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BANK Of ZAMBIA

BANK Of ZAMBIA. FIRST QUARTER 2008 MEDIA BRIEFING BY DR. CALEB M. FUNDANGA GOVERNOR Bank of Zambia 28 APRIL 2008. 1.0 Introduction. Media brief: Reviews monetary policy outcomes; and other economic and financial sector developments in quarter 1, 2008; and

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BANK Of ZAMBIA

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  1. BANK Of ZAMBIA FIRST QUARTER 2008 MEDIA BRIEFING BY DR. CALEB M. FUNDANGA GOVERNOR Bank of Zambia 28 APRIL 2008

  2. 1.0 Introduction • Media brief: • Reviews monetary policy outcomes; and • other economic and financial sector developments in quarter 1, 2008; and • Gives inflation outlook quarter 2, 2008.

  3. 2.0 NATIONAL BUDGET FOR 2008 • The Minister of MoFNP presented the 2008 National Budget to Parliament on 26 January 2008. • Major Macroeconomic targets for 2008 • Real GDP growth at least 7%; and • End year inflation of 7%. • A new fiscal regime for the Mining Sector was announced • Corporate tax increased to 30% from 25% • Mineral royalty on base metals at 3% (up from 0.6%) • A windfall tax to be triggered at different price levels

  4. 3.0 Monetary Policy • In quarter 1 of 2008, monetary policy focus: • consolidating macroeconomic stability i.e. maintaining single digit inflation (8.9%, December 2007). • By containing the growth of liquidity in banking system within the projected path.

  5. 3.1 Inflation3.1.1 Overall Inflation • Annual overall inflation rate • Single digit 9.8%, end-March 2008 (8.9%, December 2007). • Increase in food inflation (see Chart 1).

  6. 3.1.2 Food Inflation • Annual food inflation • 9.1%, March 2008 (5.9%, December 2007) • Higher prices of mealie-meal, maize grain, other cereals, cereal products, groundnuts, fresh fruits, chicken, fish (bream), beef, milk, eggs, oils and fats. • Higher production costs (electricity load shedding, rising transportation costs, lower seasonal supply, fishing ban & continued ban on movement of cattle from Southern Province- CBPP).

  7. 3.1.3 Non-Food Inflation • Annual non-food inflation lower, • 10.4%, March 2008 (11.9%, December 2007). • Relative stability exchange rate of Kwacha vs major trading currencies.

  8. 4.0 Money Supply and Domestic Credit4.1 Money Supply • Annual money supply (M3) growth, • 27.7%, March 2008 (26.3%, December 2007) (see Chart 2). • Rise in Net Foreign Assets (NFA) by 56.5%.

  9. 4.2 Domestic Credit • Domestic credit growth slowed down, • 7.1%, March 2008 (19.7%, December 2007). • Fall in net claims on government by 36.9%, despite a 28.2% expansion in private sector credit. • Excluding foreign currency denominated credit, which decreased by 3.6%, domestic credit rose by 10.7%.

  10. 4.2 Domestic Credit Cont... • Sector analysis • Credit dominated by: • Personal loans at 21.3%; • Agriculture 18.5%; • Financial services 13.7%; and • Manufacturing 10.7% (see Table 1).

  11. Table 1: Share in Total Loans and Advances (%), Dec 06 – Feb 08

  12. 5.0 Interest Rates5.1 Yields on Government Securities • Yield rates on Treasury bills declined • Weighted average Treasury bill rate 12.7%, end-March 2008 (12.9%, end-December 2007) (see Chart 3). • Increased demand for Government securities. • Bond rates increased • Weighted average bond rate 15.9%, March 2008 (15.6%, December 2007) • Continued foreign investor interest, especially in longer dated securities (see Chart 4).

  13. 16 11/16/2014

  14. 5.2 Commercial Banks Interest Rate • Lending rates continued to trend downwards • Average lending rate 24.3%, March 2008 (24.4%, December 2007). • Deposit rates increased • 30-day deposit rate for over K20 million 5.0%, March 2008 (4.8%, December 2007) • Average savings rate for over K100, 000 remained unchanged at 4.8%.

  15. 6.0 Foreign Exchange Rate • Kwacha appreciated against major foreign currencies. • By 4.2% to K3,675.36 against the US dollar; and • By 4.9% to K475.56 against the SAR. • Stronger supply of foreign exchange on the market, due to high copper prices in international markets; • Increased foreign investor participation in Government securities market due to reduction in interest rates in USA; and • General weakening of the US dollar in global markets due to on-going credit crisis. • Kwacha depreciated by 1.8% to K5,629.90 against Euro (see Chart 6).

  16. 7.0 Balance of Payments • Overall BoP surplus of US $164.8 million in quarter 1 of 2008 (US $60.6 million surplus, Quarter 4 of 2007). • Improvements in capital and financial accounts due to increase in financial inflows in form of capital transfers and other investments.

  17. 7.0 Balance of Payments Cont… • Trade surplus of US $288.3 million ( US $115.7 million surplus, 4th quarter 2007) • Increase in copper (3.2%) and cobalt earnings (36.9%). • Copper export earnings at US $886.0 million (US $858.4 million, 4th quarter 2007) • Higher realised LME prices at US $7,746.94 per ton (US $6,949.22 per ton, 4th quarter). • Cobalt export earnings at US $108.3 million (US $79.1 million, 4th quarter, • Increase in realised price to US $42.37 per pound from US $28.76 per pound (see Charts 7 & 8).

  18. Chart 7: Export Earnings (US $ Millions) 23 11/16/2014

  19. 7.0 Balance of Payments Cont… • NTEs 16.1% decline to US $183.6 million in Q1 2008 • Lower export earnings of copper wire, white spoon sugar, burley tobacco, cotton lint, electric cables, fresh flowers and gemstones (see Table 2). • However, NTEs were 5.6% higher compared to Q1 2007. • Merchandise imports 8.8% decline to US $901.1 million in Q1 2008 • Lower import bills of iron & steel products, petroleum products, fertiliser, industrial boilers & equipment and electrical machinery & equipment.

  20. Chart 8: Movement in the LME Copper Price

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

  22. 8.0 Copper and Cobalt Output • Copper output 8.9% decline to 128,592.7 mt in Q1 2008 (see Chart 9). • Flooding of mines, typical in rain season. • But output higher than 114,912.7 mt recorded in Q1 2007. • Cobalt output 8.2% decline to 1,150.2 mt. • But, 26.9% higher than 906.5 mt produced in Q1 2007.

  23. 9.0 Implementation of the Economic Programme • IMF Mission visit to Zambia in Q1 2008. • Article IV consultations; and • Discussions on new economic programme. PRGF arrangement ended September 2007. • Understanding reached on new three-year economic programme under PRGF.

  24. 10.0 Developments in Banking Sector • Overall financial condition and performance of banking sector in Q1 2008- satisfactory. • Maintained adequate capital & reserves; and • Asset quality, earnings and liquidity- satisfactory.

  25. 11.0 Developments in Non-Bank Financial Sector • Overall financial condition and performance of NBFIs in review period- satisfactory. • Leasing companies, MFIs and bureaux de change- adequate regulatory capital. • One leasing company and one building society recorded regulatory capital deficiencies. • However, measures have been put in place to address the deficiencies.

  26. 12.0 Banking, Currency and Payment Systems • Currency in circulation, 7.0% decrease to K1,408.4 billion (K1,514.9 billion, end-December 2007). • Lower demand for cash in Q1. Q4 demand for cash usually higher due to festive season

  27. 12.1 Removal of unfit paper and polymer banknotes from circulation • Unfit banknotes removed amounted to 20.3 million pieces (21.5 million pieces, Q4 of 2007). • Public exchange of mutilated banknotes amounted to 11,984 pieces (9,779 pieces, Q4 2007). • Notes burnt by fire or eaten by rats. • The public is encouraged to deposit excess cash with commercial banks.

  28. 12.2Implementation of Item Value Limits • Item Value Limits implementation has reduced dependency on cheques and DDACC in transfer of funds and payments for large value and urgenttransactions. • However, some customers have in some cases split the amount and drawn more than one cheque to the same beneficiary. • The Public encouraged to utilise RTGS for transmission of large value transactions.

  29. 12.3Implementation of Tax Payment Stream • Implementation of Tax payment stream has enabled tax payers to make payments through commercial banks on any day before the deadline. • Queues at ZRA offices greatly reduced. • Some corporate tax payers with appropriate infrastructure can issue tax payment instructions from their offices. • Public to embrace this payment stream for all their tax payment obligations.

  30. 13.0 Inflation Outlook for the Second Quarter of 2008 • Overall annual inflation to slow down in Q2 2008. • Easing of both food and non-food inflationary pressures. • Lower food prices • Improved seasonal supply.

  31. 13.0 Inflation Outlook for the Second Quarter of 2008 (cont.) • Lower non-food inflation • pass-through effects of appreciation of Kwacha against major currencies; and • Reduction in VAT to 16.0% effective 1 April 2008 (from 17.5%).

  32. 14.0 Conclusion • The Bank of Zambia will continue to monitor these developments and undertake appropriate monetary policy actions. • Thank You

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