Professional Documents
Culture Documents
BY
CALEB M. FUNDANGA
GOVERNOR
BANK OF ZAMBIA
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Introduction
This brief examines monetary policy implementation and its outcomes in the first
quarter of 2010. The brief also reviews other economic and financial sector
developments. In the conclusion, it provides an inflation outlook for the second
quarter of 2010.
Monetary Policy
Inflation
Overall inflation increased to 2.5% in the first quarter of 2010 from the 2.3%
recorded in the fourth quarter of 2009, and was 0.2 percentage points above the
2.3% recorded in the first quarter of 2009. This outturn was mainly attributed to
the rise in food inflation to 2.6% from the 2.0% recorded in the previous quarter
while non-food inflation declined slightly to 2.5% from the 2.6% recorded over the
same period.
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Total domestic credit, comprehensively defined to include foreign currency loans,
edged up by 2.1% at end-March 2010 compared with negative 2.7% registered in
the fourth quarter of 2009. The outturn in domestic credit was mainly due to
17.8% rise in net claims on central government compared with the 2.8%
registered in the fourth quarter of 2009 and contributed 5.9 percentage points to
the growth in domestic credit. However, lending to the private sector (including
public enterprises) contracted by 5.7% and contributed negative 3.8% to the total
domestic credit outturn. Excluding foreign currency denominated credit, which
rose by 4.3%, domestic credit growth increased by 1.5% against negative 2.1%
recorded in December 2009.
On an annual basis, domestic credit growth slowed down to 9.8% in March 2010
from 15.2% in December 2009. This outturn largely reflected a decline in credit
growth to the private sector (including public enterprises) by 13.8% which
contributed negative 10.9% to the total domestic credit outturn. However, credit
to Government increased to 97.6% from 73.6% growth recorded in December
2009 and contributed 20.7% to the total domestic credit growth in the quarter
under review.
Interest Rates
Due to high levels of liquidity in the banking sector, yield rates on Government
securities declined further. The composite yield rate for Treasury bills ended the
quarter at 3.7%, down from 9.5% recorded at the end of 2009. The weighted
average yield rate for Government bonds fell to 10.3%, 6.0 percentage points
lower than the end December 2009 closing rate.
Real Sector
As at 30th March 2010, the stock of maize grain held by major millers in the
country fell by 49.3% [10.0% decline last quarter] to 52,826.5 metric tons from
104,168.5 metric tons (mt) the previous quarter. In terms of holdings by province,
the Copperbelt contributed 11,350.0 mt (21.49%), Lusaka 32,971.8 mt (62.42%),
and Southern 8,484.7 mt (16.06%) while Eastern provinces accounted for 20.0 mt
(0.04%), respectively. The Central and Northern provinces had no maize stocks as
at the reporting date.
Cobalt output increased by 1.3% to 1,921.55 mt during the first quarter of 2010
from 1,896.24 mt, the previous quarter. In comparison with the output of 1,080.84
mt during the corresponding quarter of 2009, this was a 77.8% increase. The
recent trend in cobalt output shows notable recovery after a lengthy period of
falling output. The resumption of production at Konkola Copper Mines in the
second quarter of 2009 and Chambishi Metals Plc in 2010 largely explained the
recorded recovery.
During the quarter under review, production of clear beer by Zambian Breweries
Plc was 135,169 hectolitres, which was 15.9% lower than 160,820.0 hectolitres of
beer produced in the fourth quarter of 2009. However, this output was 14.8%
higher than the 117,740.0 hectolitres produced in the corresponding quarter of
2009.
Production of milk by Parmalat Zambia Ltd during the quarter under review fell by
4.2% to 7,837,803 litres from 8,178,335 litres produced in the previous quarter.
Nonetheless, this output was 12.1% higher than 6,988.856.0 litres of milk
produced during the corresponding quarter of 2009.
During the quarter under review, international arrivals at the country’s four
international airports2 were 93,241 passengers compared with 93,688 passengers
in the fourth quarter of 2009. However, this was 16.4% higher than 80,112
passengers recorded during the same quarter in 2009. Livingstone and Mfuwe,
which are the major tourist destinations, accounted for (through their respective
international airports) 19,220 passengers and 59 passengers compared with
17,133 passengers and 103 passengers in the previous quarter, respectively.
The Kwacha continued to appreciate during the quarter under review. The Kwacha
appreciated by 0.8%, 6.8% and 5.3% against the US dollar, Euro and Pound
Sterling, to an average of K4,633.96, K6,425.77/€ and K7,245.85/£, respectively.
Against the South African rand, the Kwacha posted a gain of 1.1% ending the
period at an average of K616.39/ZAR.
Balance of Payments
Preliminary data show that Zambia recorded an overall balance of payments (BoP)
deficit of US $81.4 million during the first quarter of 2010 compared with a surplus
of US $18.2 million recorded the previous quarter. This was on account of
unfavourable performance in the financial and capital account.
During the period under review, the current account deficit narrowed to US $25.1
million from US $113.3 million recorded in the previous quarter. This was largely
explained by a reduction in the income account balance following the decline in
income on equity payments. The performance of the goods, services and current
transfers, however, worsened.
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from US $1,126.1 million realised the preceding quarter following increases in
both copper and cobalt export earnings.
During the first quarter of 2010, non-traditional exports (NTEs) declined by 11.0%
to US $258.4 million from the US $290.5 million realised in the previous quarter.
This was largely due to a fall in export earnings from copper wire, cane sugar,
burley tobacco, cotton lint, fresh flowers and fruits and vegetables.
During the quarter under review, the capital and financial account surplus
narrowed to US $117.6 million from US $196.1 million recorded the previous
quarter. This was attributed to a decline in capital transfers (to US $49.1 million
from US $85.8 million), direct investment (to US $169.8 million from US $174.8
million), portfolio investment (to minus US $16.8 million from US $19.4 million)
and other investments (to minus US $84.5 million from minus US $83.8 million).
The overall financial condition of the banking sector for the quarter ended March
2010 was satisfactory. On aggregate, the banking sector was adequately
capitalized and the liquidity position remained satisfactory. However there was
deterioration in the sector’s asset quality and earnings performance.
The overall financial performance and condition of the NBFIs was rated fair during
the quarter under review. On average, the microfinance institutions and bureaux
de change sub-sectors reported adequate regulatory capital, fair asset quality and
liquidity position while earning performance was marginal. However, four leasing
finance companies, one building society and one credit and savings institution had
regulatory capital deficiencies.
Further, we have noted that there has also been an improvement in the number of
cheques returned unpaid. The total volume of cheques returned unpaid on
account of insufficiently funded accounts decreased by 15% to 5,287 (Qtr 4 2009:
6,247) cheques while the value decreased by 16% to K39.83 billion (Qtr 4 2009:
K47.49 billion). The Bank is pleased to see the reduction and hopes that this trend
will continue over the coming months.
The Bank would like to take the opportunity to advise the public that the Bank is
issuing new directives on unpaid cheques and unpaid direct debit instructions that
will help to maintain the credibility and confidence in cheques and direct debit
instructions as an alternative payment instrument. The public is reminded that
bouncing a cheque on account of an insufficiently funded account, is a criminal
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offence under the National Payment System Act. To this end, members of the
public should always ensure that they have sufficient funds in their accounts
whenever they issue cheques to avoid facing criminal charges under the Act.
An IMF Mission, led by Mr. George Tsibouris, was in the country from 18th February
to 2nd March 2010 to conduct the fourth review of the Three –Year Economic
Programme under the Extended Credit Facility (formerly Poverty Reduction and
Growth Facility Arrangement) with the Zambian Authorities.
The mission reached preliminary agreement with the Zambian Authorities on the
2010 Macroeconomic framework and structural measures. The issues that
remained to be discussed before the conclusion of the mission were the fuel
pricing and electricity pricing mechanisms, as well as issues relating to the
financing road construction. It was envisaged that the IMF Executive Board will
discuss the fourth review of Zambia’s IMF Programme in May 2010.
Total disbursed poverty reduction budget support (PRBS) in the first quarter of
2010 amounted to US $66.3 million against a projection of US $128.5 million. The
inflows were from the United Kingdom (US $38.6 million) and Norway (US $27.7
million). The difference is mainly attributed to an amount of US $48.3 million that
was expected from the European Union during the quarter under review but was
not disbursed as programmed, as it was moved to the second quarter. Payments
to various creditors, excluding IMF debt service, amounted to US $10.6 million.
The annual inflation rate is expected to slow down during the second quarter of
2010, largely due to an increase in the supply of fresh food items with the onset of
the 2009/2010 crop harvest period.