156 Zambia

Zambia

2006 At a Glance
Population (mn) 11.8 Population Growth (annual %) 1.6 Official Language English Currency Zambian Kwacha (ZMK) GDP (Current US$ bn) 10.9 GDP Growth (annual %) 5.2 GDP Per Capita (US$) 923 FDI, net inflows (US$ mn) (2005) 259 External Debt (US$ mn) 500 External Debt/GDP (%) 4.2 CPI Inflation (annual %) 8.4 Exports of goods and services (% of GDP) 30.2 Gross Official Reserves (US$ bn) 0.558 International Reserves (months of imports) 2.1 UNDP HDI RANKING 165
Source: AfDB, IMF, UNCTAD, UNDP, UN Population Division

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1. Overview of Financial System

The central purpose of the Bank of Zambia (BoZ) is to propose the formulation and implementation of monetary policies to ensure price and financial system stability. The Bank of Zambia licences, regulates and supervises commercial banks, the non-bank financial sector and micro-finance institutions. Bank and Non-Bank Financial Sector Zambias financial sector is relatively small and is dominated by banking. The sector, however, has one of the most liberal banking regimes in southern Africa. Recent developments have included the drive to privatize many sub-sectors of the financial sector. Zambias banking sector consisted of 12 operational commercial banks as at December 2006, including several foreign-controlled banks. Concentration is high, with the five largest banks controlling the bulk of assets in the system. The Zambia National Commercial Bank, Zambias only state bank and the countrys largest domestic bank, which was slated

for privatization in 2006, alone controls 24% of the retail banking market. In February 2004, the Bank of Zambia, the central bank, announced that it would lead the formation of a credit reference bureau, which will provide commercial banks with information on borrowers. There is no formal deposit insurance system in Zambia. Zambias insurance sector made moves toward privatization in 2003 with the restructuring of the Zambia State Insurance Company and the emergence of five private insurance firms. However, the privatization efforts for the state-owned insurance corporation have temporarily stalled. Capital Markets The capital market remains very small. The Lusaka Stock Exchange (LuSE) opened in 1993, and there were 14 companies listed under its main index as at the end of 2006, with a combined market capitalization of USD 3.25 bn. However, trading volumes remain limited, with the three largest listed firms dominating

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Zambia 157 the Exchange activity. The secondary market for bonds has also grown, though activity is still low. There are no restrictions on foreign investment in the stock exchange. the LuSE in August 1995. This was followed by the launch of an 18-month bond in September 1998 and then a 2-year bond in October 2000. In September 2005, the Government issued a 5-year bond making it the longest-dated government bond in Zambia to date. As of the first quarter of 2007, there has been a trend toward big volumes on the supply side to enable the Government to raise sufficient funds to refinance maturing bonds. However, despite the Governments eagerness to issue more treasury bonds, it has only been able to raise part (65% on average) of the amount it planned to raise from bond and treasury bill auctions respectively. If this trend continues, it would likely lead to an increasing yield environment.
Zambia Government Yield Curve (Dec 2006)
15.00 % 10.00 5.00
91 day 182 day 1 yr
Source: Bank of Zambia

2. Fixed Income Markets

Government Securities The Bank of Zambia issues treasury bills and government bonds on behalf of the Government, on a competitive (tender) and non-competitive (off-tender) basis. Presently, the treasury bills that are issued weekly have four maturity buckets: 28-, 91-, 182- and 273-day. Both individuals and corporate institutions are permitted to participate in the primary auctions for government bonds. Bonds are issued at 4-6 week intervals, with maturity categories of 12-, 18-, 24- and 60-months. Treasury bill auctions were introduced in 1993. Bids for up to ZMK 20 mn must be made in a noncompetitive and fixed-price format. The fixed price is calculated as the weighted average price of the successful competitive bids. A 1-year bond was introduced in January 1995 and was first listed on Non-Central Government Issuance

2 yr

3 yr

5 yr

On the back of the yield curve established by the government, several corporates from various sectors including the banking and energy sector have succesfully tapped the capital market. Outstanding corporate bond issues in Zambia Company Name Lunsemfwa Hydro Power Company (2) Barclays Bank Zambia unsecured floating rate notes 1. Data in ZMK mn 2. Equivalent of USD 7 mn Clearing and Settlement The exchange operates an electronic clearing and settlement process, with trade-for-trade netting and settlement three days after the trade (T+3). There is also an electronic depositary facility operated by LuSE Central Share Depository (CSD). Investors intending to transact in a listed security are required to trade via the LuSE. The Securities and Exchange Commission of Zambia regulates the sector. Industry Electricity Banking Amount Offered 35,000 30,000
(1)

Issue Year 2004 2003

Tenor (yrs) 6 12

Coupon Not publicly available/ disclosed 91-day T Bill + 1.25% (step up to 2.00 after 5 yrs)

158 Zambia

3. Foreign Exchange
The Zambian Kwacha (ZMK) is an independent freefloating currency. Interventions in the foreign exchange market by the Bank of Zambia are primarily aimed at smoothing out short-term fluctuations in the market, and meeting the targets for the programmed gross international reserves. The successful introduction of an inter-bank market for foreign exchange in July 2003 was considered an important step towards improving the efficiency of the markets. In 2004, the Zambian Kwacha was generally stable against the US dollar but it appreciated in real effective terms by about 8%, following, (i) an increase in copper export earnings, which was boosted by higher copper prices and metals output, (ii) growth of non-metal exports that exceeded expectations and, (iii) a subsequent increase in gross international reserves. Exchange rate dynamics in 2005 were largely driven by reduced debt service and increased balance of payments support inflows, as Zambia reached the Enhanced HIPC completion point. The Kwacha appreciated to ZMK 3,387.55 / 1 USD compared to its level of ZMK 4,597.43 / 1 USD in December 2004. It continued to appreciate, reaching a level of ZMK 2,975 / 1 USD in May 2006. The impressive appreciation of the Kwacha is due to an increased supply of foreign exchange that is attributed to the improved performance of the export sector, prudent fiscal management and lower debt service payments. It has since softened and traded at ZMK 4,428 / 1 USD as of 31 December 2006.
ZMK Per Unit of USD (Year End)
5000 4500 4000 3500 2001 2002 2003 2004 2005 2006

4. Derivatives
There are limited derivative contracts in foreign exchange and these are mostly short-term in nature i.e. up to twelve month tenor.

5. Participation of Foreign Investors and Issuers

There are no restrictions on foreign investor participation in the listed securities on the LuSE and foreigners may invest on the stock exchange on similar terms as Zambians. Foreign investors are, however, required to open a share-dealing account with one of the authorised brokers before they start dealing in securities. There is no limit on foreign ownership.

6. Investment Taxation
Under the current legislation, the income earned on Treasury Bills is subject to 15% withholding tax. However, interest income earned on bonds is not subject to tax under the same legislation. There is also no capital gains tax as well as nil property transfer tax on local shares. Listed companies are taxed at 30% and there is a 10% withholding tax on dividends. Zambia has treaties with Canada, Denmark, Finland, France, Germany, India, Italy, Japan, Kenya, the Netherlands, and Norway.

Source: Bloomberg

Zambia 159

7. Key Contacts
Bank of Zambia Bank Square Cairo Road Lusaka, Zambia Tel: 260-1-228.888/ 228.903-20 Fax: 260-1-221722/237070 E-mail: pr@boz.zm Web: www.boz.zm Lusaka Stock Exchange 3rd Floor Farmers House Building, Cairo Road, Lusaka, Zambia Tel: 260-1-228391/228537/228594 Fax: 260-1-225969 E-mail: luse@zamnet.zm Web: www.luse.co.zm Securities And Exchange Commission 5th Floor, Bank of Zambia Annex, Lusaka, Zambia Tel: 260-1-226911 Fax: 260-1-225443