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BANK Of ZAMBIA

BANK Of ZAMBIA. QUARTERLY MEDIA BRIEFING BY DR. CALEB M. FUNDANGA GOVERNOR Bank of Zambia 30 July 2007. 1.0 Introduction. This media briefing covers the second quarter of the year and reviews the following: Monetary policy outcomes

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BANK Of ZAMBIA

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  1. BANK Of ZAMBIA QUARTERLY MEDIA BRIEFING BY DR. CALEB M. FUNDANGA GOVERNOR Bank of Zambia 30 July 2007

  2. 1.0 Introduction • This media briefing covers the second quarter of the year and reviews the following: • Monetary policy outcomes • Other economic and financial sector developments; and • Provides an inflation outlook for the third quarter of 2007.

  3. 2.0 Monetary Policy • Monetary policy remained focused on: • Maintaining single digit average annual inflation rate in 2007; and • Maintaining relative stability in the exchange rate

  4. 2.0 Monetary Policy (Cont) • Achieving this goal entailed: • Containing the growth of liquidity in the banking system within the projected programme path; and • Smoothening fluctuations in the exchange rate through BoZ participation in the foreign exchange market.

  5. 3.0 Inflation3.1 Overall Inflation • Developments in inflation were favourable, with both food and non-food inflation rates falling: • On an annual basis, overall inflation fell to 11.1% at end-June from 12.7% at end-March 2007. • This downward trend in annual inflation reflected lower inflationary pressures on both food and non-food prices (see Chart 1).

  6. 3.1 Food Inflation • Annual food inflation fell marginally to 4.8% at end June from 4.9% at end March 2007. On a year-to date basis, food inflation at end-June was 1.5%. • This reflected seasonal improvements in food supply following a good 2006/07 agriculture season; and • Inflation outturn would have been better were it not for the inadequate supply of beef and beef products following the ban on movement of livestock from Southern Province.

  7. 3.2 Non-Food Inflation • Annual non-food inflation declined to 17.7% at end-June from 21.5% at end-March 2007. On a year-to-date basis, non-food inflation was 7.5%. • This reflected the lagged effects of the decline in money supply; and • The appreciation of the exchange rate of the Kwacha against major currencies during the first half of the year.

  8. 4.0 Money Supply and Domestic Credit4.1 Money Supply • Preliminary data show that broad money, comprehensively defined to include foreign exchange deposits (M3), grew by an estimated 8.8% in the second quarter compared to a decline of 8.2% in the first quarter of 2007. • On an annual basis the growth in M3 rose to an estimated 34.6% at end- June compared to 33.9% at end-March 2007. • In absolute terms, M3 is estimated to have increased to K8,465.9 billion at end-June from K7,781.9 billion at end-March, 2007.

  9. 4.1 Money Supply (cont) • The increase in M3 was largely on account of: • A 23.1% increase in net foreign assets as BoZ acted to smoothen movements in the exchange rate and built up international reserves; and • A 1.2% decline in net domestic assets, owing to a strong fiscal performance, partly reflecting higher than programmed revenues.

  10. 4.2 Domestic Credit • Preliminary data indicate that domestic credit declined in the second quarter, largely due to a decline in net lending to the Government. • Domestic credit, comprehensively defined to include foreign exchange loans, fell by 7.7% in the second quarter compared to a quarterly rise of 2.1% at end-March.

  11. 4.2 Domestic Credit (Cont) • On an annual basis domestic credit growth slowed to 1.9% in June from 22.1% in March 2007. • Excluding foreign currency credit, domestic credit is estimated to have declined by 2.8% at end-June compared to a decline of 2.4% at end-March 2007.

  12. 4.2 Domestic Credit Cont... • With respect to the distribution of credit, preliminary data show that: • The agriculture sector continued to dominate, accounting for 23.4% of domestic credit; • Personal loans had a share of 16.8%, and wholesale and retail trade 13.8%; and • Other sectors such as Manufacturing (11.2%) and transport and communications (10.0%) also had a double digit share of domestic credit.

  13. 4.2 Domestic Credit Cont…Table 1: Share in Total Loans and Advances (%), Dec 05 – Jun 07)

  14. 5.0 Interest Rates5.1 Yields on Government Securities • Interest rates on Government securities stabilized in the second quarter, after rising over the first quarter of the year: • The composite yield rate on Treasury bills rose marginally to an average of 11.4% in June from an average of 11.0% in March 2007, partly driven by weak demand. • However, the composite yield rate on Government bonds remained unchanged at 14.5% in June when compared to March, 2007 (see, Charts 3 and 4).

  15. 5.2 Commercial Banks Interest Rate • Commercial lending rates maintained their downward trend: • The average lending rate falling marginally to 24.3% in June from 26.2% in March 2007. Similarly the weighted lending base rate declined to 18.2% in June from 20.1% in March, 2007. • However, the average savings rate for amounts above K100,000 and 30-day deposit rate have remained at 6.1% and 8.4%, respectively (Chart 5).

  16. 6.0 Foreign Exchange Rate • The Kwacha appreciated against the major currencies during the second quarter, reflecting increased supply of foreign exchange relative to demand: • Against the US dollar the Kwacha appreciated by 8.4% to an average of K3,904.21 / US$ in June, compared with a depreciation of 3% in the first quarter of the year. (Chart 6). • Commercial bank purchases and sales of foreign exchange from non-banks rose to US $927.7 million and US $792.2 million from US $818.9 million and US $689.2 million, respectively. • BoZ made net purchases of US $57.9 million during the quarter under review, compared to US $8.5 million during the first quarter of the year.

  17. 7.0 Balance of Payments • Preliminary data indicate that there was a sharp improvement in the Balance of Payments (BoP) during the second quarter of 2007: • The overall (BoP) surplus rose to an estimated US $106.8 million from a revised figure of US $70.4 million in the first quarter of the year. • The current account deficit narrowed to minus US $33.6 million from a revised figure of minus US $285.8 million in the first quarter. • This followed the sharp increase in the trade surplus to US $254.9 million, from a revised figure of US $82.9 million in the previous quarter.

  18. 7.0 Balance of Payments Cont… • Merchandise export earnings rose to US $1,037.2 million in the second quarter from US $822.3 million in the first quarter. • The value of metal export earnings at US $803.6 million in the second quarter, were 23.5% higher than the US $650.8 million recorded in the previous quarter following an increase in both copper and cobalt earnings. (see Chart 7).

  19. Chart 7: Export Earnings (US $ millions)

  20. Chart 8: Movement in the LME Copper Price

  21. 7.0 Balance of Payments Cont.. • Over the same period, non-traditional exports (NTEs) at US$233.6 million were 36.3% higher than the US $179.3 million recorded in the previous quarter. • This favourable performance was due to increased export earnings of burley tobacco, cotton lint, fresh fruits and vegetables, gemstones, and gasoil (Table 2). • Significant increases in earnings were also recorded for copper wire and electric cables. However, products such as fresh flowers and sugar recorded lower earnings.

  22. Table 2: Selected Non-Traditional Exports (US $ Million)

  23. 7.0 Balance of Payments Cont… • Merchandise imports at US $788.8 million were 5.8% above the US $745.9 million recorded in the first quarter. • The capital and financial account balance narrowed to US $140.4 million from US $356.2 million the previous quarter. • This decline stemmed largely from an increase in net foreign assets held by commercial banks by US $98.5 million compared with a decline of US $209.3 million recorded the previous quarter.

  24. 8.0 Copper and Cobalt Output8.1 Copper • Preliminary data show that copper output rose by 4.6% to 117,124.67 mt during the second quarter of 2007 from 111,977.00 mt in the first quarter 2007. • However, this level of output was 15.3% lower than the 138,372.25 mt produced during the same quarter in 2006. • Higher water levels in the mines, following the heavier seasonal rains when compared to the previous year, and closure of the border with Congo DR adversely affected production at some mines.

  25. 8.2 Cobalt • During the quarter under review, cobalt output rose by 66.1% to 1,355.65 mt in the second quarter from the 816 mt in the previous quarter. • Compared to 1,209.00 mt produced in the corresponding quarter of 2006, cobalt output was 12.3 % higher and followed a more favourable trend in the realised cobalt price on the international market.

  26. 9.0 Implementation of the Economic Programme • The IMF Executive Board completed the fifth as well as the sixth and final review of Zambia’s economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement on 8th June 2007. • The successful completion of the reviews resulted in a disbursement of SDR 22 million (about US $33.4 million) on 22nd June 2007.

  27. 10.0 Developments in Banking Sector • The overall financial condition and performance of the banking sector during the months of April and May 2007 was satisfactory: • The sector maintained adequate capital reserves while asset quality, earnings and liquidity remained satisfactory. • All the banks met the minimum capital adequacy requirements of 5% for primary regulatory capital and 10% for total regulatory capital.

  28. 11.0 Developments in Non-Bank Financial Sector • The overall financial condition and performance of the leasing sector was designated fair during the period under review: • On average, leasing companies maintained adequate regulatory capital and reserves relative to their risk profiles. • The building societies sector continued to register positive performance in April and May, 2007. • With respect to Bureaux de change, the volume of purchases and sales of foreign currency registered an increase of 12% and 13%, amounting to US$82.7 million and US$82.8 million, respectively.

  29. 12.0 Banking, Currency and Payment Systems • The Bank continued the implementation of the “Clean Note Policy”. In the second quarter the Bank withdrew 12.2 million pieces of unfit polymer banknotes valued at K10 billion compared to 5.7 million pierces of unfit polymer banknotes valued at K4 billion in the previous quarter. • Statutory Instrument SI NO. 42 of 2007 was published on 15th June 2007 and brought the National Payment Systems Act into force. The Act provides for the management, administration, operation, supervision and regulation of payment, clearing and settlement systems.

  30. 12.0 Banking, Currency and Payment Systems (cont). • It further empowers the Bank of Zambia to develop and implement payment, clearing and settlement system policy so as to promote efficiency, stability and safety of the Zambian financial system. • The law will require any person intending to operate a payment system or carry out a payment system business to apply to the Bank of Zambia, in the prescribed format.

  31. 12.0 Banking, Currency and Payment Systems (cont). • The Bank of Zambia implemented the Visa National Net Settlement Service (VNNSS) on the 19th of June 2007. • This is a service that allows local visa member banks to settle their visa card transaction obligations in the local currency at the Bank of Zambia through the Real Time Gross Settlement System or Zambian Inter-bank Payment and Settlement System (RTGS/ZIPSS).

  32. 13.0 Inflation Outlook for the Third Quarter of 2007 • In the third quarter of 2007 inflationary pressures are expected to ease premised on the following: • Lagged effects of lower money supply growth over the first half of the year compared to the high liquidity overhang experienced in the fourth quarter of 2006; • The build-up in strategic food reserves and improved supply of food items from the 2006/2007 agricultural season, particularly maize grain, with the commencement of the official Marketing Season by the Food Reserve Agency on 1 June 2007; and

  33. 13.0 Inflation Outlook for the First Quarter of 2007 (cont.) • Relative stability of exchange rate of the Kwacha in view of anticipated increase in foreign exchange earnings following the sustained high copper prices on the London Metal Exchange. • However, in the third quarter, inflationary pressures were anticipated to continue to emanate from high world crude oil prices.

  34. Quarterly Survey of Business Opinion (QSBO) • Since 1994, BoZ has conducted a quarterly survey of business opinion (QSBO), which is available on the BoZ website, www.boz.zm. • The current report of the Quarterly Survey of Business Opinion and Expectations is for the first quarter of 2007 conducted between April and June 2007. The Survey covered respondents engaged in manufacturing, trading, services, and tourism, farming and construction activities.

  35. Quarterly Survey of Business Opinion (QSBO) (cont.) • The Survey reviews respondents’ economic performance during the first quarter and presents their outlook for the second quarter of 2007 and the subsequent twelve months. • In the Survey, 400 questionnaires were distributed and 325 were responded to. This reflected a response rate of 81.3%, which was higher than the 80.2 % achieved during the fourth quarter.

  36. Quarterly Survey of Business Opinion (QSBO) (cont.) • A review of the performance of respondents during the first quarter indicated the following: • Respondents reported that capacity utilisation, employment levels, domestic sales, improved while output, profits, exports and average selling prices declined. Average operating costs were maintained at the fourth quarter 2006 levels.

  37. Quarterly Survey of Business Opinion (QSBO) (cont.) • Monetary policy was perceived to have been appropriate in the first quarter of 2007 although commercial interest rates were perceived to be high and firms continued to rely on retained earnings for their long term finance and working capital. • Nonetheless, bank borrowing was second as a source of finance for firms.

  38. Quarterly Survey of Business Opinion (QSBO) (cont.) • The outlook for the second quarter of 2007 and the ensuing twelve months was favourable with expectations of improved capacity utilisation and output as well as increased sales as they expect demand to pick up following improved mining and tourism activities. Employment levels were also expected to increase. • Respondents expected the Bank of Zambia to maintain an appropriate monetary policy stance while interest rates would remain basically unchanged.

  39. Quarterly Survey of Business Opinion (QSBO) (cont.) • Taking a sector approach: on interest rates, firms in the services, manufacturing, tourism and construction were of the view that interest rates would decline in the second quarter while merchants predicted an increase in interest rates in the second quarter. • All sectors however were in consensus concerning the stability in the exchange rate. They expected a stable exchange rate. • On inflation, firms in construction, merchants and manufacturing expected inflation to decline while those in tourism and services expected an increase in inflation.

  40. 14.0 Conclusion • The Bank of Zambia will continue to monitor monetary and financial sector developments and undertake appropriate monetary policy actions to ensure that our monetary policy objectives for the year are met. • Thank You

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