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zambia weekly wrap - November 22 edition

22/11/2014

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Bank of Zambia raises policy rate by 50 basis points

The central bank raised the policy rate by 50 basis points to 12.5% until their next monetary policy committee meeting on 8th February 2015. They cited elevated inflationary pressures likely to last into the beginning of 2015 and material deterioration of the external sector (Balance of Payments deficit of $123.2 million in Q3 compared to a surplus of US $740 million in Q2) relative to conditions in August i.e. at their previous meeting. I’m pretty sure uncertainty over presidential elections was also baked into their decision but they didn’t mention it directly!
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The country is in a phase where the national budget is heavily directed at vital infrastructure projects while simultaneously being constrained by the fact that civil sector wages are consuming at least 50% of tax revenues. This has forced the government to borrow more domestically via t/bills and bonds in addition tapping international markets (Eurobonds). However, their appetite for domestic debt has caused a rise in interest rates within the country which has adversely impacted businesses. This is summed up by the following extract in the MPC statement in relation to the third quarter:
’Domestic credit rose by 14.8% to K28.5 billion from K24.8 billion in June. This was mainly due to the 68.9% and 7.4% rise in lending to Government and households, respectively. Credit to public enterprises fell, however, by 21%.
This phase will only start to moderate over the next 4 to 6 years as major infrastructure projects reach completion or when either tax revenues are substantially increased or wage consumption of revenues is substantially reduced – whichever happens quickest. In the meantime, business will either have to bite the bullet and borrow at high rates or continue trying to bootstrap their growth and finding cheaper ways to be financed.
Ministry of Finance releases K128 m for 2015 elections

The Ministry of Finance released K128 million to the Electoral Commission of Zambia (ECZ) toward funding for the presidential by-election which will be held on January 20 2015. The ECZ has projected a budget of K344 million for the elections. There has been talk that balance of K216 million could be financed by the British or Chinese but nothing concrete has been released yet.

This highlights the importance of amending or replacing the current constitution because close to K1 billion will have been spent in totality on presidential (2008 & 2014) as well as parliamentary by- elections  over the years – money which would have been better spent on development projects. 
Energy Regulation Board analyzing latest fuel cargo amidst pressure to drop pump prices

The Energy Regulation Board (ERB) announced that it is performing an analysis on the latest fuel cargo following the reduction of Oman and Murban (their suppliers) crude oil prices over the period June to October by 19.7% and 20.5%, respectively. The findings will be sent to the ERB board which will then make a decision on the potential reduction of fuel prices in the country which currently stand at K10.63 per liter (petrol) and K10.01 per liter (diesel).

Fuel prices are a major determinant of the cost of doing business in the country and any substantial reduction in price would give a tremendous boost to the import-heavy economy. There is an argument that this could be an opportune time for the government to use Wall Street to hedge their fuel purchases using forward contracts to lock in a low price for a longer period (say 12 months) as opposed to buying on a cargo-by-cargo basis – just a thought!
Two big conferences set for final week of November, first week of December

There are two major conferences which should be on your calendars over the next 3 weeks. First there is the Zambia International Energy Conference (ZIEC) from the 25 to 27 November sponsored by Stanbic Bank. You can follow their Twitter account @ZIEC_ for more details.

After that, there will be the Pangaea Zambia Investment Conference from the 4 to 5 December with key note speaker Sir. Richard Branson. You can follow them on Twitter @PangaeaZIC for more details.
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