BANK Of ZAMBIA QUARTERLY MEDIA BRIEFING BY DR CALEB M. FUNDANGA GOVERNOR Presented at Bank of Zambia 12 April 2007
EXECUTIVE SUMMARY This brief provides a preliminary assessment of monetary policy implementation and its outcomes in the first quarter of 2007. The brief also reviews other economic and financial sector developments. In the conclusion, it provides an inflation outlook for the second quarter of 2007. Monetary Policy Monetary policy objective in the first quarter of 2007 was aimed at consolidating the gains made in 2006 by maintaining single digit inflation, which was recorded at 8.2% in December 2006. Achieving this goal entailed containing the growth of liquidity in the banking system within the projected path. Inflation Developments in inflation were unfavourable. Annual overall inflation increased to 12.7% in March 2007 from 8.2% in December 2006. On a year-to-date basis, it stood at 4.5% compared to the 0.5% recorded during the corresponding quarter in 2006. The unfavourable overall inflation outturn reflected both higher food and non-food inflation. Annual food inflation increased to 4.9% in March 2007 from -0.2% in December 2007. On year to-date basis, it was recorded at 4.1% compared to the -1.0 % registered during the corresponding period in the previous year. Contributing most to higher food inflation were prices of breakfast and roller mealie meal increasing by 2.7% and 6.1% to K37,381 and K27,893 of 25kg bag, respectively. These were besides increases in the cost of fresh vegetables notably tomatoes, onions and cabbages and most other food items, typical seasonal during the first quarter of the year. Higher cost of fish, in light of the fish ban traditionally imposed during the period, was another contributing factor. Further assisting in the build up of food inflationary pressures was the rise in the cost of beef, following the ban on transportation of cattle from Southern province, a remedy measure to curb the spread of the cattle disease, CBPP. Annual non-food inflation rose to 21.5% in March 2007 from 18.1% in December 2006. On a year-to-date basis, it was recorded at 5.1%, well above the 2.2 % reported during the corresponding period in 2006. Contributing most to non-food inflationary pressures were increased household energy and transportation costs, following upward adjustments in prices of petrol and diesel by 10.5% and 5.0% in January 2007, respectively. These fuel price hikes were partly in response to the depreciation of the Kwacha against major currencies. Money Supply and Domestic Credit Preliminary data show that broad money (M3), comprehensively defined, declined by 10.8% in March 2007 to K7,563.38 billion due to the 22.9% and 0.3 % Bank of Zambia 1
contraction in net foreign assets and net domestic assets, respectively. Excluding foreign currency deposits, the growth in M3 was 13.3 %. On an annual basis, M3 growth decreased to 30.1 % in March 2007 from 45.1 % in December 2006. Annual money growth, excluding foreign currency deposits, was recorded at 26.4%. Preliminary estimates indicate that total domestic credit, comprehensively defined to include foreign currency loans, declined by 4.1% to K6,099.9 billion in the first quarter of 2007 due to the 15.3% and 12.2% reduction in banking system lending to the Government and public enterprises, respectively. However, domestic credit to the private sector increased by 2.5%. Excluding foreign currency denominated credit, which increased by 35.4%, credit denominated in Kwacha declined by 15.7%. On an annual basis, domestic credit growth slowed down to 13.8% from 25.9% at end-december 2005. Excluding foreign currency denominated loans, which increased by 87.0%, domestic credit growth slowed down to 3.2% from 17.2%. A sectoral analysis reveals that up to October, the agriculture sector continued to account for the largest share of domestic credit (26.4%), reflecting expanded activities during the 2006/07 farming season. This was followed by the wholesale and retail trade, personal loans and manufacturing sectors. o It is worth noting that the share of personal loans has continued to be in double digits, in part, reflecting efforts by commercial banks to enhance household s participation in economic activity through consumer expenditures, including home ownership schemes. Interest Rates Due to low demand for Government securities, yield rates on Government securities increased. The composite yield rate on Treasury bills rose to an average of 12.6% in March 2007 from an average of 9.8% in December 2006. Similarly, the composite yield rate on Government bonds went up to 14.5% in March 2007 from an average of 12.6% in December 2006. Reflecting lower inflation expectations, the declining trend in commercial banks lending rates continued during the first three months of 2007, though at slower rate. The average lending base rate and the average lending rate declined to about 20% and 26% in March 2007 from around 22% and 28% in December 2006, respectively. However, average savings rate for amounts above K100, 000 and the 30 day deposit rate remained unchanged at 6.1% and 8.4%, respectively. Real Sector During the first quarter of 2007, the Food Reserve Agency (FRA) maize stocks stood at 298,628.0 metric tons (mt) compared to 378,200 mt at end of the fourth Bank of Zambia 2
quarter of 2006. By province, Southern, Copperbelt, Central, Eastern and Lusaka provinces largely accounted for these stocks. As at end-march 2007, the stock of maize grain held by major millers in the country was estimated to have declined to 45,103.7 mt from 78,022.82 mt as at 27 th December 2006. By province, millers in Lusaka, Copperbelt, Central and Southern provinces largely accounted for these stocks. Preliminary data show that copper output declined marginally by 0.14% to 114,238.58 mt during first quarter of 2007 from 114,403.00 mt in the last quarter 2006. This was largely due to flooding of mines, typical during the rain season. High water levels in the mines also caused a decline in cobalt output by 6.96% to 948.96 mt in the first quarter of 2007 from 1,020.00 mt in the previous quarter. Balance of Payments Preliminary data show that there was an improvement in Zambia s balance of payments (BoP) position during the reviewed period. The overall BoP deficit narrowed to US $85.1 million in the first quarter of 2007 from US $203.9 million in the previous quarter, due to improvements in the capital and financial accounts. During the first quarter of 2007, the current account deficit widened to US $252.1 million from US $139.3 million in the previous quarter of 2006, reflecting a decline in the trade surplus and a widening of the services account, income account as well as the current transfers. The trade surplus narrowed to US $57.5 million from US $142.1 million registered during the preceding quarter, following an increase in merchandise imports combined with lower merchandise export earnings. During the reviewed quarter, merchandise export earnings declined by 2.0% to US $860.4 million, reflecting lower non traditional exports (NTE s). Metal export earnings increased to US $698.1 million from US $676.2 million recorded in the preceding quarter, reflecting both higher copper and cobalt exports earnings. Copper export earnings increased by 2.4% to US $651.1 million, attributable to higher sales volumes. Copper export volumes increased by 4.6% to 112,198.2 metric tons (mt) while the realised price of copper declined to US $5,804.7 from US $5,932.0 per ton. Cobalt export earnings rose by 16.4% to US $46.8 million in the first quarter of 2007, due to an increase in the realised price of cobalt to US $21.5 per ton from US $17.6 per ton. Bank of Zambia 3
NTE earnings at US $162.3 million, during the first quarter of 2007, were 19.5% lower than the US $201.6 million recorded in the previous quarter. This was as a result of decreased export earnings associated with copper wire, white spoon sugar, burley tobacco, cotton lint, electric cables, fresh flowers and gas oil, with agricultural related products depicting a seasonal pattern. Merchandise imports increased to US $809.4 million during the first quarter of 2007 from US $744.9 million in the previous quarter, following higher import bills associated with petroleum products, chemicals and motor vehicles. During the reviewed quarter, the capital and financial account improved to a surplus of US $167.0 million from a deficit of US $64.5 million in the previous quarter, as a result of increased foreign direct investment. Foreign Exchange Market Developments In March 2007, the Kwacha depreciated by 3.0% against the US dollar to an average of K4, 260.80/US$. The depreciation largely occurred due to the high demand for foreign exchange by oil importers. However, against the South African Rand, the Kwacha appreciated by 0.5% to an average of K580.30/ZAR. Implementation of the Economic Programme During the reviewed period, an IMF Mission visited Zambia from 14 th March to 28 th March 2007 to complete the fifth and sixth reviews of performance under the Poverty Reduction and Growth Facility (PRGF) arrangement and to carry out 2007 Article IV consultations. The mission observed that significant progress was made in the implementation of the PRGF-supported programme in the first quarter of 2007. The completion of the fifth and sixth reviews would trigger a further disbursement of SDR 22.009 million in 2007. Developments in the Financial Sector Preliminary data indicate that the overall financial condition and performance of the banking sector during the first two months of 2007 was satisfactory. The sector maintained adequate capital and reserves while asset quality, earnings and liquidity were also satisfactory. In the non-bank financial sector, o the overall financial condition and performance of the leasing sector was fair. o With regards to the building societies sector, despite some improvement, the financial condition remained unsatisfactory. Bank of Zambia 4
Developments in Banking, Currency and Payment Systems Currency in Circulation As at end first quarter of 2007, currency in circulation (CIC) decreased by 6.7% to K1,143.4 billion (255.8 million pieces), as a result of lower demand for cash with the end of the festive season. Removal of Unfit Polymer Banknotes from Circulation Bank of Zambia continued its efforts to remove unfit bank notes. The number of unfit polymer banknotes removed from circulation increased to 54.7 million pieces in the first quarter of 2007 from 49.1 million pieces in the previous quarter. Going forward, the public is urged to change all unfit polymer banknotes for fit polymer banknotes through the Bank of Zambia or any commercial banks. The same applies to unfit non-polymer notes. Usage of Middle and Low Value Notes The Bank of Zambia continues to urge financial institutions, particularly commercial banks to ensure that their customers are provided with the appropriate denominational mix when requested during cash transactions. The Bank of Zambia has observed that the public does not have access to some denominations, particularly the middle value notes, that is, the K10,000 and K5,000. The Bank would also like to appeal to the public to use small value notes i.e. K100, K50 and K20 when making payments for transactions during shopping. The Bank has noted that there is a large amount of these denominations which are in circulation and yet some of the notes are just being kept in peoples homes because of their small values. Other Developments Opening of Solwezi Cash Sub-Chest The Bank of Zambia wishes to inform the public that it opened the Solwezi cash sub-chest in January 2007, in support of the continued growth of economic activity in the North-Western Province. In particular, the opening of the cash sub-chest will ensure that financial institutions and the business community, at large, have their financial requirements met in the shortest possible time and at reduced cost. Bank of Zambia 5
Implementation of item value limits The Bank of Zambia, in conjunction with the Bankers Association of Zambia (BAZ), has introduced the Item Value Limits (IVL) initiative on transactions processed through Physical Inter-bank Clearing (PIC) and the Direct Debit and Credit Clearing (DDACC) streams which are processed in the Electronic Clearing House. This follows wide consultations with stakeholders, such as, the Ministry of Finance and National Planning, Zambia Association of Chambers of Commerce and Industry and Zambia Manufacturers Association as well as individual business entities in all provincial centres. The initiative is aimed at reducing dependency by the public on usage of cheques and Direct Debits and Credits Clearing (DDACC) in effecting transfer of funds and payments for large value transactions. In the run-up to the implementation of the initiative, the Bankers Association of Zambia took a deliberate step to sensitise the public by issuing a series of public announcements in the local press advising the public of the impending launch of the initiative. The project was successfully launched on 2 nd April 2007. However, in order to accommodate payment instruments which may have been issued before 2 nd April 2007 a period of 6 months from the implementation date will be allowed to ensure that such instruments are processed. Implementation of tax payment stream To extend the benefits derived from the use of the Zambia Inter-bank Payment and Settlement System/Real-time Gross Settlement system (ZIPSS/RTGS), a joint team of the Bank of Zambia, the Bankers Association of Zambia and the Zambia Revenue Authority (ZRA) was set up to develop and implement a stream for tax payments on the ZIPSS/RTGS. The objective of these efforts was to ensure that a more efficient mechanism for making tax payments for tax payers and Government was developed. In this respect, the Tax Payment Stream which allows Tax Payers to make payments for taxes electronically was launched on 1 April 2007. Tax Payers now have the benefit of being able to make payment for taxes at their convenience from their commercial banks on any day before the deadline. This will greatly reduce queuing at the offices of the Zambia Revenue Authority. Added to this will be the possibility of Tax Payers being able to make payments from their offices if they have the appropriate infrastructure. Tax Payers will also benefit from the reduction in the risk of fraud associated with cheque and cash payments. Bank of Zambia 6
Inflation Outlook for the Second Quarter of 2007 During the second quarter, overall annual inflation is anticipated to slow down. This is premised on the easing of both food and non-food inflationary pressures. Lower food prices are expected due to improved supply of fresh foods, as evidenced in March when monthly food inflation slowed down to 1.3% from 2.0% in February. What will further mitigate food inflationary pressures are the lower maize prices as a result of the recently observed low domestic demand for the commodity and the anticipated improved maize supply associated with the start of 2007/2008 crop marketing season in May. For example, due to low domestic demand for maize, the increase in the average price of a 25 kg bag of mealie meal slowed down to 0.2% in March from 3.6% in the previous month. Despite the floods in some regions, overall normal rains have been reported, and thus with a surplus carryover stocks from the 2005/2006 agricultural season, lower maize prices are anticipated in the second quarter. A slow in non-food inflation is also expected on account of the lagged effects of lower money growth. Further contributing to this positive non-food inflation outlook is the relative stability in the exchange rate. However, there a number of challenges to inflation during the second quarters that needs to be taken into account. Notably, the high cost of beef in light of the ban on cattle movement from Southern province to curb the spread of the livestock diseases, CBPP. This is in addition to the recent fuel price hikes. The Bank of Zambia will continue to monitor these developments and undertake appropriate monetary policy actions to bring reserve money in line with the target. I THANK YOU FOR YOUR ATTENTION Bank of Zambia 7
INTRODUCTION This brief provides a preliminary assessment of monetary policy implementation and its outcomes during the first quarter of 2007. The brief also reviews other economic and financial sector developments. In the conclusion, it provides an inflation outlook for the second quarter of 2007. MONETARY POLICY Monetary policy objective in the first quarter of 2007 was aimed at consolidating the gains made in 2006 by maintaining single digit inflation, which was recorded at 8.2% in December 2006. Achieving the set goal entailed containing the growth of liquidity in the banking system within the projected path. In this regard, the Bank of Zambia (BoZ) has relied mainly on Open Market Operations (OMO) and the auctioning of Government securities, complemented by prudent fiscal policy. INFLATION Overall Inflation Overall annual inflation increased to 12.7% in March 2007 from 8.2% in December 2006 with food products accounting for 2.6 percentage points and non-food products accounting for 10.1 percentage points. On a year-to-date basis, it stood at 4.5% compared to the 0.5% recorded during the corresponding quarter in 2006. The unfavourable overall inflation outturn reflected both higher food and non-food inflation. Food Inflation Annual food inflation increased to 4.9% in March 2007 from -0.2% in December 2007. On year to-date basis, it was recorded at 4.1% compared to the -1.0 % registered during the corresponding period in the previous year. Contributing most to higher food inflation were prices of breakfast and roller mealie meal increasing by 2.7% and 6.1% to K37,381 and K27,893 of 25kg bag, respectively. These were besides increases in the cost of fresh vegetables notably tomatoes, onions and cabbages and most other food items, characterizing the typical seasonal low supply pattern during the first quarter of the year. Higher cost of fish, in light of the fish ban traditionally imposed during the period, was another contributing factor. Further assisting in the build up of food inflationary pressures was the rise in the cost of beef, following the ban on transportation of cattle from Southern province, a remedy measure to curb the spread of the cattle disease, Contagious Bovine Pleural Pneumonia (CBPP). Non-Food Inflation Annual non-food inflation rose to 21.5% in March 2007 from 18.1% in December 2005. On the year-to-date basis, it was recorded at 5.1%, well above the 2.2 % Bank of Zambia 8
reported during the corresponding period in the previous year. Contributing most to higher non-food inflation were higher household energy and transportation costs, following the upward adjustments in prices of petrol and diesel by 10.5% and 5.0% in January 2007, respectively. These fuel price hikes were partly in response to the depreciation of the Kwacha against major currencies. BROAD MONEY AND DOMESTIC CREDIT Preliminary data show that broad money, comprehensively defined to include foreign exchange deposits (M3), declined by 10.8% to K7,563.3 billion at end- March 2007 from K8,476.8 billion at end-december 2007, on account of the decline in both net foreign assets and net domestic assets of 22.9% and 0.3%, respectively. The decrease in net foreign assets largely reflected lower commercial banks foreign assets following the decrease in foreign currency deposits. The decline in net domestic assets was due to the contraction in domestic credit. Excluding foreign currency deposits, the growth in broad money was 13.3 %. On an annual basis, broad money growth decreased to 30.1 % in March 2007 from 45.1 % in December 2006. Annual money growth, excluding foreign currency deposits, was recorded at 26.4%, suggesting the strong influence of domestic credit in monetary expansion. Preliminary data show that domestic credit, comprehensively defined to include foreign currency loans, declined by 4.1% to K6,099.9 billion in March 2007 from K6,361.6 billion in December 2006. This was largely due to the 15.3% and 12.2% contraction in lending to the Central Government and public enterprises. On the other hand, domestic credit to the private sector increased by 2.5%. Excluding foreign currency denominated credit, which increased by 35.4%, credit denominated in Kwacha declined by 15.7%. On an annual basis, domestic credit growth slowed down to 13.8% in March 2007 from 25.9% in December 2006. Excluding foreign currency denominated loans, which increased by 87.0%, domestic credit growth slowed down to 3.2% from 17.2%. A sectoral analysis reveals that up to February 2007, the agriculture sector accounted for the largest share of domestic credit (24.7%), reflecting expanded activities during the 2006/07 farming season. This was followed by the wholesale and retail trade (13.1%), personal loans(12.1%), manufacturing (11.1%), transport and communications (8.3%), electricity, gas and energy (5.9%), mining and quarrying sector (5.6%), financial services (3.9%), construction(3.6% and real estate (2.3%) sectors. It is worth noting that growth in personal loans continues to be in double digits, in part, due to efforts by commercial banks to enhance household s participation in economic activity through consumer expenditures, including home ownership schemes. Bank of Zambia 9
INTEREST RATES Yields on Government Securities Interest rates on Government securities increased in the reviewed quarter, partly driven by weak demand for Government securities. The composite yield rate on Treasury bills rose to an average of 12.6% in March 2007 from an average of 9.8% in December 2006. Similarly, the composite yield rate on Government bonds rose to 14.5% in March 2007 from an average of 12.6% in December 2006. Commercial Banks Interest Rates The declining trend in commercial banks lending rates, though at a slower rate, continued during the first three months of 2007, in part, reflecting lower inflation expectations. The average lending base rate and the average lending rate declined to about 20% and 26% from around 22% and 28% in December 2006, respectively. However, average savings rate for amounts above K100, 000 and the 30 day deposit rate remained unchanged at 6.1% and 8.4%, respectively. REAL SECTOR DEVELOPMENTS Agriculture Maize At end-march 2007, the Food Reserve Agency (FRA) maize stocks stood at 298,628.0 metric tons (mt) compared to 378,200 mt at end of the fourth quarter of 2006. By province, Southern, Copperbelt, Central, Eastern and Lusaka provinces largely accounted for these stocks, 65,539 mt (21.9%), 59,018 mt (19.8%), 54,206 mt (18.2%), 50,731 mt (17.0%) and 29,541 mt (9.9%), respectively. As at end-march 2007, the stock of maize grain held by major millers in the country was estimated to have declined to 45,103.7 mt from 78,022.82 mt as at 27 th December 2006. By province, millers in Lusaka, Copperbelt, Central and Southern provinces largely accounted for these stocks, 22,446.22 mt (49.8%), 11,300.00 mt (25.1%), 5,695.20 mt (12.6%) and 5,362.28 mt (11.9%), respectively. Mining Preliminary data show that copper output declined marginally by 0.14% to 114,238.58 mt during the first quarter of 2007 from 114,403.00 mt in the last quarter 2006. This level of output was also 9.3% lower than the 125,880.00 mt produced during the same quarter in 2006. This was largely due to flooding of mines, typical during the rain season. Bank of Zambia 10
High water levels in the mines also led to a decline in cobalt output by 6.96% to 948.96 mt in the first quarter from the 1,020.00 mt in the previous quarter. Compared to 1,183.70 mt produced in the similar quarter in 2006, this cobalt output level was about 20 % lower. EXTERNAL SECTOR DEVELOPMENTS Exchange Rate In March 2007, the Kwacha depreciated by 3.0% against the US dollar to an average of K4, 260.80/US$. The depreciation largely occurred due to the sustained demand for foreign exchange by oil importers. However, against the South African Rand, the Kwacha appreciated by 0.5% to an average of K580.30/ZAR. Balance of Payments Preliminary data show that Zambia s overall balance of payments (BoP) position improved to a deficit of US $85.1 million in the first quarter of 2007 from a deficit of US $203.9 million in the previous quarter. This favourable performance stemmed from improvements in the capital and financial accounts to a surplus of US $167.0 million from a deficit of US $64.5 million. During the first quarter of 2007, the current account deficit widened to US $252.1 million from US $139.3 million recorded during the last quarter of 2006. This was mainly explained by the decline in the trade surplus, a widening of the services account, income account as well as the current transfers. The trade surplus narrowed to US $57.5 million from US $142.1 million registered during the previous quarter, following an increase in merchandise imports coupled with lower merchandise export earnings. During the reviewed quarter, merchandise export earnings at US $860.4 million, were 2% lower than the US $877.8 million realised in previous quarter, following lower non traditional exports (NTE s) earnings. Metal export earnings increased to US $698.1 million from US $676.2 million in the preceding quarter, reflecting both higher copper and cobalt exports earnings. Copper export earnings at US $651.1 million in the first quarter of 2007 were 2.4% higher that the US $636.0 million recorded during the previous quarter, as a result of higher sales volumes. Copper export volumes increased to 112,198.2 metric tons (mt) from 107,221.0 mt. The realised price of copper declined to US $5,804.7 from US $5,932.0 per ton. On a year-to-date basis, this export receipts was also favourable as it was 17.1% higher than the US $555.8 million realised during the corresponding in 2006. Bank of Zambia 11
Cobalt export earnings rose to US $46.8 million in first quarter of 2007 from US $40.2 million in the previous quarter, due to an increase in the realised price of cobalt to US $21.5 per ton from US $17.6 per ton. Cobalt export volumes declined to 989.04 mt from 1036.9 mt recorded during the last quarter of 2006. On year to date basis, this cobalt receipts was 57.0% above the US $29.8 million recorded during the corresponding period in 2006. NTE earnings at US $162.3 million, during the first quarter of 2007, were 19.5% below the US $201.6 million realised in the previous quarter. This was as a result of lower export earnings associated with copper wire, white spoon sugar, burley tobacco, cotton lint, electric cables, fresh flowers and gas oil, with agricultural related products depicting a seasonal pattern. However, on a year to date basis, NTEs were 18.2% higher than the US $137.3 million registered during the similar quarter in 2006. The first quarter of 2007 witnessed merchandise imports increasing to US $809.4 million from US $744.9 million in the previous quarter, as a result of higher import bills associated with petroleum products, chemicals and motor vehicles. During the reviewed quarter, the capital and financial account improved to a surplus of US $167.0 million from a deficit of US $64.5 million in the preceding quarter. This improvement was mainly attributed to an increase in foreign direct investment to US $111.8 million from US $100.8 million. The overall balance of payments deficit was partially financed by balance of payments support grants amounting to US $35.2 million. IMPLEMENTATION OF THE ECONOMIC PROGRAMME During the reviewed period, an IMF Mission visited Zambia from 14 th March to 28 th March 2007 to complete the fifth and sixth reviews of performance under the Poverty Reduction and Growth Facility (PRGF) arrangement and to carry out 2007 Article IV consultations. During the review, the mission observed that significant progress was made in the implementation of the PRGF-supported programme in the first quarter of 2007. The completion of the fifth and sixth reviews would trigger a further disbursement of SDR 22.009 million in 2007. DEVELOPMENTS IN THE FINANCIAL SECTOR The overall financial condition and performance of the banking sector during the first two months of 2007 was satisfactory. The sector maintained adequate capital and reserves while asset quality, earnings and liquidity were also satisfactory. Bank of Zambia 12
The banking sector as a whole continued to be adequately capitalized. However, following the revision of the minimum capital requirement to K12.0 billion beginning January 2007, two banks were marginally below the new requirement. The banks in question have initiated measures to increase their capital base before the grace period expires in June 2008. The asset quality of the banking sector was generally satisfactory during the two months. Overall, the banking sector experienced a decrease of 6.2% in total assets to K10,016.7 billion as at end-february 2007 from end-december 2006. The decrease was largely on account of the decrease in Balances with Foreign Institutions by K502.4 billion during the period. The banking sector s earnings performance during the period was satisfactory with the Cumulative Return on Assets (ROA) and Cumulative Return on Equity (ROE) at 5.0% and 31.5%, respectively. The sector s liquidity condition was also satisfactory and the ratio of liquid assets to total deposits and short-term liabilities as at end-february 2007 was 35.7%. DEVELOPMENTS IN THE NON-BANK FINANCIAL SECTOR Leasing Sector The overall financial condition and performance of the leasing sector has been designated fair. On average, leasing companies have maintained adequate regulatory capital and reserves relative to their risk profiles. As at 28 February 2007, the sector regulatory capital was K44, 750 million, an increase of 5 % over the 31 December 2006 figure of K42, 637 million. This was largely due to the K482 million increases in profit after tax recorded during the two months period. Building Societies The building societies sector continued to register a fair performance during the first two months of 2007. The sector recorded a profit before tax of K1, 991 million for the period under review compared to the profit before tax of K2, 057 million recorded in the previous two months ended 31 December 2006. Despite the profit recorded, the sector still had a deficiency on the aggregate regulatory capital account. Bureaux de Change The volume of purchases and sales of foreign currency by the bureaux de change during the two months period to 28 February 2007 amounted to K267,692 million and K265, 632 million compared to K285, 387 million and K285, 604 million respectively, recorded during the for the two months period ended 31 December 2006. Bank of Zambia 13
The United States (US) Dollar remained the most traded currency in the quarter followed by the South African (SA) Rand. Total purchases and sales of the US Dollar amounted to K253,127 million and K251,285 million while those of the SA Rand amounted to K9,967 million and K9,737 million, respectively. FINANCIAL SECTOR DEVELOPMENT PLAN IMPLEMENTATION Launch of Corporate Governance Guidelines In order to enhance integrity in the financial sector, Corporate Governance Guidelines for Banks and Non-bank financial Institutions were issued on 29 November 2006. Official Launch of Credit Reference Bureau Africa Limited (CRBAL) In order to improve the credit culture in the country, the Credit Reference Bureau Code of Conduct and Guidelines were gazetted in 2006. This resulted in the licensing of the Credit Reference Bureau Africa Limited (CRBAL) by BoZ on 5 June 2006. The promoters of CRBAL officially launched the operations of CRBAL in Zambia on 12 January 2007. The operations of the Credit Reference Bureau will be implemented in a phased manner, beginning with the banking sector. All commercial banks are expected to sign the Service Level Agreement by end of April 2007 and the will pave way for data collection. The benefits of the Credit Reference Bureau, among others, include the following: Reduction in loan/credit processing costs. Reduction in loan/credit processing time. Reduction in write-offs. Lower borrowing costs. Expansion in credit facilities. Creation of increased demand for goods and services. Economic growth. Improved standard of living for natural persons living in the country where Credit Bureau is domiciled. Encourages and rewards Natural Persons who maintain good credit. Dissemination of the findings of the FinScope 2005 Survey To disseminate the findings of the Zambia FinScope Survey further, a series of working sessions were conducted for commercial banks, microfinance institutions and insurance companies, between 6 and 7 February, 2007. These working sessions explored in more detail the potential market for financial products and services and Bank of Zambia 14
identified inadequate physical infrastructure in the country as the major key factor that prevents people from becoming consumers. Supply Side study on the inclusiveness of Zambia s Financial System To compliment the survey on the demand for financial services in Zambia, FinMark Trust will undertake the Supply Side study on the inclusiveness of the Zambia s financial system. The study commenced on 22 March 2007 and is expected to be concluded by end May 2007 The project on the supply side of financial services in Zambia is expected to look at a number of access-related issues from a supply-side perspective and will include the following activities: o Mapping the supply of finance by institutional type and seeing which segments of society they serve; o Identifying the scope and scale of accessible supply; o Identifying gaps in the platform for accessible supply; o Identifying obstacles to expanded accessible supply; and o Recommending practical options for improvement. Payment Systems Bill The National Payment Systems Bill has been passed by Parliament and awaits Presidential assent. The Bill was developed to mitigate the shortcomings in the current legislative framework and provide legal backing to international best practices in the payment systems. DEVELOPMENTS IN BANKING, CURRENCY AND PAYMENT SYSTEMS Currency in Circulation As at end first quarter, currency in circulation (CIC) decreased by 6.7% to K1,143.4 billion (255.8 million pieces) from K1,225.9 billion (261.6 million pieces) at the end of the previous quarter. This was largely on account of decreased demand for cash with the end of the festive season. The large value denominations of K50,000 and K20,000 accounted for a combined share of 85% in value terms of currency in circulation, while the middle value notes - the K10,000 and K5,000- accounted for 11% of CIC and low value denominations (4.0%). Removal of Unfit Polymer Banknotes from Circulation In our continued implementation of the Bank of Zambia Clean Note Policy during the first quarter of 2007, a cumulative total of K39.9 billion (54.7million pieces) of unfit polymer banknotes were removed from circulation compared to K35.6 billion (49.1 million pieces) in the previous quarter. Bank of Zambia 15
Going forward, the public is urged to change all unfit polymer banknotes for fit polymer banknotes through the Bank of Zambia or any commercial banks. The same applies to unfit non-polymer notes. Usage of Middle and Low Value Notes The Bank of Zambia urges financial institutions, particularly commercial banks to ensure that their customers are provided with the appropriate denominational mix when requested during cash transactions. The Bank of Zambia has observed that the public does not have access to some denominations, particularly the middle value notes, that is, the K10,000 and K5,000, as most commercial banks prefer to pay out their customers in high value notes only. The public is advised that they are at liberty to request for a denominational mix that suits their cash requirements when transacting with a commercial bank. The Bank also continues to appeal and urge the public to make use of small value notes, that is, K100, K50 and K20 notes during their normal business transactions. The Bank has observed that large quantities of these denominations, although in circulation, are not generally used and therefore do not find their way back into the banking system. It has also been observed that the public prefers to store these notes in homes as they are considered to be of low or no purchasing value. In this regard, the Bank of Zambia urges all those members of the general public who have no use for these denominations to take these notes to any commercial bank and exchange them for higher value notes, depending on the amounts presented. Where persons have bank accounts, these persons are encouraged to deposit these notes with their commercial banks. Other Developments Opening of Solwezi Cash Sub-Chest The Bank of Zambia wishes to inform the public that it opened the Solwezi cash sub-chest in January 2007. The opening of the Solwezi cash sub-chest brings to six the number of cash sub-chest that the Bank of Zambia operates countrywide in addition to the operations at the Head Office in Lusaka and the Regional Office in Ndola. The opening of the Solwezi cash sub-chest is significant and it is an important development in the continued growth of economic activity in the North- Western Province. The opening of the cash sub-chest will ensure that financial institutions and the business community at large have their financial requirements met in the shortest possible time and at reduced cost. Implementation of item value limits We wish to inform you that the Bank of Zambia, in conjunction with the Bankers Association of Zambia (BAZ), has introduced the Item Value Limits (IVL) initiative on transactions processed through Physical Inter-bank Clearing (PIC) and Bank of Zambia 16
the Direct Debit and Credit Clearing (DDACC) streams which are processed in the Electronic Clearing House. This follows wide consultations with stakeholders, such as, the Ministry of Finance and National Planning, Zambia Association of Chambers of Commerce and Industry and Zambia Manufacturers Association as well as individual business entities in all provincial centres. The initiative is aimed at reducing dependency by the public on usage of cheques and Direct Debits and Credits Clearing (DDACC) in effecting transfer of funds and payments for large value transactions. The use of cheques and DDACC for large value payments poses systemic risk in the payment system. Consequently, the initiative has been introduced to manage this risk. To this end, cheques and Direct Credits above K100 million and Direct Debits above K50 million will not be processed in the clearing house. Amounts above the limits will be processed through the Zambia Inter-bank Payment and Settlement System/Real-time Gross Settlement system (ZIPSS/RTGS). I therefore wish to urge the public to ensure that they do not issue cheque or DDACC payment instructions for amounts above the limits set to avoid being inconvenienced as such instructions will not be acted upon by commercial banks.. In the run-up to the implementation of the initiative, the Bankers Association of Zambia took a deliberate step to sensitise the public by issuing a series of public announcements in the local press advising the public of the impending launch of the initiative. The project was successfully launched on 2 nd April 2007. However, in order to accommodate payment instruments which may have been issued before 2 nd April 2007 a period of 6 months from the implementation date will be allowed to ensure that such instruments are processed. Implementation of tax payment stream To extend the benefits derived from the use of the Zambia Inter-bank Payment and Settlement System/Real-time Gross Settlement system (ZIPSS/RTGS), a joint team of the Bank of Zambia, the Bankers Association of Zambia and the Zambia Revenue Authority (ZRA) was set up to develop and implement a stream for tax payments on the ZIPSS/RTGS. The objective of these efforts was to ensure that a more efficient mechanism for making tax payments for tax payers and Government was developed. In this respect, we wish to inform you that these efforts have born fruit with the launch of the Tax Payment Stream which allows Tax Payers to make payments for taxes electronically. The initiative was launched on 1 April 2007. Tax Payers now have the benefit of being able to make payment for taxes at their convenience from their commercial banks on any day before the deadline. This will greatly reduce queuing at the offices of the Zambia Revenue Authority. Added to this will be the possibility of Tax Payers being able to make payments from their offices if they have the appropriate infrastructure. Tax Payers will also benefit from the reduction in the risk of fraud associated with cheque and cash payments. Bank of Zambia 17
The Tax Payment stream is available for use by all Tax Payers ranging from corporate to individual tax payers. The payments can be made from any commercial bank across the country. Furthermore, payments can be made for any tax office. For example, a Tax payer can make an electronic transfer in Lusaka for payment of customs duty charged by Chirundu ZRA office. The Zambia Revenue Authority has been running a number of advertisements in the local press to sensitise the public of the implementation of the payment stream. In this regard, I wish to urge the public to fully utilise this payment mechanism which is more efficient and more convenient. Bank of Zambia 18
INFLATION OUTLOOK FOR THE SECOND QUARTER OF 2007 During the second quarter, overall annual inflation is anticipated to slow down. This is premised on the easing of both food and non-food inflationary pressures. Lower food prices are expected due to improved supply of fresh foods, as evidenced in March when monthly food inflation slowed down to 1.3% from 2.0% in February. What will further mitigate food inflationary pressures are the lower maize prices as a result of the recently observed low domestic demand for the commodity and the anticipated improved maize supply associated with the start of 2007/2008 crop marketing season in May. For example, due to low domestic demand for maize, the increase in the average price of a 25 kg bag of mealie meal slowed down to 0.2% in March from 3.6% in the previous month. Despite the floods in some regions, overall normal rains have been reported, and thus with a surplus carryover stocks from the 2005/2006 agricultural season, lower maize prices are anticipated in the second quarter. A slow in non-food inflation is also expected on account of the lagged effects of lower money growth. Further contributing to this positive non-food inflation outlook is the relative stability in the exchange rate. However, there a number of challenges to inflation during the second quarters that needs to be taken into account. Notably, the high cost of beef in light of the ban on cattle movement from Southern province to curb the spread of the livestock diseases, CBPP. This is in addition to the recent fuel price hikes. The Bank of Zambia will continue to monitor these developments and undertake appropriate monetary policy actions to bring reserve money in line with the target. Bank of Zambia 19