Bank of Zambia

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FOURTH QUARTER 2010 MEDIA BRIEFING
 

BY

CALEB M. FUNDANGA

Governor  BANK OF ZAMBIA

Presented at the Bank of Zambia  February , 2011

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Bank of Zambia

INTRODUCTION

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This brief reviews monetary policy outcomes; Other economic and financial developments in Q4 2010; and
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sector

In conclusion, we provide an inflation outlook for Q1 2011

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1.0
Bank of Zambia

MONETARY POLICY

• Monetary policy focus in Q4 2010:

• Macroeconomic

stability and inflation target of 8.0%.

achieving

end-year

ð By containing growth of liquidity in banking system within projected path.

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2.0
Bank of Zambia

INFLATION

Annual inflation rose marginally to 7.9% in December (Sept 2010, 7.7%).

Ø Rise was mainly on account of the increase in
annual food inflation to 4.4% (Sept 2010, 2.8%), while non-food inflation slowed down to 11.3% (Sept 2010, 12.5%).

Ø Ø Food inflation rose due to price increases on
cereals, vegetables, beef products and fish attributed to seasonal supply factors. lower price increases on several goods and services, reflecting pass through effects of the Kwacha exchange rate appreciation against the US dollar.

Ø Non-food inflation slowed down on account of

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2.0
Bank of Zambia

INFLATION

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3.0
Bank of Zambia

MONEY SUPPLY & DOMESTIC CREDIT

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Annual money supply growth was 30.8% (September 2010, 32.8%). Annual growth in total domestic credit increased to 22.9% (September 2010, 13.5%). On sectoral basis, personal loans continued to account for highest share of credit at 26.8% followed by  agricultural 17.6%;  manufacturing 12.7%; and  wholesale and retail trade 10.8%.
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4. 0
Bank of Zambia
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INTEREST RATES

Yield Rates On Government Securities
Weighted average yield rates on Treasury bills increased to 8.2% in December 2010 (in September 2010, 7.4%). Weighted average yield rate on bonds declined marginally to 11.3% (September 2010, 11.5%).



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Commercial Bank Interest Rates ¡ Weighted average lending base rate fell to 19.4% (September 2010, 19.8%). ¡ Average lending rate fell to 26.4% (September 2010, 26.8%). ¡ Average savings rate for amounts above K100,000 remained unchanged at 4.7%.


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Bank of Zambia

5. 0 MARKET

FOREIGN EXCHANGE


The Kwacha appreciated against major currencies mainly due to:

Ø Favourable

macroeconomic improvement in domestic exchange; and

fundamentals and supply of foreign

Ø  Sustained increase in international price of
copper, which stood at US $9,127.4 per tonne.

• • •

The Kwacha appreciated by 2.1% against the US dollar to an average of K4,731.52/US$. Commercial banks made spot purchases of US$1,417.2 million from the non-bank public against sales of US$1,213.3 million. This translated into net purchases of US$203.8 million. BoZ participated in the market with a net purchase of US$58.5 million (Sept 2010, net purchase of US $67.5 million).
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Bank of Zambia
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5 . 0 Foreign Exchange Market ( cont )

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Bank of Zambia

6.0

Real Sector


Preliminary estimates indicate that Gross Domestic Product (GDP) grew by 7.1% in 2010 from 6.4% in 2009. This growth in GDP was largely driven by the agricultural, construction and mining sectors.

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Ø The 2010 agricultural harvest was the highest recorded in history, having produced over 2.8 million metric tonnes (mt) of maize.

Ø The mining sector also benefitted from higher copper prices and production levels.

Ø Growth in the construction sector emanated from increased residential, commercial and public infrastructure construction projects across the country by both Government and the private sector. §
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Bank of Zambia

6 . 0 Real Sector - Cont


During the fourth quarter, positive growth was recorded in the following sectors: Ø Agriculture – as reflected in the rise in Food Reserve Agency maize stocks at end-December 2010, to 982,784 mt from 162,956.0 mt at end-September 2010. Ø Manufacturing - supported by increased output of cement, clear beer, soft drinks and milk by 26.1%, 6.2%, 28.8% and 10.0% respectively. Ø Mining - as reflected in increased cobalt production by 1.5% to 2,401.8 mt, although copper output fell by 13.5% to 197,500.23 mt. Ø Total investment pledges were estimated at US $1.0 billion in the fourth quarter of 2010 compared with US $110.4 million in the third quarter.

Ø The pledges when fully executed are expected to generate 22,532 jobs with the highest contribution from services at 12,763 jobs followed by agroprocessing at 5,860 jobs.

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Bank of Zambia

7 . 0 BALANCE OF PAYMENTS ( BoP )
• •
Overall BoP position deteriorated to a deficit of US $71.1 million during the fourth quarter (surplus of US $330.2 million in third quarter). This was due to unfavourable performance in both the current account balance and financial account. The current account surplus declined to US $354.5 million from $238.9 million in third quarter largely on account of a decline in the merchandise trade surplus and widening of the net income deficit.

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7 . 0 BALANCE OF PAYMENTS ( BoP )
Bank of ZambiaTable 1 : Trade Data in US $ millions ( f . o . b ), Q4 2009 - Q4 
2010
2009 Q4 Balance on Goods General Merchandise Exports Metals Copper Cobalt Non-Traditional Other Exports Imports 389.1 1,400.5 1,126.1 1,067.1 59.0 274.4 18.6 -1,030.0 2010 Q1 568.2 1,658.0 1,389.7 1,311.5 78.2 268.2 28.9 -1,118.7 2010 Q2 532.3 1,641.3 1,343.3 1,267.2 76.1 298.0 39.4 -1,148.4 849.6 1,939.2 1,610.2 1,534.9 75.3 329.0 44.6 -1,134.3 771.4 2,040.9 1,728.5 1,654.3 74.2 312.4 39.0 -1,308.4 2010 Q3 2010 Q4*

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7 . 0 BALANCE OF PAYMENTS ( BoP ) Cont ’ d …
• • Merchandise export earnings, rose by 5.2% to US $2,040.9

million (US $1,939.2 million in third quarter) due to an increase in metal exports earnings by 7.3% to US $1,728.5 million. 15.4% higher than US $1,134.3 million recorded in the third quarter of the year. $354.5 million (US $238.9 million in third quarter).

• However, merchandise imports, at US $1,308.4 million were

• The capital and financial account deficit widened to US

• This was largely due to unfavourable performance in the
financial account following an increase in short - term deposits abroad by the private sector.
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8 . 0 IMPLEMENTATION OF THE ECONOMIC PROGRAMME
Bank of Zambia

• A follow-up IMF Mission visited the country from 28th October to 3rd
November 2010.

o The mission and the Zambian authorities agreed on macroeconomic

policies and structural measures for the remainder of 2010 and 2011 under the Extended Credit Facility (ECF) arrangement. Ø The IMF Executive Board meeting which was held on 10th December 2010, completed the fifth review of Zambia’s economic programme.

Ø This resulted in the immediate disbursement of SDR 18.395 million (about US$28.3 million), bringing total disbursements under the ECF arrangement to SDR 201.7 million (about US$310.3 million).

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The Net Domestic Assets of the Bank of Zambia, and the Unencumbered International Reserves under the ECF arrangement were observed as at end-December 2010. However, the performance criteria on Net Domestic Financing of Government was not met.

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9.0
Bank of Zambia

DEVELOPMENTS IN FINANCIAL SECTOR


The overall financial condition and performance of banking sector was satisfactory in the fourth quarter of 2010. Ø On aggregate, the banking sector’s capital position, asset quality and liquidity were satisfactory.

Ø However, the earnings performance declined, largely on account of an increase in the non-interest expenses (rise in staff emoluments, reorganization costs and additional tax provisions). overall financial • TheNBFIs was rated fair. performance

and condition of the

Ø The sector was adequately capitalised with ‘fair’ asset quality while earnings performance was rated ‘satisfactory’.


As part of the overall objective to enhance financial inclusion under the FSDP, the BoZ undertook provincial sensitisation tours on savings and credit covering all the nine provinces of Zambia.
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Bank of Zambia

INFLATION OUTLOOK FOR FIRST QUARTER 2011


Annual overall inflation is projected to remain above 8.0% during the first quarter of 2011, mainly due to the following factors: Ø Seasonal increase in selected food items including fish, fresh vegetables and beef; and

 

Ø The lagged effects of
 

money supply growth in 2010.


The Bank of Zambia will continue to undertake appropriate monetary policy actions to contain reserve money growth within the programmed path, with a view to slow down inflationary pressures.

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I THANK YOU FOR YOUR ATTENTION

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