Transcript BANK Of ZAMBIA - Bank of Zambia

BANK Of ZAMBIA
QUARTERLY MEDIA BRIEFING
BY
DR. CALEB M. FUNDANGA
GOVERNOR
Bank of Zambia
13th April 2006
7/18/2015
1
1.0 Introduction
 This brief reviews monetary policy outcomes and
other economic and financial sector developments in
the first quarter of 2006; and
 Gives an inflation outlook for the second quarter of
2006.
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2.0 Monetary Policy
 Monetary policy stance during the first quarter
remained tight to further reduce inflation.
 To this end, money supply growth was to be
restrained in line with the need to achieve the endDecember 2006 annual inflation target of 10.0%.
 In this regard, the BoZ employed Open Market
Operations and the sale of Government securities.
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3.0 Overall Inflation Outturn
 End-March inflation rate declined to 10.7% from
15.9% at end-December 2005.
Due to a drop in non-food inflation owing to passthrough effects of Kwacha appreciation and
downward adjustment in prices of petroleum
products; and
 Decline in food inflation due to improved food
supply (see Chart 1).

 Inflation outturn enhances our optimism that the
end-2006 inflation target of 10.0% will be
achieved.
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Annual Non-Food Inflation outturn
 Annual non-food inflation declined to 10.4% at
end-March 2006 from 14.0% at end-December
2005.
 Outturn was below the projection of 13.5% (see
Chart 2).
 Attributed to the decline in broad money growth,
pass-through effects of the appreciation of the
Kwacha and reduction in prices of petroleum
products.
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Chart 2: Annual Non-food Inflation
24.0
22.0
18.0
16.0
14.0
12.0
10.0
Proj. Annl Non-Food lnf
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Mar
Feb
Jan 06
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan 05
8.0
Dec-04
Percent
20.0
Actual AnnI Non-Food Inf.
7
Food Inflation Outturn
 Similarly, annual food inflation fell to 10.9% at
end-March 2006 from 17.5% in December 2005
(see Chart 3).
 The drop was explained by the improved maize
supply following the importation of maize duty
free and FRA maize sales to registered millers.
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
Chart 3: Annual Food Inflation
25
(%)
20
15
10
Proj. Food Inf.
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Mar
Feb
Jan 06
Dec 05
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan 05
Dec-04
5
Actual Food Inf.
9
4.0 Money Supply and Domestic
Credit
 Preliminary data indicate that broad money(M3)
growth remained within programmed levels.
 Broad money growth decelerated by negative
0.4% in February 2006 from December 2005.
 This contraction was due to the decline in net
domestic assets mainly owing to the revaluation
effects of the Kwacha appreciation.

On an annual basis, broad money growth
remained well below the projections (see Chart 4).
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10
40
30
20
10
Annual M3
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Feb
Dec 05
Oct
Aug
Jun
Apr
Feb
Dec-04
Oct
Aug
Jun
Apr
Feb
0
Dec-03
Annual M3 growth (%)
Chart 4: Annual Changes in Broad Money
Proj. Annual M3
11
5.0 Nominal Yield Rates on
Government Securities
 Yield rates on Government securities fell on all
government securities portfolios.
 The composite yield rate on Treasury bills decreased
to 11.7% at end-March 2006 from 16.2% in
December 2005.
 The composite yield rate on Government bonds fell to
16.8% at end-March 2006 from 23% in December
2005 (see Charts 5 and 6).
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Chart 5: Treasury bill Yield Rates % p.a
22.0
20.0
18.0
16.0
14.0
12.0
10.0
8.0
Mar
Feb
Jan-06
Dec-05
273-day
Nov
Oct
Sep
Aug
182-day
Jul
Jun
May
Apr
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Mar
Feb
Jan-05
Dec-04
91-day
364-day
13
Chart 6: Government bonds yield rates, % p.a
29.0
26.0
23.0
20.0
17.0
14.0
11.0
8.0
12-mth
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18-mth
2-year
3-year
Feb
Dec-05
Oct
Aug
Jun
Apr
Feb
Dec-04
5.0
5-year
14
6.0 Commercial Banks Nominal
Interest Rates
 Similarly, lending rates declined.
 Commercial banks weighted average lending base rate
fell to 25.4% from 27.4% in December 2005.
 Average lending rate fell to 31.6% from 33.7%.
 The decline reflected a drop in inflation during the
quarter under review (see Chart 7).
 However, the pace at which lending rates are declining
is slower than drop in the rate of inflation. Therefore,
BoZ will continue urging commercial to adjust lending
rates in line with the fall in inflation.
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Chart 7 : Lending Interest Rates
38
36
Percent
34
32
30
28
26
WALBR
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Mar
Feb
Jan 06
Dec 05
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan-05
Dec-04
24
Lending
16
7.0 Developments in GDP
 In 2005, real GDP continued to post positive growth for
the seventh consecutive year, with the last three years
recording an average growth of 5.2%. This was despite a
slowdown in growth in agriculture in 2005 on account
of drought in some parts of the country, which adversely
affected output of maize (see Chart 8).
 Contributing to this outturn was the favourable
performance in most sectors including mining (2.8%),
manufacturing (3.7%), construction (19.9%), agriculture
(2.8%), transport and communications (8.5%), and trade
(6.1%). Growth in the domestic economy also benefited
from the strong global demand and the sustained high
prices for non-fuel commodities such as copper.
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Chart 8: Real GDP Growth, 1999-2005
6
Percent
5
4
3
2
1
0
1999
2000
2001
2002
2003
2004
2005*
Growth Rate
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8.0 Foreign Exchange Market
 The Kwacha continued to appreciate against major
international currencies although at a slower pace
than the previous quarter.
 Kwacha strengthened by 3.8% against the US
dollar in the first quarter compared with 12.4%
appreciation in the fourth quarter of 2005.
 Likewise, the Kwacha appreciated against the
British pound sterling, Euro and South African
Rand (see Table 1 and Chart 9).
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Table 1: Period Average Inter-bank Exchange Rate, Kwacha
per Currency
Dec - 05
March – 06
Kwacha
Kwacha
US Dollar
3,431.86
3,301.45
-3.8
Pound
6,043.13
5,753.06
-4.8
Euro
4,168.27
3,964.02
-4.9
547.32
531.45
-2.9
SA Rand
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Percent Change
20
Chart 9: Interbank Exchange Rates (Kwacha per Currency)
850
800
750
700
650
600
550
500
450
8500
7500
6500
Rand
US$.Pound, Euro
9500
5500
4500
3500
2500
Mar
Feb
Jan 06
Dec 05
Nov
Euro
Oct
Sep
Aug
Pound
Jul
Jun
May
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Apr
Mar
Feb
Jan-05
Dec-04
USD
SA Rand
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Key factors explaining the appreciation of
the Kwacha
 Increased copper output and exports (see Table 2 and 3);
 High price of copper;
 Increased non-traditional export earnings;
 Attainment of the Enhanced HIPC Initiative Completion
Point in April 2005;
 Implementation of appropriate monetary and fiscal policies;
and
 Increased portfolio investments to US $120 million from
almost zero the previous year, BoP support to US $154.9
million (2004: US $64.8 million) and project assistance
grants to US $306 million (2004: US $246 million).
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9.0 Trade Balance Developments
 Preliminary data show that the trade balance
improved to a surplus of US $25 million in the
first quarter from a deficit of US $49.6 million
during the fourth quarter of 2005.
 Merchandise imports decreased to US $601.3
million in the period under review from US
$710.9 million in the fourth quarter.
 Merchandise export receipts declined by 6.6% to
US $626.3 million from US $661.3 million in the
fourth quarter (see Chart 10 and Table 2, and 3).
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Chart 10: Export Earnings (in US $)
250.0
150.0
100.0
50.0
Copper
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Cobalt
Mar*
Feb
Jan 06
Dec 05
Nov
Oct
Sept
Aug
July
June
May
April
Mar
Feb
Jan 05
0.0
Dec 04
US $' million
200.0
NTEs
24
Chart 11: Movement in the LME Copper Price

US cents per pound
300.5
250.5
200.5
150.5
100.5
50.5
2004
Jan
Apr
Jul
Oct
2005
Jan
Apr
Jul
Oct
Jan
Apri
Price
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Table 2: Selected External Sector
Performance Indicators (in US $’ million)
Year
Copper
Copper
Copper
Output
Sales
Export
Volume
Receipts
(mt)
(US $‘mn)
(mt)
NTEs
(US $‘mn)
2000
259,573.00
234,148.20
425.20
255.70
2001
301,414.80
300,384.70
514.90
302.20
2002
341,938.80
334,087.00
521.40
362.20
2003
356,045.40
357,320.40
609.80
410.00
2004
409,543.30
393,182.30
1,036.90
497.60
2005
444,051.90
421,112.40
1,449.30
589.30
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Table 3: Major Non-traditional Exports (in US
$’million)
2004
Q1
Q2
Q3
Q4
2005
Ann.
Change
%
Copper Wire
60.1
23.3
26.2
27.3
29.7
106.5
77.1
White Spoon Sugar
33.4
13.5
31.4
10.0
12.9
67.8
102.8
Burley Tobacco
39.4
1.3
18.6
28.9
11.4
60.3
52.7
Cotton Lint
51.4
10.1
4.1
27.4
14.3
55.9
8.6
Electrical Cables
32.7
13.0
9.7
11.9
13.9
48.5
48.3
Fresh Flowers
25.5
7.5
8.1
6.6
10.0
32.1
26.0
Cotton Yarn
23.9
6.5
6.2
6.5
4.8
24.1
0.7
Fresh Fruits
Vegetables
23.2
5.4
5.1
5.3
5.6
21.3
-8.2
Gemstones
16.2
2.6
4.9
7.2
4.7
19.5
20.2
Gasoil/PetroleumOils
24.3
2.3
4.9
1.7
0.9
9.8
-59.7
4.4
1.2
1.2
1.2
1.2
4.8
8.1
Electricity
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Other External Sector Performance Indicators
 The BoZ purchased US $129.1 million in 2005
compared to US $96.1 in 2004.
 However, no sales of foreign exchange to the
market were made.
 This was in addition to purchase of US $154.9
million BoP support inflows, of which US $90.5
million was purchased in Q4 of 2005.
 Actual debt service fell by 57.8% to US $156.5
million in 2005 from US $370.9 million in 2004
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Copper Output
 copper output declined by 7.7% in the quarter
under review to 119,306.25 mt from
129,313.00 mt in the fourth quarter of 2005.
(see Chart 11).
 This was due to:
-slowdown in production on account of higher
water levels, prompting mines to spend more
time to pump out the water.
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Cobalt Output
 Cobalt output also declined by 8.4% to
1,162.35 mt from 1,270.0 mt in the previous
quarter.
 This was also due to high water levels in the
mines coupled with continued low
international prices.
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45000
630
600
570
540
510
480
450
420
390
360
330
300
270
240
210
180
150
35000
30000
25000
20000
Jul 02
Sep
Nov
Jan-03
Mar
May
Jul
Sep
Nov
Jan-04
Mar
May
Jul
Sep
Nov
Jan 05
Mar
May
Jul
Sep
Nov
Jan 06
Mar
Copper
40000
Cobalt
Chart 11: Mineral Production (Metric Tons)
Copper
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Cobalt
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10.0 Multilateral Debt Relief Initiative
 In the quarter under review, the IMF disbursed
SDR 11 million (equivalent to US $16 million)
under the PRGF arrangement.
 In January, the IMF delivered SDR 403 million in
debt relief to Zambia under the Multilateral Debt
Relief Initiative (MDRI).
 Regarding quantitative and structural benchmarks,
preliminary data indicate that performance was
broadly in line with PRGF arrangement
benchmarks.
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11.0
Developments in the
Financial Sector
 In the quarter under review, the banking
sector continued to be adequately
capitalised.
 All the industry’s 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.
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12.0
Payment Systems

There have been concerns by the public about BoZ’s apparent inability to meet
high demand for some low value bank notes and quality of one of the high
value notes.

The Bank is keen to ensure that banknotes circulating in the economy remain
of high quality and are in adequate quantities. In this regard, the Bank has put
in place long-term measures for sustainable improvement in the quality and
supply of banknotes circulating.

You will recall that, in 2003, the Bank issued a circular to commercial banks
urging them, to penalise customers who bounce cheques on account of
insufficient funds. The Bank implemented these measures in order to instil the
public’s confidence in the cheque as a safe and secure payment instrument.
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13.0
Inflation Outlook for the
Second Quarter of 2006
 Inflationary pressures are expected to continue to
slow down due to:
 Secondary effects of downward adjustment of
diesel price announced by ERB in mid-March
2006;
 Continued low money supply growth;
 The beginning of the offloading of fresh crops
reaching the market from 2005/2006 agricultural
season; and
 Pass-through effects of Kwacha appreciation.
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14.0
Conclusion
 The Bank of Zambia’s monetary policy actions
will continue to 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.
 Thank You
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