Transcript 200807022045010.BOZ DGOs Presentation to EAZ

Bank of Zambia
CURRENT ISSUES IN THE MANAGEMENT
OF THE EXCHANGE RATE AND INFLATION
Denny H. Kalyalya
Deputy Governor – Operations
Bank of Zambia
June 17, 2008
1
Bank of Zambia
Presentation Outline
i.
Performance of the Economy
ii.
Factors responsible for recent appreciation
iii.
Implications of the exchange rate appreciation
iv.
Inflation
v.
Recent Developments in the exchange rate
vi.
Conclusion
Performance of the Economy
Bank of Zambia

The economy has performed relatively well in
recent years:
i.
Positive GDP growth;
ii. Low inflation; and
iii. Declining lending interest rates
iv. Relative exchange rate stability.

Focus of Discussion is on Exchange Rate
Developments
3
Developments in the Exchange Rate
Bank of Zambia



Prior to 2003, Kwacha experienced persistent
depreciation.
Exchange rate of the Kwacha against major foreign
currencies has generally appreciated since 2003.
Contributing factors include:
i.
Introduction of IFEM;
ii. Improved supply of foreign exchange due to a
better performing external sector; and
iii. Increased foreign investment flows.
4
Introduction of IFEM
Bank of Zambia

In July, 2003, BoZ launched the broad – based
Interbank Foreign Exchange Mechanism (IFEM)

IFEM has brought a number of benefits including:
i.
ii.
iii.
iv.
Improved availability of foreign exchange on the
market;
Better information flow among market players;
Elimination of multiple exchange rates; and
More efficient and transparent allocation of foreign
exchange.
5
Trends in Exchange Rate Volatility
Bank of Zambia
•
•
•
•
•
IFEM has led to significant reduction in the
exchange volatility.
During the period 1964 - 1983 (fixed exchange), the
exchange rate was relatively stable with a
coefficient of variation of 36 (Chart 1).
Between 1983 & 1994 (auction system), volatility
increased - coefficient of variation rose to 186
(Chart 2).
1994 to 2002 (liberalization) - coefficient of variation
reduced to 60 (Chart 3).
Under the IFEM (2003 to date), the coefficient of
variation decreased further to 11 (Chart 4).
Trends in Exchange Rate Volatility
Bank of Zambia
C ha rt 1: K/ US $ E xc ha nge ra t e ( 19 6 4 - 19 8 3 )
1.60
1.40
CV = 36
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
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Trends in Exchange Rate Volatility
Bank of Zambia
C ha rt 2 : K/ US $ E xc ha nge ra t e ( 19 8 4 - 19 9 3 )
500.00
450.00
CV = 186
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
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Trends in Exchange Rate Volatility
Bank of Zambia
Chart 3: K/US$ Average Exchange rate
5,000.00
4,500.00
CV = 60
4,000.00
3,500.00
3,000.00
2,500.00
2,000.00
1,500.00
1,000.00
500.00
0.00
1994
1995
1996
1997
1998
1999
2000
2001
2002
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Trends in Exchange Rate Volatility
Bank of Zambia
Chart 4: K/US$ Average Exchange rate
6,000.00
5,000.00
4,000.00
3,000.00
CV =11
2,000.00
1,000.00
0.00
2003
2004
2005
2006
2007
10
Improved External Sector Performance
Bank of Zambia


The external sector performance has improved
significantly.
Contributing factors include:




Increased metal and NTE earnings (Chart 5)
Savings from lower debt service
Enhanced post – HIPC Initiative investment flows
Copper output rose by 101.6% between 2000 and
2007 while earnings from NTEs tripled.
Improved External Sector Performance
Bank of Zambia
2005
2006
2007
576.7
1457.6
158.2
5: EXPORT
EARNINGS
611.4 Chart
1530.8
169
(in US $ 249.9
millions)
924.4
3150.4
3500
3000
2500
2000
1500
1000
500
0
2001
2002
2003
NTE's
2004
Copper
2005
2006
2007
Cobalt
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Increased metal and NTE earnings
Bank of Zambia
Trade Statistics
2001
2002
2003
2004
2005
Total Exports
(US$’m)
914.1
979.7
1,209.9
1,843.7
Metal Exports
Copper
Cobalt
602.4
514.9
87.5
611.4
521.4
90.0
794.7
609.8
184.8
Non-Traditional
Exports (NTEs)
311.8
368.3
18.3
18.1
NTEs Growth
year-on-year
(%)
2006
2007
2,209.8
3,826.7
4,324.7
1,358.8
1,074.6
284.2
1,644.2
1,485.9
158.2
3,084.1
2,380.0
146.1
3,400.3
3,150.4
249.9
415.2
484.9
565.7
742.6
920.7
12.7
16.8
16.7
31.3
24.5
Note: Data is presented as c.i.f
13
Major Non-Traditional Exports (C.I.F.) 2001–
2007, in US $’ Million
2001
2002
2003
2004
2005
2006
2007
Copper Wire
9.0
16.5
29.2
58.5
106.5
175.0
195.4
Cane Sugar
34.3
35.1
30.6
33.4
67.8
54.3
74.4
Burley Tobacco
10.1
18.7
19.0
43.3
60.3
70.5
63.2
Cotton Lint
12.2
30.2
28.6
51.4
55.9
62.3
37.1
5.5
5.4
16.2
32.7
48.5
103.7
150.5
Fresh Flowers
29.0
27.3
22.4
25.5
32.1
34.7
38.3
Cotton Yarn
31.0
20.9
22.2
23.9
24.1
18.9
12.4
Fresh Fruit &
23.3
27.8
26.9
23.2
21.3
25.3
24.6
15.7
37.1
23.4
16.2
19.5
18.1
28.6
Gas Oil
1.2
5.9
16.6
24.3
9.8
10.3
20.9
Electricity
9.3
7.3
7.0
4.8
3.8
7.0
9.2
Other
83.9
99.6
127.5
138.8
116.3
161.5
265.0
Exporter Audit
Adjustment
47.2
36.5
45.5
9.0
0
1.0
1.2
311.8
368.3
415.2
484.9
565.7
742.6
920.7
Electrical Cables
Vegetables
Gemstones
Total
Lower Debt Service
Bank of Zambia

Enhanced HIPC Initiative completion point
attained in April 2005.
 Debt cancellation resulted in drastic reduction
in Zambia’s external debt stock.
 Debt stock decreased to US $2.1 billion at
end-2007 from US $7.3 billion as at end-2001.
 Led to lower demand for foreign exchange
(Chart 6).
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Debt Service
Bank of Zambia
Chart 6: Debt Service Projections Without and With HIPC
Initiative Assistance, 2005 - 2014
500
450
Debt Service ( US $ Millions)
400
350
300
250
200
150
100
50
0
2005
2006
2007
Debt Service before HIPC
2008
2009
2011
2014
Debt Service After HIPC
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External Reserves Position
Bank of Zambia
Country’s external reserves have improved.
 Gross International Reserves have increased
to over US$1.0 billion at end-December 2007
from $116.5mn at end-2002.
 As at May 31, 2008 GIR amounted to
US$1,330 million.
 Commercial banks foreign currency deposit
liabilities have followed a similar trend (Chart
7).

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External Reserves Position
Bank of Zambia
Chart 7: International Reserves and Foreign Currency Deposit
Liabilities, 2002 - 2007
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Increased foreign investment flows
Bank of Zambia

The improved investment environment in the
economy has resulted in:

increased inflow of foreign direct and portfolio
investments, particularly in:
i.
in the mining sector; and
ii.
portfolio investment in the Government
securities market (Chart 8).

Leading to increased supply of foreign exchange.
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18
400.0
16
350.0
14
300.0
12
250.0
10
402.7
372.7
402.7
319.4
319.4
319.4
251.3
283.3
209.5
251.3
199.4
209.5
207.4
225.4
207.4
231.1
222.4
231.1
231.3
231.3
231.3
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Oct-06
Sep-06
Aug-06
Jul-06
Jun-06
May-06
Apr-06
Mar-06
Feb-06
Jan-06
Dec-05
Nov-05
Oct-05
Sep-05
Aug-05
Jul-05
Jun-05
May-05
Apr-05
Mar-05
Feb-05
Jan-05
Dec-04
Percent of Total Outstanding
Nominal Values
231.3
238.0
239.9
234.4
239.9
180.8
191.6
156.8
180.8
100.3
154.8
100.3
100.3
91.3
100.3
0.0
1.9
26.1
26.1
54.1
0
0.0
2
50.0
4
100.0
372.7
200.0
6
150.0
8
Percent of Outstanding
450.0
Nominal Values, K'Blns
Increased foreign investment flows
Bank of Zambia
Chart 8: External Investors' Government Bond
Holdings
Portfolio and Direct Investment
Bank of Zambia
Chart 9: Foreign Direct Investment US $ millions
900
800
700
600
500
400
300
200
100
0
2001
2002
2003
2004
2005
2006
2007
Foreign Direct Investment
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The Role of BoZ
Bank of Zambia

BoZ’s role is more of:
i.
Monitoring; and
ii. smoothening fluctuations.

In 2007, a total of US $141.9 million was purchased
against sales of US $88.5 million.
In 2008, BoZ has so far purchased US $50.5 million
against sales of US $28.5 million.
Net purchases indicate excess supply.
GIR…….



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Bank of Zambia
Implications of the Exchange Rate
Appreciation

Employment and wealth creation

Improvement in real wages;

Improved Productivity;

Loss of export competiveness; and

Current Account Effect.
Inflation Developments
Bank of Zambia







End-2008 inflation target is 7 percent.
Terms of trade projected to be 8.7 percent.
Reserve Money and broad money projected at 11.5
percent.
Recent inflation trends are above the projections.
Effect of food prices on inflation is consistent with past
trends.
The inflation challenge remains for Zambia, as in other
countries, in the face of high global oil rising food
prices and power outages.
The relative stability in the Kwacha exchange rate
against major traded foreign currencies is expected to
moderate inflationary pressure.
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Conclusion
Bank of Zambia
Recent developments in the foreign
exchange rate are market driven.
 There is need for stakeholders to develop
mechanisms for managing fluctuations.
 BoZ is committed to ensuring that the
exchange rate remains relatively stable.

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8.00%
5,200.00
6.00%
5,000.00
2.00%
4,400.00
0.00%
4,000.00
-2.00%
-4.00%
3,800.00
3,600.00
3,400.00
-6.00%
-8.00%
3,200.00
-10.00%
3,000.00
29-May-08
29-Apr-08
28-Feb-08
1-Apr-08
3-Jan-08
31-Jan-08
4-Dec-07
6-Nov-07
8-Oct-07
10-Sep-07
13-Aug-07
13-Jul-07
13-Jun-07
15-May-07
16-Apr-07
15-Mar-07
14-Feb-07
17-Jan-07
18-Dec-06
20-Nov-06
20-Oct-06
21-Sep-06
24-Aug-06
26-Jul-06
29-May-06
26-Jun-06
27-Apr-06
28-Mar-06
27-Feb-06
30-Jan-06
30-Dec-05
1-Dec-05
3-Nov-05
5-Oct-05
Percentage Change
Rate
% CHANGE
4,200.00
RATE
Recent Developments:
Should BoZ Fix the Exchange Rate
Bank of Zambia
4,800.00
4,600.00
4.00%
Bank of Zambia
THANK YOU
27