Caleb M Fundanga: Review of Zambia's economy
Remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Zambia
Association of Manufacturer's Annual General Meeting, Lusaka, 16 April 2010.
* * *
The President of ZAM - Mr Chance Kabaghe
The Vice Presidents (North and South) - Mr Sebastian Kopulande and Mr Eugen Appel
The ZAM Executive Committee
Captains of Industry
Ladies and Gentlemen
I feel greatly honoured to officiate at this Annual General Meeting for the Zambia Association
of Manufacturers (ZAM). The Bank of Zambia and the Zambia Association of Manufacturers
have a long standing relationship which is intertwined in more ways than one. I am sure that
without making appropriate policies to support key sectors such as manufacturing, we would
be robbing the country of the development that it deserves. I am reliably informed that ZAM
has been going through restructuring in the last two years and has achieved a lot in terms of
the establishment and making itself relevant not only to its members but to the Government
and other stakeholders. It therefore gives me pleasure to stand before you to discuss issues
that are pertinent to manufacturing. I am hopeful we will be able to understand the
challenges and identify plausible ways of overcoming them for the sector to forge ahead and
make a meaningful contribution to the economy.
Mr President, the performance of the Zambian economy in 2009 was favourable. Although
projections of GDP growth for 2009 had been revised downwards to 4.3% on account of the
effects of the global financial and economic melt-down, preliminary data indicates that the
economy posted a real GDP growth rate of 6.3% compared with the 5.7% recorded in 2008.
Almost all key sectors of the economy recorded positive growth except for restaurants and
hotels which saw negative growth due to lower tourist and business travel arrivals during the
financial crisis.
Annual overall inflation slowed down, reverting to single digit level of 9.9% in December 2009
from the 16.6% recorded in December 2008, and was in line with the original end-year
target1 of no more than 10%. This outturn was attributed to the decline in both annual food
and non-food inflation.
In the external sector, Zambia's external position showed remarkable improvement as
reflected in the build-up of gross international reserves to 5.1 months of import cover in 2009
from 2.1 months of import cover in 2008.
Zambia's overall balance of payment position is expected to remain favourable in 2010 due
to the rebound of copper prices on the international market as well as the expected increase
in copper production as some mines increase production to full capacity and the resumption
of production at some mines.
The rebound in the international price of copper in the second half of 2009 and the return of
foreign portfolio flows resulted in an appreciation of the exchange rate of the Kwacha by 4%
at the end of the year.
However, fiscal performance in 2009 was weak, mainly due to the global economic crisis,
which reduced domestic revenues. Despite this, Government remained within the
programmed domestic financing for the year.
the financial sector has remained resilient despite the effects of
Distinguished Members,
the recent global financial crisis. Currently, the Zambian financial sector is characterized by
high liquidity levels, reflecting tighter lending standards in the wake of the lessons from the
global financial crisis leading to marked decline in private sector lending. As a result, the
demand for the relatively risk free Government securities has increased causing a decline in
yield rates on Government securities. The decline in Government securities yield rates and
relatively low inflation experienced since the beginning of the year should contribute to a
decline in banks lending rates and thus stimulate borrowing by the private sector.
I am aware that the high interest rates in the country pose a very big challenge for our
manufacturers to borrow for recapitalisation and expansion of their businesses. Access to
finance is essential for the economy to grow and therefore it is necessary that we find ways
that could reduce the cost of borrowing to allow key sectors to expand.
Ladies and Gentlemen, I wish to reiterate that the economic fundamentals point to a
reduction in lending rates. In a liberalised financial market environment, the central bank
contributes to the reduction in lending rates by reducing inflation. The Government also
contributes by implementing prudent fiscal policy, thus limiting the incidence of crowding out
of the private sector by the Government. As a result, yield rates on Government securities
fall. As inflation and yield rates on Government securities decline, lending rates are also
expected to decline in the medium to long term as the two provide the relevant opportunity
cost of lending to the private sector.
Another factor that commercial banks take into consideration in determining lending rates is
the default risk arising from the poor credit culture in the economy in general. In resolving the
problem of poor credit culture, the Central Bank through the Financial Sector Development
Plan, facilitated the establishment of a credit reference bureau which collects information on
borrowers to be used by credit providers.
Furthermore, in order to increase competition in the financial sector the Bank of Zambia has
registered a number of commercial banks and other financial institutions to operate in
Zambia. In 2009, the number of registered banks increased from 14 to 17.
In addition, the Bank of Zambia is developing a framework to migrate from the use of
monetary aggregates as the anchor of inflation expectations to the use of interest rates.
Inflation expectations are fundamental to the process of interest rate determination and low
inflation expectations are entrenched not only by the implementation of appropriate monetary
and fiscal policies at any given time, but also by past inflation developments. Low inflation
expectations were becoming entrenched in 2008 following two consecutive years of single
digit inflation in 2006 and 2007. However, towards the end of 2008, the increase in food
prices and the impact of the global financial crisis caused inflation to increase to a double
digit figure of 16.6%. In spite of this, the prospects for low inflation, now look positive,
creating an appropriate environment for interest rate reduction.
Mr President, as you may have noticed from the newspapers in the recent days, a number
of banks have reduced their lending base rates though not as much as we would like to see.
We hope that this is just a start, and that banks will continue adjusting their rates downwards
consistent with developments in other macroeconomic indicators.
Distinguished Members, allow me to comment on the statutory instrument regarding the
US$5000 over the counter limit on deposits. These regulations are meant to encourage the
use of the banking system in order to assist in curbing money laundering. Doing away with
this would deprive the Central Bank of a mechanism for detecting fraudulent activities and
create a healthy environment for money to be laundered in our financial system.
Ladies and Gentlemen, the Bank of Zambia recognises the importance of long term finance
for growth. We are also aware of the important role that the Development Bank of Zambia
and others institutions that provide long term finance can play in this process. It is for this
reason that the Bank of Zambia monitors the performance of these institutions to ensure that
they are financially viable to be able to play this important role. Rather than thinking of
Government recapitalising these institutions, we should think more in terms of developing the
capital markets to enable these institutions raise resources for long term financing from the
private sector.
On the issue of the foreign exchange market, I wish to emphasise that we have a flexible
exchange rate regime that has served us well after doing away with exchange controls in the
early 90s. The exchange rate of the Kwacha against other international currencies has
enjoyed relative stability since 2003 when the interbank foreign exchange market system
(IFEM) was introduced. With this system, the Bank of Zambia intervenes in the market
mainly to smoothen fluctuations and to build international reserves. The exchange rate is
expected to be driven by economic fundamentals such as the terms of trade. An attempt to
fix the exchange rate would have disastrous effects especially when the fundamentals
suggest that the rate should depreciate as this would wipe out all the reserves we have
struggled to build over the recent past. In such circumstances, the Bank intervenes to
moderate short term volatility of the exchange rate but not to change the direction dictated by
the fundamentals. On the other hand, an improvement in the terms of trade provides an
opportunity for the Bank of Zambia to build reserves as it smoothens the rate of appreciation.
Finally, I wish to congratulate you on the contribution made by manufacturing
Mr President,
sector to the GDP growth in 2009. The performance of the sector was favourable, recording
a real growth of 2.5% compared with 1.8% in 2008. I am confident that as the economic
fundamentals continue to improve, banks are expected to increase lending to the private
sector at reduced rates. We therefore expect the sector's contribution to growth in 2010 to
increase. In order to assist the country's diversification process away from copper, I wish to
implore you to seek ways of enhancing productivity in your various sectors as a means
improving competiveness of your products for exports.
Mr. President, one way by which your members can contribute to increased GDP is through
participation in the Multi-Facility Economic Zones (MFEZs) for which the Government has
approved establishment of three. You may wish to note that the construction of the
Chambishi MFEZ on the Copperbelt has reached an advanced stage while work on the
Lusaka South MFEZ is underway. Several enterprises with significant investments are
already being established at the Chambishi MFEZ. There is also a proposal for the
establishment of the Lumwana MFEZ in North-western province. These zones are expected
to enhance the country's efforts of promoting value addition to raw materials which will in turn
boost the manufacturing sector. They are also consistent with the budget themes for 2009
and 2010 of In
"Enhancing Growth through Competitiveness and Diversification".
collaboration with the development partners, Government will provide the necessary support
institutions, infrastructure and services conducive to efficient and competitive manufacturing.
I would like to strongly encourage Zambian firms particularly members of ZAM to take
advantage of the opportunities created under this initiative.
Mr President, as I conclude my remarks, I wish you and your members a prosperous 2010.
I thank you for your attention.