 mt produced during
  2004.
• Cobalt output was lower on account of smelter
  problems, continued suspension of processing of
  cobalt at some mines owing to unfavourable
  conditions in the market.

26

• Chart 10 Mineral Production (Metric tons)

27
9.1 Maize Stocks and Prices

• During the review period, FRA cumulative maize
  purchases rose to 77,163.00 mt from 64,958 mt as
  at end-September 2005.
• At end-December 2005, millers had imported 70,000
  mt of maize grain from South Africa and Tanzania.
• Millers average maize purchase price marginally
  went up by 3.5 to K44,956.00 at end-December
  2005 per 50 kg bag compared to the increase of
  14.7 (K43,419.41 per 50 kg bag) at end-September
  2005. This price was 26.5 higher than K35,524.91
  per 50kg as at 29th December 2004.

28
9.2 Tourism

• During the quarter under review, the countrys
  four international airports recorded a decline in
  international passenger arrivals to 68,740
  passengers from 75,674 passengers recorded in the
  third quarter of 2005.
• However, the international passenger arrivals in
  the fourth quarter of 68,740 passengers were
  higher than the 62,727 passengers recorded over
  the corresponding period in 2004.

29
10.0 Multilateral Debt Relief Initiative

• In the quarter under review, the IMF approved
  debt relief for Zambia under the MDRI.
• The IMF was to provide 100 debt relief on all
  outstanding debt incurred by Zambia by December
  31, 2004.
• This culminated into the IMF implementing the
  Board decision for debt relief to Zambia
  amounting to US 575 million.
• With this debt relief, the stock of debt Zambia
  owed to the IMF stood at SDR22 million (or US
  31.4 million).

30
11.0 Developments in the Financial Sector

• In the quarter under review, the banking sector
  continued to be adequately capitalized.
• All the industrys individual banks capital
  adequacy ratios were in excess of the prescribed
  minimum of 5 and 10, for primary and regulatory
  capital respectively, and were all rated strong
  on capital adequacy.
• Generally, the performance of the NBFIs sector in
  the period under review was satisfactory though
  some institutions were still undercapitalized and
  were making efforts to achieve their minimum
  regulatory capital requirements.

31
12.0 Payments Systems

• The BoZ BAZ embarked on an initiative to
  introduce item value limits on transactions
  processed through the Real Time Gross Settlement
  System (RTGS).
• Purpose was to reduce reliance on the use of
  cheques and DDACCs in large value transactions.
• In the quarter under review, 4 commercial banks
  launched the E-switch facility.

32
13.0 Inflation Outlook for the First Quarter of
2006

• Inflationary pressures are expected to continue
  to slow down due to
• Secondary effects of the reduction of the prices
  of petroleum products effected in mid-December
  2005 and January 2006
• The sale of maize reserves by FRA
• Slow down in broad money expansion and
• Pass-through effects of Kwacha appreciation.

33
14.0 Conduct of Monetary Policy

• The Bank of Zambias monetary policy actions will
  continue to primarily focus on mitigating
  inflationary pressures by taking monetary policy
  measures to contain reserve money and money
  supply growth within levels consistent with the
  2006 inflation objective of 10 at end-December
  2006.

34
Table2Macroeconomic Developments