BANK Of ZAMBIA

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BANK Of ZAMBIA

• QUARTERLY MEDIA BRIEFING
• BY
• DR. CALEB M. FUNDANGA
• GOVERNOR
• Bank of Zambia
• 13th April 2006

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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
  end-December 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
  pass-through 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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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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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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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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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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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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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 Kwacha March 06 Kwacha Percent Change
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
SA Rand 547.32 531.45 -2.9
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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 11 Movement in the LME Copper Price

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Table 2 Selected External Sector Performance
Indicators (in US million)
  Copper Copper Copper  
Year Output Sales Export NTEs
    Volume Receipts  
  (mt) (mt) (US mn) (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
Electricity 4.4 1.2 1.2 1.2 1.2 4.8 8.1
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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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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 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.

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12.0 Payment Systems

• There have been concerns by the public about
  BoZs 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 publics
  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 Zambias 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