Add files using upload-large-folder tool

clean/cb_requests/024c0e4e0c3001b81b15dd06b5116aa2.json

@@ -0,0 +1 @@
+{"doc_id": "024c0e4e0c3001b81b15dd06b5116aa2", "text": "CENTRAL BANK OF KENYA\nREMARKS\nBY\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCENTRAL BANK OF KENYA\nON THE OCCASION OF\nA PUBLIC LECTURE\nKenyatta University\n16th March 2010\nThe Chairman of Council;\nThe Vice-Chancellor;\n\nDeputy Vice-Chancellors;\nMembers of the entire University Community;\nDistinguished Guests;\nLadies and Gentlemen:\nTOPIC: “EAST AFRICAN INTEGRATION AS A SOLUTION TO\nECONOMIC GROWTH AND EMPLOYMENT GENERATION”\nIt is a pleasure and honour for me to address this distinguished audience on a\nvery topical and timely issue of EAC integration as a solution to economic growth\nand employment generation for Kenya and the EAC region. I wish to focus my\ntalk on domestic and regional policy initiatives and how they impact on growth,\nand more specifically on the employment situation in Kenya.\nMay I start by pointing out that unemployment reflects the inability of economic\nactivity to absorb labour or human resource at different levels. When we talk of\neconomic activity, we mean growth. It allows economic opportunities to emerge.\nThe most important one; investment opportunities that increase the demand for\nhuman capital. So employment is a derived demand, from the demands on\neconomic activity and increased investment.\nBut how does regional integration improve economic activity (growth) for\nmember countries and so increase labour absorption - employment? This is the\nquestion we need to focus our attention on. Let me try some quick avenues:\n1. EAC will provide a wider market - this will induce firms’ production\nexpansion in size and product lines – to satisfy a wider market.\n2. A larger market requires a larger investment outlay.\n3. A larger market diversifies the sources of income flows.\n4. Financial services to cover the region will have to adjust to a higher\nplatform: for instance, Kenyan banks are currently expanding to the region\nin a significant way. The same applies to a number of other sectors such as\nretail services as evident with the expansion of Nakumatt and Uchumi\nretail shops to the region.\n2\n\n5. Larger demands for regional infrastructure to facilitate trade and\nproduction.\nThe list can be long and depends on where one starts, but at the end, labour\ndemand is derived demand from all of these economic activities.\nTo develop this topic on Kenya, I wish to develop three arguments on Kenya’s\ncase:\nFirst, the policy solutions, their evolution and shocks; It is often good to start\nfrom a perspective that policies, once implemented, will work and even when\nshocks hit the economy, the economy will return to its potential. How long it\ntakes to return to its potential is determined by how pervasive and persistent\nshocks were. Having said that, the blue print of growth and employment creation\nwas laid out by the NARC Government - “Economic Recovery Strategy for Wealth\nand Employment Creation” which covered the period 2003-2007. This bore fruit\nand the economy picked up from a low of 0.5 percent annual growth in 2002 to\n6.3 percent in 2006 to 7.1 percent in 2007. This saw the number of new jobs\ncreated reaching 506.5 thousand, 488.4 thousand, 485.5 thousand, 467.3\nthousand in 2004, 2005, 2006 and 2007 respectively.\nThe results of this blue print of policy paradigm show that success will always\ngenerate success. Once policies are followed to the paper, they will generate the\ndesired results.\nBut then external and internal shocks hit the economy in 2008 stepped in.\nHowever, the economy is on the recovery path and it was expected to grow by\nabout 2.1 percent in 2009 and at between 3 and 4.5 percent in 2010 and by over\n5 percent in subsequent years. It is important perhaps to explain why in times of\nshocks, growth, investment and even economic decisions are affected and even\naffect other outcomes like consumption and employment.\nThree examples include:\n1. At the individual level optimizing welfare under uncertainty\n3\n\n2. Irreversibility of fixed investment decisions\n3. Informal sector expansion as a disequilibrium queuing model of employment.\nThese are short-run and should not condemn us to a low equilibrium trap.\nSecond, the EAC Common Market and its potential for employment\n• In general, most countries in Africa are forming regional economic\nintegration arrangements in order to; secure access to larger markets and\nenhance trade flows and in the process attract the much needed foreign\ndirect investments; lower trade costs among neighbours; leverage or lock\nin domestic reforms; create a framework for regional cooperation and\nresource pooling; increase their bargaining power and political cohesion.\n• Economic integration has the potential for economic growth; to create\nwealth; improve labour and social conditions and result in a better division\nof labour between countries based on comparative advantage. Exploiting\nrelative comparative advantage of each integrating member country\nenhances the region’s efficiency in production, increasing output and\nboosting economic growth of each member country.\n• Regional integration, uniformity of policy and common goals will act as an\nagency of restraint and cushion the external shocks in some cases.\n• The EAC brings together nationals of five countries namely, Kenya,\nTanzania, Uganda, Rwanda and Burundi. In 2008, the five countries had a\ncombined population of 126.6 million people and a nominal GDP of\nUSD73 billion (based on EAC Facts and Figures Report, 2009). In the\nsame year, Kenya’s GDP stood at USD26.9 billion, that is 37 percent of the\nEAC total. It is the dominant economy in the bloc. This enlarged market\nmeans potential for increased free trade among members. Free trade is\nexpected to lead to rapid expansion of trade and output, which in turn is\nexpected to lead to demand for further investment, employment and GDP\ngrowth. These gains result from the dynamic effects of a Common Market,\nwhich have been shown to overshadow the static effects, that is, trade\ncreation, trade diversion and terms of trade effects. The dynamic effects,\n4\n\nwhich are cumulative in nature lead to growth. Indeed, the dynamic effects\nof a Common Market are often described as the long-run consequences for\nthe economic growth of member countries as a consequence of increased\nmarket size and exploitation of economies of scale, increased competition,\nlearning by doing and increased investment. Also, the stronger the\npotential economies of scale are, and the more rapid the autonomous\nproductivity advantages, the more likely the economic integration will lead\nto growth. Thus, the contribution of the EAC Common Market to economic\ngrowth and employment will be greater if the economies of scale are\npossible by increased market size, takes place pari passu with learning by\ndoing.\n• However, higher levels of economic integration that would ensure such\nbenefits are realized require heavy infrastructural investments in the\nregion. With this realization, the EAC Development Strategy sets out the\npriority programmes for the region focusing on among others, cooperation\nin infrastructure development. An efficient infrastructure development\nmainly for EAC in terms of roads and railway interconnectivity has the\npotential to increase from 3.7 million tonnes in 2007 to over 16 million\ntonnes by 2030, at an annual rate of growth of 6.7 percent, according to a\nstudy on the EAC Railways Master Plan. Current EAC efforts to develop\nregional infrastructures are complemented at the continental level by such\ninitiatives as the Infrastructure Consortium for Africa (ICA), established in\n2005 and mandated to support and promote increased investment in\ninfrastructure in Africa from both public and private sources. In addition,\nwith the implementation of the EAC Common Market Protocol, regional\ninfrastructural projects will be well defined.\n• Ladies and Gentlemen, it is worth noting that the overriding rationale\nfor regional integration is development, with all the benefits that come\nwith it. Theoretically, integration fosters growth through different\nchannels such as increasing innovation through economies of scale and\nthrough technological spillovers and elimination of replication in research\nand development. Empirically, integration gives access to a larger market,\n5\n\nmore stock of technology and knowledge and therefore, more innovations\nand growth. Furthermore, expanded markets and increased productivity\nfollowing integration, triggers increasing returns in the research and\ndevelopment sectors due to the implied scale effects. All these channels\nhave important implications on employment generation and economic\ngrowth for the integrating economies.\n• The overriding objective of the EAC Common Market is to widen and\ndeepen cooperation among partner states in both economic and social\nfields for the benefit of the citizens of the member states. This is beyond\nwhat literature terms as “beg thy neighbour” effects. The Common Market\nProtocol provides for the free movement of goods, persons, labour,\nservices and capital within the region as well as the right of establishment\nand the right of residence.\n• The Common Market will unlock many other benefits among East African\ncitizens. Currently, efforts are underway to move to the next level of\neconomic integration, after the completion of a Study by the European\nCentral Bank consultants on the East African Monetary Union (EAMU).\nThe study has explored among other things the current preparedness for a\nMonetary Union, institutional frameworks and structure for an EAMU,\ndesign of a protocol on the EAMU to be negotiated by partner states, and\nproposals for monitoring and enforcing macroeconomic convergence in\nthe region.\n• Ladies and Gentlemen, all these integration endeavours will create\nemployment opportunities. I will emphasize on employment opportunities\nbecause it is a dynamic concept that focuses on gainful employment and\nspace to utilize your own relative comparative advantage. It is upon you to\nposition yourselves to take advantage of these new opportunities. Our\nhigher institutions of learning have the responsibility of training an\ninternationally competitive labour force to enable Kenya take full\nadvantage of these regional initiatives. The Investment opportunities that\ncome with it will allow the appropriate signals of skill requirement.\n6\n\nFinally, the Vision 2030 and Unemployment in Kenya: The Vision 2030 aims at\ntransforming Kenya into a newly-industrialised, middle income country: what\ndoes it mean to solve the unemployment problem of Kenya?\nTo solve unemployment, we need a long-run vision for growth and investment\nsupported by short-run policies like macroeconomic policies, specifically: fiscal\nand monetary policy and also trade policies.\na) Fiscal Policy and Fiscal Stimulus\nThe Economy is just emerging from the devastating consequence of drought and\nthe global financial crisis. The pervasiveness and persistence of these shocks\nrequired that the government develops a fiscal stimulus. It is important to\nunderstand how fiscal stimulus works in an economy like ours:\n1. Recognizes support and protection for the wage good through targeted\npublic investment and public works – Kazi Kwa Vijana\n2. A shilling spent in rural Kenya has a higher multiplier effect in the\neconomy\n3. Support local industries - via government expenditure and higher\ndomestic consumption - preserve jobs - prevent layoffs\n4. Increase public investments that are complementary to private\ninvestments - in that they enhance profitability of private investments\n5. Finally, in this way the government crowds-in private sector but not\ncrowd-out\nb) Monetary Policy\nBut perhaps one may ask how has the Monetary Policy reacted to the crisis and\nhow does it work to support economic activity? Monetary Policy works to control\nthe level of money supply consistent with economic activity.\nSeveral Instruments:\n7\n\n• Central Bank Rate (CBR) – as a signalling rate of the stance of\nmonetary policy. It has been progressively reduced from a high of 9\npercent in August 2008 to the current level of 7 percent. Lowering of the\nCBR signalled the intention of the Central Bank for a low interest rate\nregime to encourage credit extension to the private sector and so\ninvestment to support growth.\n• Cash Ratio Requirement (CRR) – in order to avail liquidity to\ncommercial banks and release more resources for financial intermediation,\nthe Bank has lowered the CRR from 6 percent to 5 percent in December\n2008 and further to 4.5 percent in June 2009.\n• Liquidity management tools: To further enhance liquidity\nmanagement in the banking system, the Bank has instituted several\nreforms to introduce new instruments like horizontal repo, vertical repo\nwith fixed tenors.\n• Financial Development: In general an efficient and developed financial\nsystem is important to collect and collate savings from micro-savers to\ninvestors. Second, an effective monetary policy will depend on an efficient\nand developed financial system.\nIn concluding my remarks, let me emphasize that employment is a function of\neconomic activity. Sustained economic growth is good for employment. One\nmajor solution for sustained growth is a wider market for trade and investment.\nEAC provides just that. But public investment infusion required to support the\nprivate sector investment is immense. Public investment especially in\ninfrastructure will reduce transaction costs for the private sector and allow\nprofitable regional trade. To date 43% of the total Kenyan exports of goods and\nservices go to the EAC region. These exports are mostly manufactured exports.\nThere is scope for more within the EAC and locational advantages. This is what\nwe want to strive for in EAC and these are the positive development agenda EAC\npresents to Kenya and East African countries.\nThank you for your attention\n8", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Governors%20Remarks%20during%20Kenyatta%20University%20Lecture.pdf"}

clean/cb_requests/07c95c95803593d4cbec07819c99d1bb.json

@@ -0,0 +1 @@
+{"doc_id": "07c95c95803593d4cbec07819c99d1bb", "text": "CENTRAL BANK OF KENYA\nClosing Remarks by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\nAAtt tthhee\nJOINT WORKSHOP FOR THE DOMESTIC FINANCIAL\nSECTOR REGULATORS ON RISK CONTROL AND\nCOMPLIANCE\nGreat Rift Valley Lodge and Golf Resort, Naivasha\n21st – 22nd October 2010\n\nJoint Workshop for the Domestic Financial Sector Regulators on Risk 2010\nControl and Compliance , 21st – 22nd October 2010\nDirectors of Financial Sector Regulators present;\nMr. Sammy Makove, Chief Executive Officer, Insurance Regulatory\nAuthority (IRA);\nFacilitators from Quantum Global Wealth Management Ltd;\nParticipants;\nLadies and Gentlemen:\nI am honoured to have been invited to give the closing remarks at this joint forum\norganised by the Financial Sector Regulators. This is yet another significant step\nin our collective efforts as domestic financial sector regulators to execute our\nrespective mandates in a coordinated manner. Indeed, this workshop has offered\nus invaluable opportunities for further knowledge exchange and networking,\nwhich I believe will facilitate the necessary collaboration in our endeavours. At the\noutset, I would like to sincerely appreciate the efforts of all of those who have\ncontributed towards making this workshop a success.\nLadies and Gentlemen: The focus of this workshop has been risk and its\neffects on the financial sector. I am informed that the facilitators have done a\ncommendable job in detailing aspects of the different types of risks. In business, as\nin life itself, risk is a reality, an inescapable factor accompanying every productive\nendeavour. Fortunately, risk can be significantly reduced if well managed and also\nexpected. For us as regulators, our task is then to ensure that risks in our daily\noperations and in the business of the institutions we regulate are identified,\nquantified and managed within safe limits.\nThe key to effective financial regulation, then, is in proper risk identification,\nmeasurement, assessment and mitigation. All types of risks will involve\ndiscernible relationships between various variables, and it is our duty as\nregulators to constantly monitor these variables, their trends and relationships\nover time. This makes our collection of quality data, its processing and reporting\nan indispensable function of our mandate. The availability of quality data makes it\npossible to generate appropriate information for effective regulation. One\noutcome of this course is also that we need to re-examine our database and its\ngeneration and processing to support effective management of risks.\nLadies and Gentlemen: As financial sector regulators, risk identification and\nmonitoring is a critical mandate. Effective regulation entails keeping business risk\n2\n\nJoint Workshop for the Domestic Financial Sector Regulators on Risk 2010\nControl and Compliance , 21st – 22nd October 2010\nwithin acceptable limits, while simultaneously leaving service providers free to\nmake their operational and investment choices as they deem fit. In other words,\nour role as regulators in a liberalized economy such as ours is to facilitate, not\nstifle, business innovations. We, however, must understand the business\nenvironment and risk management to be able to regulate.\nIn conclusion, ladies and gentlemen, our journey towards regulatory harmony,\nas envisaged in our signed MoU, continues. By our discussions here, I hope our\nunderstanding of risk as a business and regulatory concern has been renewed;\nenabling us carry out our responsibilities in a more informed manner. We should\naccordingly continue our information sharing, both at technical and board level,\non risk and other areas of mutual concern as we strive towards regulatory and\nsupervisory harmony. But more importantly, we should continue to search for\ncourses that update our knowledge base and push us to the knowledge frontiers.\nThis is the only sure road for our success as regulators. Remember we have a\nfour-dimensional approach to our duty – always emphasized at the Domestic\nRegulators Platform: Advice, Cultivate Partnership, Development the\nMarket and finally, Regulate the Market.\nThank you for your attention.\n3", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Governor%27s%20Remarks%20-%20Joint%20Workshop%20Domestic%20Regulators.pdf"}

clean/cb_requests/0a97d9a03048a24a4a8f5bb09e61504d.json

@@ -0,0 +1 @@
+{"doc_id": "0a97d9a03048a24a4a8f5bb09e61504d", "text": "CENTRAL BANK OF KENYA\nREMARKS\nBY\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCENTRAL BANK OF KENYA\nAT\nA ONE DAY INTERACTIVE FORUM ON\n‘GROWING AGRICULTURE THROUGH FINANCE’\nKenya School of Monetary Studies\n17th March 2010\nDeputy Prime Minister & Minister for Finance, Hon. Uhuru\nKenyatta;\n\nMinister for Agriculture, Hon. William Ruto;\nUS Government Representative – Deputy Chief of Mission, Mr. Lee\nA Brudvig;\nCEOs of Commercial Banks Present;\nResource Persons;\nDistinguished Participants;\nLadies and Gentlemen:\nIt gives me great pleasure to be with you this morning, and to welcome you all\nas we deliberate and exchange views on this crucial matter of growing\nAgriculture through Finance.\nThe Agricultural sector is the livelihood of many in Kenya. The sector\ncontributes directly about 24% of GDP, 65% of the country’s export\nearnings and employs about 80% of Kenya’s labour force, directly and\nindirectly. But more important, food security is the most critical and cuts\nacross all other developmental objectives. The policy paradigm that supports\nthis sector is indeed the cornerstone of our development blueprint.\nIt is tempting to say that financing Agriculture will rely on the financial sector\nin totality. The subject is broader than this and this is what we want to\ngenerate via dialogue this morning.\nBut what is not in doubt in financing Agriculture is the presence of long-term\nfunds as well as appropriate avenues to develop crop insurance.\nSmall-holder farmers have done well in increasing quality production and\nadoption of high yielding varieties, but have done poorly where they are not\nsupported by cooperatives to market and create buffers for them. That is, they\nhave been failed by lack of supporting agricultural infrastructure.\nA policy to support Agricultural infrastructure should focus on:\n• Financing production – crop insurance/crop finance\n• Financing processing\n2\n\n• Investing in storage\n• Investing in distribution and marketing networks\n• Complemented with an appropriate credit policy\nIn this way, the farmer can participate in the market fully. This is what will\nensure food security and stability of domestic prices – food is now accounting\nfor 36% of the Consumer Price Index (CPI) basket – an important tool to fight\nnational inflation. To that extent, increased agricultural productivity,\nparticularly in food helps reduce food inflationary pressure that also feeds to\nthe national inflation. In addition, GDP growth in this country is determined\nby growth in this sector.\nFrom the Central Bank side, our support in this initiative is important. The\nCentral Bank of Kenya through its capacity building arm – the Kenya School\nof Monetary Studies (KSMS) intends to develop a certified agricultural\nfinance program in collaboration with COMPETE – USAID. This program\nwill be suitable for agricultural officers as well as credit officers. This is\nimportant in developing the critical mass of human capital that fully\nunderstands agribusiness, such as agribusiness cycles, risk management\npractices, farm cash-flows and finance and insurance. This will support\nfarmers and also develop a strong drive to lift the policy paradigm in this area.\nBut the wider scope of monetary policy support is not in doubt.\nFinally, Distinguished Guests, Ladies and Gentlemen, I would like to conclude\nmy brief remarks by wishing all of you fruitful deliberations this morning.\nThank you very much for your kind attention.\n3", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Governors%20Remarks%20at%20Agriculture%20Forum.pdf"}

clean/cb_requests/0b430f026fedbca120d883b3578a65cf.json

@@ -0,0 +1 @@
+{"doc_id": "0b430f026fedbca120d883b3578a65cf", "text": "CENTRAL BANK OF KENYA\nRemarks by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\naatt tthhee\nMARKET LEADERS FORUM COCKTAIL\nIntercontinental Hotel, Nairobi\nFriday, December 3, 2010\n\nMembers of the Market Leaders Forum,\nOfficials from the Treasury,\nMy Colleagues at the Central Bank,\nLadies and Gentlemen,\nIt is my great pleasure to be with you this evening. Allow me to make a few remarks on\nthe achievements of MLF this year. I will also briefly highlight the challenges we are\ncurrently facing this Financial Year and propose the way forward for our financial\nmarkets so as to achieve faster growth and stability:\nMarket Leaders Forum\nStarting from 2003, the original Market Leaders Forum objectives were to lengthen\nthe tenor of government securities and to raise money to meet Treasury’s\nrequirements. Having pushed the tenor to 25 years and with the market ready to take\nup even a 30 year bond, the first objective has been met. The second objective will\nalways remain but with improved fiscal policy it has become much easier to manage.\nThe Forum, therefore, needs to be restructured in terms of representation and it needs\nto aim at influencing policy at stakeholders level so that we can consolidate the gains\nfor the betterment of Kenya. In short: the Forum needs a new mandate, new course,\nand new players. We would like to brainstorm on this and parade/rank the options we\nshould start with to show quick results.\n1. This occasion comes at the heels of a very successful FY 2009-10 with respect to\nraising money for the government where annual target amount was achieved by\nApril 2010. By June 2010, CBK had raised 100.3 percent of target, ensuring stable\ninterest rates and introduction of new products that were well received by the\nmarket. In FY 2010/11, 48 percent of the target Ksh.105.3bn has been raised so far.\n2. Implementation of Benchmark Bonds Programme: Successful issuance of\nbenchmark Treasury Bonds and reopening as from April 2009 have been critical\nsteps towards addressing the Bond Market fragmentation problem and creating\nliquidity necessary for development of a firm and reliable yield curve.\n3. Extending the Yield Curve: To minimize rollover risks but at the same time\nprovide a benchmark for pricing long term capital, the Bank issued a 25-year bond,\n2\n\nthe longest maturity in Africa, with the exception of South Africa. The paper issued\nin June 2010 and reopened immediately thereafter, has been very active at the\nsecondary market.\n4. Issuance of Infrastructure Bonds; Building on the success of the debut\nInfrastructure Bond in February 2009, the Bank raised Ksh.32.9 billion in the FY\n2009/10 and Ksh.30.6 billion in FY 2010/11 through Infrastructure Bonds to fund\nkey projects in Roads, Energy and Water Sectors. All the offers were\noversubscribed including the biggest one tranche Infrastructure Structure Bond of\nKsh.30.5 billion in August 2010. Consequently, corporate issuers like KenGen Ltd,\nSafaricom, some commercial banks and mortgage firms have taken advantage of\nthe growing bond market to raise long term funds to finance their capital projects.\nThis is the road to realization of a deep and vibrant bond market.\ni. Longer Maturity Profile of domestic debt - the average maturity profile of\ndomestic debt in government securities rose from 3 years 9 months in June\n2009 to 4 years 7 months by June 2010 then to 5 years 1 month or ratio\n23:77 in Bills and Bonds by November 2010. With a functioning secondary\nbond market in place, the Government no longer faces rollover risks\nassociated with short term debt.\nii. Secondary market for bonds: With the adoption of the Automated Trading\nSystem (ATS) in November 2009 and increased reopening of benchmark\nbonds, turnover at NSE has risen from Ksh.107.85 billion in 2009 to\nKsh.443.50 billion just in the period January – November 2010. ATS\nlinkage between the NSE and CBK ensures simultaneous exchange of\nsecurities and cash settlement using the KEPSS (RTGS) infrastructure on\nDvP basis, ensuring efficiency of trading in terms of safety of transactions\nand price discovery. The overall effect has been a firmed up yield curve,\noversubscriptions in primary auctions and declining bond yields due to\nimproved market confidence.\niii. Market-Makers framework: The Bank hosted a successful two-day\nworkshop for stakeholders in November 2010, in preparation for its\ncommencement expected within this Financial Year. This was to sensitize\n3\n\nstakeholders on the finalized Market Makers Operational Guidelines and\nCode of Conduct for Market Makers in Government Securities (GSMM).\nTo summarise, where do we want to go now:\n(a) The financial market is deep and vibrant as evidenced by the World Bank report\non ’Ease of Doing Business’ which has placed Kenya’s financial sector third in\nSub-Saharan Africa.\n(b) MLF has already achieved one of its key objectives of lengthening of maturity\nprofiles of fixed income securities. The focus going forward, MLF is to be\nreconstituted so as to be able to guide policy.\n(c) Policy directions should be enhanced and revised now to guide market\nbehavior.\nMarketing\nThe department seems to have gone slow on marketing the bonds. We need to address\nthe critical issue of popularizing and marketing Governmentt securities. But this also\ncalls for a new direction at both the CBK and the MLF. A well functioning National\nDebt Office will go a long way to alleviating this, since it will be in constant touch with\nthe markets.\nWith these remarks, ladies and gentlemen, I wish you a pleasant evening and thank\nyou for coming.\n4", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Market%20Leaders%20Forum%20Cocktail%20December.pdf"}

clean/cb_requests/0b896dae37753c6aaa8da66acc4aa9a6.json

@@ -0,0 +1 @@
+{"doc_id": "0b896dae37753c6aaa8da66acc4aa9a6", "text": "RESEARCH DEPARTMENT \n \nCENTRAL BANK OF NIGERIA \n Volume 4, Issue 3 \nSeptember 2009 \nECONOMIC REPORT FOR \nTHE THIRD QUARTER OF \n2009 \n \n \n \nCENTRAL BANK OF NIGERIA \n \nQUARTERLY ECONOMIC REPORT \n \n \nEDITORIAL BOARD \n \nEditor-In-Chief \nC.N.O. Mordi \n \nManaging Editor \nB. S. Adebusuyi \n \nEditor \nS. N. Ibeabuchi \n \nAssistant Editor \nS. A. Olih \n \nAssociate Editor \nU. Kama \n \nThe Central Bank of Nigeria Quarterly Economic Report is designed for the dis-\nsemination of financial and economic information on the Nigerian economy on current \nbasis. The Report analyses developments in the financial, fiscal, real and external sectors \nof the economy, as well as international economic issues of interest. The Report is di-\nrected at a wide spectrum of readers including economists and financial analysts in gov-\nernment and the private sector, as well as general readers. \n \nSubscription to the Quarterly Economic Report is available without charge to in-\nstitutions, corporations, embassies and development agencies. Individuals, on written re-\nquest, can obtain any particular issue without a charge. Please direct all inquiries on the \npublication to the Director of Research, Central Bank of Nigeria, P.M.B. 187, Garki, \nAbuja, Nigeria. \n \n \n \n \n \n \n i \n \n \n \nTABLE OF CONTENTS \n \n \nEDITORIAL BOARD … \n \n \n… \n \ni \n \nTABLE OF CONTENTS … \n \n \n… \n \nii \n1.0 \nSUMMARY \n \n \n… \n \n \n… \n1 \n2.0 \nFINANCIAL SECTOR DEVELOPMENTS \n… \n... \n3 \n \n2.1 \nMonetary and Credit Developments … … \n3 \n2.2 \nCurrency-in-Circulation and Deposits at the CBN \n… \n... \n3 \n2.3 \nMoney Market Developments \n… \n... \n... \n… \n4 \n2.3.1 Interest Rate Developments \n… \n… \n... \n… \n4 \n2.3.2 \nCommercial Papers (CPs) \n… \n… \n… \n… \n4 \n2.3.3 \nBankers Acceptances (Bas) \n… \n… \n… \n… \n4 \n2.3.4 \nOpen Market Operations \n… \n… \n… \n… \n5 \n2.3.5 \nPrimary Market \n… \n… \n… \n… \n… \n5 \n2.3.6 \nBonds Market \n \n… \n… \n… \n… \n… \n5 \n2.3.7 \nCBN Standing Facilities … \n… \n… \n… \n… \n5 \n \n2.4. \nDeposit Money Banks‘ Activities \n... \n… \n... \n5 \n \n2.5 \nDiscount Houses‘ Activities \n... \n… \n \n… \n5 \n2.6 \nCapital Market Developments \n... \n... \n… \n... \n6 \n2.6.1 Secondary Market \n… \n… \n… \n… \n… \n6 \n \n2.6.2 \nOver-The-Counter (OTC) Bonds Market \n… \n… \n… \n6 \n2.6.3 \nNew Issues Market \n… \n… \n… \n… \n… \n6 \n2.6.4 \nMarket Capitalization \n… \n… \n… \n… \n… \n6 \n2.6.5 \nNSE All-Share Index \n… \n… \n… \n… \n… \n6 \n3.0 \nFISCAL OPERATIONS \n… \n \n… \n \n7 \n3.1 \nFederation Account Operations \n… \n... \n… \n... \n7 \n3.2 \nThe Fiscal Operations of the three tiers of Government \n… \n7 \n3.2.1 \nThe Federal Government \n… \n... \n… \n... \n7 \n3.2.2 \nStatutory Allocations to State Governments \n… \n... \n8 \n3.2.3 \nStatutory Allocations to Local Government Councils ... \n... \n8 \n3.3 \nConsolidated Federal Government Debt \n… \n… \n… \n8 \n3.3.1 \nDomestic Debt \n \n \n \n... \n… \n… \n8 \n4.0 \nDOMESTIC ECONOMIC CONDITIONS \n… \n... \n8 \n4.1 \nAgricultural Sector \n \n… \n... \n... \n… \n8 \n4.2 \nIndustrial Production \n \n… \n... \n... \n… \n9 \n4.3 \nPetroleum Sector \n \n… \n... \n... … 9 \n4.4 \nConsumer Prices \n… \n \n \n… \n... 10 \n5.0 \nEXTERNAL SECTOR DEVELOPMENTS \n… \n... 10 \n5.1 \nForeign Exchange Flows … \n \n \n… \n... 10 \n \n \n \n \n \n \n \nii \n \n \n5.2 \nNon-Oil Export Proceeds by Exporters \n… \n \n... \n11 \n5.3 \nSectoral Utilisation of Foreign Exchange \n... \n… \n... 11 \n5.4 \nForeign Exchange Market Developments \n \n… \n... \n11 \n6.0 \nGLOBAL ECONOMIC CONDITIONS \n... \n… \n \n12 \n \n6.1 \nGlobal Inflation \n… \n… \n… \n… \n… \n13 \n6.2 \nGlobal Commodity Prices … \n… \n… \n… \n… \n13 \n6.3 \nInternational Financial Markets… … \n… \n… \n… \n14 \n6.4 \nOther International Economic Developments and Meetings \n… \n14 \n \n \nF I G U R E S \n \n1. \nAggregate Money Supply in Nigeria \n \n \n… \n3 \n2. \nAggregate Domestic Credit to the Economy \n \n… \n3 \n3. \nSelected Bank Interest Rates \n \n \n … 4 \n4. Treasury Bills‘ Holdings \n… \n4 \n5. \nVolume and Value of Traded Securities \n \n \n… \n6 \n6. \nMarket Capitalization and Value Index \n \n \n… \n7 \n \n7. \nComponents of Federally Collected Revenue \n \n… \n7 \n8. \nTrends in Oil and Non-Oil Share of GDP \n \n \n… \n8 \n9. \nIndex of Industrial Production \n \n \n \n… \n9 \n10. \nTrends in Crude Oil Price \n \n \n \n… \n10 \n11. \nQuarterly Consumer Price Indices in Nigeria \n \n... 10 \n12. \nInflation Rate in Nigeria \n \n \n \n… 10 \n13. \nForeign Exchange Flows through the CBN \n \n... 11 \n14. \nSectoral Utilisation of Foreign Exchange \n \n \n… \n11 \n15. \nDemand for and Supply of Foreign Exchange \n \n… \n11 \n16. \nAverage Exchange Rate Movements \n… \n… \n… \n12 \n17. \nWDAS-BDC Exchange Rate Premium \n… \n… \n… \n12 \n17. \nSelected Macroeconomic Indicators Tables \n \n... \n17 \n \n \n \n \n \n \niii \n \n \n1.0 Summary \n \nProvisional data from the National Bureau of Statistics \n(NBS) estimated GDP growth in the third quarter of 2009 \nat 7.6 per cent, compared with 7.2 per cent in the preceding \nquarter. The projected growth was driven mainly by the non\n-oil sector which contributed 83.6 per cent of total GDP. \nBroad money (M2) grew by 4.2 per cent, relative to the pre-\nceding quarter. The increase in M2 was attributed largely to \nthe rise in aggregate banking system credit to the domestic \neconomy (net). Narrow money (M1), however, declined by \n3.4 per cent from the level in the preceding quarter. \n \nAvailable data indicated a general increase in banks’ de-\nposit rates, while lending rates declined. The spread be-\ntween the weighted average term deposit and maximum \nlending rates narrowed from 11.00 percentage points in the \npreceding quarter to 10.49 percentage points. The margin \nbetween the average savings deposit and maximum lending \nrates, however, widened from 19.96 to 20.02 percentage \npoints during the period. The weighted average inter-bank \ncall rate fell to 12.66 per cent from 14.76 per cent in the \npreceding quarter, reflecting the liquidity condition in the \ninter-bank funds market. \n \nThe value of money market assets outstanding rose by 13.5 \nper cent over the level in the preceding quarter to \n=N=3,515.9 billion. The increase was attributed largely to \nthe rise in outstanding Nigerian Treasury Bills (NTBs). \nActivities on the Nigerian Stock Exchange were mixed dur-\ning the review quarter. \n \nTotal federally-collected revenue in the third quarter, 2009 \nstood at =N=1,218.30 billion, representing a decline of 8.1 \nper cent from the proportionate budget estimate but an in-\ncrease of 16.6 per cent over the preceding quarter’s level. \nAt =N=716.81 billion, oil receipts constituted 58.8 per cent \nof the total revenue, and was lower than the proportionate \nbudget estimate. The fall in oil receipts relative to the pro-\nportionate budget estimate was attributed to the decline in \ncrude oil production occasioned by the attacks on oil facili-\nties. Non-oil receipts, at =N=501.49 billion or 41.2 per \ncent of the total, was lower than the proportionate budget \nestimate but higher than the receipts in the preceding quar-\nter. The decline in non-oil receipts relative to the budget \nestimate was attributed largely to the fall in customs and \nexcise duties, Value-Added-Tax (VAT) and independent \nrevenue of the Federal Government. Federal Government \nretained revenue for the third quarter 2009 was \n=N=817.28 \nbillion, \nwhile \ntotal \nexpenditure \nwas \n=N=1,011.22 billion. Thus, the fiscal operations of the \nFederal Government resulted in an estimated overall defi-\ncit of =N=193.94 billion, compared with =N=382.23 bil-\nlion in the preceding quarter and the budgeted deficit of \n=N=209.15 billion. \n \nThe major agricultural activities in the review quarter \nincluded harvesting of root crops such as yams, irish and \nsweet potatoes and groundnuts. \nIn addition, farmers commenced the preparation of land \nand nurseries for the cultivation of tomatoes, pepper, car-\nrots, cabbage and other vegetables. \n \nNigeria’s crude oil production, including condensates and \nnatural gas liquids, was estimated at 1.73 million barrels \nper day (mbd) or 159.16 million barrels for the quarter. \nCrude oil export was estimated at 1.33 mbd or 122.36 mil-\nlion barrels for the quarter, while deliveries to the refiner-\nies for domestic consumption remained at 0.445 mbd or \n40.94 million barrels. The average price of Nigeria’s refer-\nence crude, the Bonny Light (370 API), estimated at \nUS$70.05 per barrel, rose by 14.6 per cent over the level in \nthe preceding quarter. The end-period inflation rate for the \nthird quarter, 2009, on a year-on-year basis, was 10.4 per \ncent, compared with 11.2 and 13.0 per cent recorded at the \nend of the preceding quarter and the corresponding quarter \nof 2008, respectively. Inflation rate on a twelve-month mov-\ning average basis for the third quarter, was 13.1 per cent, \ncompared with 13.7 and 9.2 per cent recorded in the pre-\nceding quarter and the corresponding quarter, 2008, re-\nspectively. \n \nForeign exchange inflow and outflow through the Central \nBank of Nigeria (CBN) amounted to US$5.67 billion and \nUS$9.01 billion, respectively, resulting in a net outflow of \nUS$3.34 billion during the quarter. Foreign exchange sales \nby the CBN to the authorized dealers amounted to US$7.34 \nbillion in the review quarter. The weighted average ex-\nchange rate of the Naira vis-à-vis the US dollar, depreci-\nated by 2.1 per cent to =N=150.92 per dollar at the WDAS. \nIn the bureaux de change segment of the market, the naira \nalso depreciated from =N=175.68 per dollar to =N=157.36 \nper dollar. Non-oil export earnings by Nigerian exporters \ndeclined by 11.4 per cent from the level in the preceding \nquarter to US$335.84 million. . The development was at-\ntributed largely to the fall in the prices of all the commodi-\nties traded at the international commodities market during \nthe period. \n \nThe modest growth in the global economy experienced in \nthe second quarter continued in the third quarter, following \nthe strong performance of Asian economies. In the ad-\nvanced economies, unprecedented public intervention has \nstabilised activity and has even fostered a return to modest \ngrowth in several economies. Emerging and developing \neconomies were generally further ahead on the road to re-\ncovery, led by rebound in Asia. The recent rebound in com-\nmodity prices and supportive policies are helping many of \nthese economies. World crude oil output in the third quarter \nof 2009, was estimated at 84.32 million barrels per day \n(mbd), while demand was estimated at 83.13 mbd, com-\npared with 83.62 and 83.17 mbd supplied and demanded in \nthe preceding quarter, respectively. The increase in demand \nwas due to renewed optimism of a global economic recov-\nery. Crude oil prices in particular have hovered between \n$70 and $80 per barrel during the quarter. Price develop-\nments will partly depend on how strongly supply responds \nto recovering demand. \n \n \n \n \n \n \n \n \n \n \n \nOther major international economic developments of rele-\nvance to the domestic economy during the quarter in-\ncluded: the 9th meeting of the Special Implementation \nCommittee (SIC) of the Nigeria-South Africa Bi-National \nCommission (BNC) held in Abuja from July 22- 23, 2009. \nThe meeting had six working groups on Foreign Affairs \nand Cooperation; Agriculture, Water Resources and Envi-\nronment; Social and Technical; Trade, Industry and Fi-\nnance; Minerals and Energy; and Defence and Security \n(see July 2009 Report). \n \nAlso, the Committee of Ten African Ministers of Finance \nand Governors of Central Bank (Committee of Ten) held \ntheir third session in Abuja on July 14, 2009 under the \nauspices of the African Development Bank, the Economic \nCommission for Africa and the African Union Commis-\nsion. The objective of the meeting was to review the latest \ninformation pertaining to the impact of the global finan-\ncial crisis on Africa; take stock of recent internal and in-\nternational developments; and agree on African perspec-\ntives to be fed into the global discussions, in particular \nduring the G20 Leaders Summit in Pittsburgh on Septem-\nber 26, 2009 (see July Report). \nIn a related development, the International Monetary \nFund (IMF) concluded its Article IV Consultation Mission \nwith the Nigerian authorities on July 29, 2009 and noted \nthat Nigeria entered the global financial crisis from a po-\nsition of strong macroeconomic stability. The reforms of \nrecent years paid off, with oil savings, high international \nreserves, and a well-capitalized banking system preventing \nthe type of economic crisis Nigeria witnessed during the \noil price cycles of the early 1980s (see July Report). In \nanother development, the 33rd Ordinary Meetings of the \nAssociation of African Central Banks (AACB) was held in \nKinshasa, Democratic Republic of Congo (DRC) from \nAugust 17—21 2009. The theme for the 2009 AACB An-\nnual Meetings was ―The Formulation of Monetary Policy \nin Africa: The Relevance of Inflation Targeting‖ (see Au-\ngust Report). \n \nThe International Monetary Fund (IMF) on August 28, \n2009 bolstered its members’ reserves through an alloca-\ntion of Special Drawing Rights (SDRs) worth US$250 bil-\nlion, followed by an additional allocation of $33.0 billion \non September 9, 2009. With the two allocations totaling \n$283.0 billion, the outstanding stock of SDRs would in-\ncrease nearly ten-fold to about $316 billion (see August \nReport). \n \nIn another development, the 8th African Growth and Op-\nportunity Act (AGOA) Forum was convened by the Gov-\nernment of the Republic of Kenya in conjunction with the \nUnited States (US) Government in Kenya from August 1 – \n6, 2009 on the theme ―Realizing the Full Potential of \nAGOA through Expansion of Trade and Investment‖. The \nobjective of the forum was to create a platform on which \nboth the US and the sub-Saharan African countries could \narticulate their views and concerns in order to foster \ncloser economic ties for mutual benefit (see August Re-\nport). Also, the summit of the Group of twenty (G-20) in-\ndustrialized and emerging market economies was held \nfrom September 24 – 25, 2009 in Pittsburgh, USA. The \nleaders noted that the forceful policy response to the crisis \nhad helped to stop a dangerous, sharp decline in global \nactivity and stabilized financial markets. Industrial output \nwas now rising in nearly all economies and international \ntrade was starting to recover, while IMF analysis indi-\ncated that the global economy is expected to grow at \nnearly 3 per cent by 2010. \n \nLastly, the African Development Bank (AfDB) approved a \ngrant of US$1 million to AB Microfinance Bank Of Nigeria \n(ABN) from the Fund for Africa Private Sector Assistance \n(FAPA) on September 7, 2009. The Technical Assistance \n(TA) contribution from FAPA, which accounted for 7.7 \npercent of the overall TA package, will be used to co-\nfinance the provision of technical assisted to ABN to build \nthe capacity of the institution during its first few years of \noperation. \n \n \n \n \n \n \n \n \n2 \n \n \n 2.0 FINANCIAL SECTOR DEVELOPMENTS \n \n2.1 Monetary and Credit Developments \nProvisional data indicated growth in monetary aggregate \nin the third quarter, 2009. Broad money (M2) rose by 4.2 \nper cent to =N=9,458.5 billion, compared with the in-\ncrease of 0.9 per cent in the preceding quarter. Narrow \nmoney (M1), however, fell by 3.4 per cent to \n=N=4,333.5 billion from the level in the preceding quar-\nter. The rise in M2 was accounted for largely by the 23.1 \nper cent increase in aggregate banking system credit to \nthe domestic economy (net) (fig. 1 and table 1). \n \nAt =N=6,991.2 billion, aggregate banking system credit \n(net) to the domestic economy increased by 23.1 per \ncent in the third quarter of 2009, compared with the rise \nof 17.8 per cent in the preceding quarter. The develop-\nment reflected largely the 14.7 per cent rise in claims on \nthe private sector, reinforced by the 2.1 per cent increase \nin claims on the Federal Government. \n \nBanking system‘s credit (net) to the Federal Govern-\nment increased by 2.1 per cent to negative =N=2,820.2 \nbillion, compared with the increase of 15.4 per cent in \nthe preceding quarter. The rise was accounted for \nwholly by the increase in CBN‘s holding of Federal \nGovernment securities. \n \nBanking system‘s credit to the private sector increased \nby 14.7 per cent to =N=9,811.4 billion, compared with \nthe increase of 4.0 per cent in the preceding quarter. The \nrise reflected largely the 13.9 per cent increase in CBN‘s \nclaims on the sector (fig 2). \n \nAt =N=6,886.9 billion, foreign assets (net) of the bank-\ning system fell by 9.9 per cent, compared with the de-\ncline of 5.7 per cent in the preceding quarter. The devel-\nopment was attributed largely to the 11.8 per cent de-\ncline in the CBN‘s holdings. \n \nQuasi money increased by 11.6 per cent to =N=5,125.0 \nbillion, compared with the increase of 6.0 per cent in the \npreceding quarter. The development was attributed to \nthe rise in all the components namely, time, savings and \nforeign currency deposits of the (DMBs). \n \n \nOther assets (net) of the banking system, however, \ndeclined by 4.1 per cent to =N=4,419.6 billion, com-\npared with the decline of 8.0 per cent in the preceding \nquarter. The fall reflected largely the decline in un-\nclassified assets of the CBN during the quarter. \n \n \n2.2 Currency-in-circulation and Deposits at \nthe CBN \n \nAt =N=1,031.9 billion, currency in circulation rose by \n2.6 per cent in September 2009 over the level in the \nsecond quarter, 2009. The increase was attributed \nwholly to the 4.3 per cent rise in currency outside the \nbanking system during the period. \n \nTotal deposits at the CBN amounted to =N=4,949.2 \nbillion, indicating a decline of 7.0 per cent from the \nlevel in the preceding quarter. The development was \nattributed wholly to the fall in Federal Government \ndeposits. The shares of the Federal Government, \nbanks and ―others‖ in total deposits at the CBN were \n86.2, 9.1 and 4.7 per cent, respectively, compared \nwith the shares of 89.3, 5.3 and 5.4 per cent, in the \nsecond quarter, 2009. \n \n \nM ajor monetary aggregate rose, while \nbanks’ deposit and lending rates indicated mixed devel-\nopments in the third quarter of 2009. The value of \nmoney market assets increased, following largely the \nrise in outstanding Nigerian Treasury Bills (NTBs) and \nBankers Acceptances (BAs). Transactions on the Nige-\nrian Stock Exchange (NSE) recorded mixed develop-\nments during the review quarter. \n4th Qtr \n07\n1st Qtr \n08\n2nd \nQtr 08\n3rd Qtr \n08\n4th Qtr \n08\n1st Qtr \n09\n2nd \nQtr 09\n3rd Qtr \n09\nQCP\n7.3\n3.9\n13.3\n10.4\n7.8\n2.1\n4\n14.7\nQCG\n-7.8\n1.9\n-8.6\n-19.4\n-3.8\n-9.6\n15.4\n2.1\nQAC\n6.9\n5.5\n16.6\n4.4\n16.7\n-2.6\n17.8\n23.1\nCCP\n90.8\n18\n33.6\n47.5\n59.4\n2.1\n6.2\n21.7\nCCG\n-22\n5.6\n-14.7\n-36.9\n-31.2\n-9.6\n7.3\n9.3\nCAC\n276\n28.8\n50.2\n56.8\n84.2\n-2.6\n14.7\n41.2\n-100\n-50\n0\n50\n100\n150\n200\n250\n300\nPer cent \nFigure 2: Aggregate Domestic Credit to the Economy (Quarterly and \nCummulative Growth Rate)\n \n \n \n \n \n \n 3 \n \n \n 2.3 \nMoney Market Developments \n \nActivities in the money market were influenced by the \nvarious policy actions taken by the monetary authority \nto inject liquidity into the economy during the review \nperiod. These included the reduction in Monetary Pol-\nicy Rate, suspension of transactions at the Expanded \nDiscount Window, the injection of N420.0 billion into \nfive (5) Deposit Money Banks, the re-introduction of \nthe interest rate corridor as well as the Bank‘s guarantee \nof unsecured inter-bank market transactions. The ac-\ntions moderated risk expectations among market partici-\npants as the spread between the unsecured and secured \ntransactions at the inter-bank market narrowed, while \nthe volume of transactions increased significantly. \n \nProvisional data indicated that the value of money mar-\nket assets outstanding as at end–September 2009 was \n=N=3,515.9 billion, representing an increase of 13.5 per \ncent over the level at end-June 2009. The increase dur-\ning the period was attributed mainly to the 17.4, 29.5 \nand 27.6 per cent increase in Nigerian Treasury Bills \n(NTB), Bankers Acceptances (BAs) and Commercial \nPapers (CPs). \n \n2.3.1 \nInterest Rate Developments \n \nAvailable data indicated a general increase in banks‘ \ndeposit rates, while lending rates declined in the third \nquarter, 2009. With the exception of the average sav-\nings deposit rate, which declined by 0.13 percentage \npoints to 2.80 per cent, all other rates on deposits of \nvarious maturities increased from a range of 6.74 – \n13.14 per cent in the preceding quarter to 6.81 – 13.84 \nper cent. Similarly, at 12.33 per cent, average term de-\nposit rate rose by 44 basis points from the level in the \npreceding quarter. On the other hand, the average prime \nand maximum lending rates declined by 63 and 07 basis \npoints to 18.38 and 22.82 per cent, respectively. Conse-\nquently, the spread between the weighted average term \ndeposit and maximum lending rates narrowed from \n11.00 percentage points in the preceding quarter to \n10.49 percentage points. The margin between the aver-\nage savings deposit and maximum lending rates, how-\never, widened from 19.96 percentage points in the pre-\nceding quarter to 20.02 percentage points. With head-\nline inflation rate at 10.4 per cent at end-September, all \ndeposit rates, with the exception of savings and 7-day \nrates, were positive in real terms. \n \nAt the inter-bank call segment, the weighted average \nrate, which stood at 14.76 per cent in the preceding \nquarter, fell to 12.66 per cent, reflecting the liquidity \ncondition in the inter-bank funds market. Similarly, \nweighted average rate at the Open Buy Back (OBB) fell \nfrom 7.32 per cent in June to 6.89 per cent at the end of \nthird quarter. \nIn tandem with activities at the inter-bank market, Nige-\nria Inter-bank Offered Rate (NIBOR) for the 7 and the \n30-day tenors declined to 14.15 and 16.14 per cent at \nthe end of the third quarter from 15.81 and 17.00 per \ncent respectively, in the second quarter 2009. \n \n2.3.2 Commercial Papers (CPs) \n \nInvestment in Commercial Papers (CPs) as a supple-\nment to bank credit to the private sector rose in the re-\nview period. The value of CPs held by DMBs rose by \n=N=166.23 billion to =N=768.7 billion at end-\nSeptember 2009, as against a decline of =N=145.83 \nbillion at end-June 2009. Thus, CPs constituted 21.9 per \ncent of the total value of money market assets out-\nstanding as at end-September 2009, compared with 25.9 \nper cent at the end of the preceding quarter. \n \n2.3.3 Bankers’ Acceptances (BAs) \n \nHoldings of BAs by DMBs rose by 21.9 per cent to \n=N=96.1 billion as at end-September 2009, as against \nthe decline of 3.3 per cent in the preceding quarter. The \nrise reflected the increase in investments by DMBs and \ndiscount houses. Consequently, BAs accounted for 2.7 \nper cent of the total value of money market assets out-\nstanding at the end of the third quarter, compared with \n2.6 per cent in the preceding quarter. \n \n \n \n \n3rd \nQtr \n07\n4th \nQtr \n07\n1st \nQtr \n08\n2nd \nQtr \n08\n3rd \nQtr \n08\n4th \nQtr \n08\n1st \nQtr \n09\n2nd \nQtr \n09\n3rd \nQtr \n09\nAvg. Term Deposits\n8.99\n8.69\n9.35 10.78 11.06 11.67 12.27 11.89 12.33\nPrime\n16.46 16.9 16.05 15.86 15.97 16.03 18.34 19.01 18.38\nInter-bank\n8.13\n8.25 10.21 10.4 12.83 14.01 15.79 14.76 12.66\nMaximum\n18.27 18.24 18.17 17.9\n18.1 19.79 22.24 22.89 22.82\n2\n7\n12\n17\n22\n27\nPer cent\nFigure 3: Selected Bank Interest Rates (Per cent \nAverage)\n \n \n \n \n \n 4 \n \n \n 2.3.4 Open Market Operations \n \nAggressive mop–up of excess liquidity remained sus-\npended and there was no direct auction at the open \nmarket. In the same vein, there was no purchase or sale \nof government securities through the two-way quote \nplatform due to the unattractiveness of the offer rates \nquoted at the trading sessions. \n \n2.3.5 Primary Market \n \nAt the primary market, Nigerian Treasury Bills of 91, \n182 and 364-day tenors were offered fortnightly during \nthe review period in line with the issue program. Total \nNTBs issued and allotted was =N=322.22 billion \napiece, compared with the =N=341.60 billion apiece \nissued and allotted in the second quarter. Public sub-\nscriptions stood at =N=513.13 billion, compared with \n=N=560.30 billion in the second quarter. The range of \nissue rates for the 91-182- and 364-day NTBs was \nfrom 2.80-6.75 per cent, compared with the range of \n2.00-6.50 per cent for the same tenors in the preceding \nquarter. All the auctions were oversubscribed as mar-\nket players showed stronger preference for risk-free \ngovernment securities. \n \n2.3.6 Bonds Market \n \nFGN Bonds of 3, 5 and 20-year tenors were re-opened \n(in line with the restructuring of the domestic debt \nprofile to longer tenors) and offered to the public in the \nperiod under review. Total issue and allotment during \nthe third quarter, 2009 stood at =N=180.0 billion, com-\npared with =N=170.0 billion, in the preceding quarter. \nTotal subscriptions stood at =N=356.26 billion. A \nbreakdown of the total issues and allotments showed \nthat \n=N=60.00 \nbillion, \n=N=54.00 \nbillion \nand \n=N=66.00 billion, were issued for the 3-, 5- and 20-\nyear tenors, while the total subscriptions were \n=N=116.71 billion, =N=110.09 billion and =N=129.46 \nbillion, respectively. In the preceding quarter, issue \nand allotment for the respective tenors were =N=75.00 \nbillion 3-year, =N=55.00 billion 5-year and =N=40.00 \nbillion 20-year. The FGN Bonds were offered and al-\nlotted at marginal rates ranging between 7.88-11.00 \nper cent, as against the issue rate range of 10.10-12.79 \nper cent, in the preceding quarter. The impressive sub-\nscription, especially for the 20-year tenor, reflected \nmarket players‘ confidence in the Nigerian economy \nand perceived stable and attractive yields on the instru-\nments. \n \n2.3.7 CBN Standing Facilities \n \nThe re-introduction of remuneration on standing de-\nposit facility by the Bank increased activities at that \nsegment. \n \n \n \nConsequently, cumulative lending facility granted to \nDMBs \nat \nend-September \n2009 \nstood \nat \n=N=10,659.29 \nbillion, \ncompared \nwith \n=N=10,299.22 billion in the second quarter of 2009. \nTotal deposits stood at =N=2,387.28 billion. The \nlending and deposit rates were fixed at 8.00 and 4.0 \nper cent, respectively, (plus and minus 2 per cent \nabove and below the Monetary Policy Rate). \n \n2.4 \nDeposit Money Banks’ Activities \n \nAvailable data indicated that total assets/liabilities \nof the DMBs amounted to =N=16,731.5 billion, \nrepresenting an increase of 7.8 per cent over the \nlevel in the preceding quarter. The development was \nattributed largely to the 13.8 per cent increase in \nclaims on the private sector, reinforced by the 15.6 \nper cent rise in unclassified assets. \n \nFunds, which were sourced mainly from accumula-\ntion of time, savings and foreign currency deposits \nand capital accounts were used mainly for the exten-\nsion of credit to the private sector. \n \nAt =N=10,516.3 billion, credit to the domestic econ-\nomy rose by 8.5 per cent over the level in the pre-\nceding quarter. The development was attributed \nwholly to the 13.9 per cent increase in claims on the \nprivate sector. \n \nCentral Bank‘s credit to the DMBs rose by 133.8 \nper cent to =N=387.7 billion in the review quarter, \nreflecting largely the increase in CBN‘s loan & ad-\nvances to the DMBs. \n \nTotal specified liquid assets of the DMBs stood at \n=N=2,287.4 billion, representing 25.0 per cent of \ntheir total current liabilities. At that level, the liquid-\nity ratio fell by 6.9 percentage points from the pre-\nceding quarter‘s level, but the same as the stipulated \nminimum ratio of 25.0 per cent. The loans-to-\ndeposit ratio rose by 3.3 percentage points to 89.0 \nper cent over the level in the preceding quarter, and \nexceeded the prescribed minimum target of 80.0 per \ncent by 9.0 percentage points. \n \n2.5 \nDiscount Houses’ Activities \n \n Total assets/liabilities of the discount houses stood \nat =N=329.3 billion in the third quarter of 2009, \nindicating a decline of 29.3 and 21.1 per cent from \nthe levels in the preceding quarter and the corre-\nsponding period of 2008, respectively. The fall in \nassets was accounted for largely by the 53.1 per \ncent decline in claims on others, reinforced by the \nfall in claims on banks during the quarter. Corre-\nspondingly, the fall in total liabilities was attributed \nlargely to the 41.9 per cent decline in other amount \nowing during the period. \n \n \n \n \n \n \n \n \n 5 \n \n \n Discount houses‘ investments in Federal Government \nsecurities of less than 91 days maturity rose by 106.3 \nper cent to =N=62.5 billion, representing 23.3 per cent \nof their total deposit liabilities. At this level, discount \nhouses‘ investments rose by 15.6 per cent over the \nlevel in the preceding quarter. This level of investment \nwas 36.7 percentage points below the prescribed mini-\nmum level of 60.0 per cent for fiscal 2009. \nTotal borrowing by the discount houses was \n=N=104.2 billion, while their capital and reserves \namounted to =N=41.8 billion. Thus, resulting in a \ngearing ratio of 2.5:1, compared with the stipulated \nmaximum target of 50:1 for fiscal 2009. \n \n2.6 \nCapital Market Developments \n \n2.6.1 \nSecondary Market \n \nAvailable data indicated that the volume and value of \ntraded securities rose by 6.3 and 3.9 per cent to 28.9 \nbillion shares and =N=207.1 billion, respectively, \ncompared with 27.2 billion shares and =N=199.4 bil-\nlion in the second quarter. In the first nine months of \nthe year, total turnover volume and value stood at 75.3 \nbillion shares and =N=508.7 billion, respectively. The \nbanking sub-sector was the most active on the Ex-\nchange with traded volume of 15.4 billion shares val-\nued at =N=135.4 billion exchanged in 246,837 deals. \nTransactions during the period included 100 units of \nLagos State Fixed Rate Bond worth =N=119,530. \n \n \n2.6.2 Over-the-Counter (OTC) Bonds Mar-\nket \n \n \nTransactions on the over-the-counter (OTC) bond \nsegment of the market indicated that a turnover of 4.7 \nbillion units worth =N=5.3 trillion in 38,418 deals was \nrecorded in the review quarter, compared with a total \nof 4.4 billion units valued at =N=4.2 trillion recorded \nduring the preceding quarter. The most active bond \nmeasured by turnover volume was the 4th FGN Bond \n2014 Series 3 with traded volume of 349.0 billion \nunits valued at =N=401.0 billion in 3,245 deals. \nCumulatively, total transactions on FGN Bonds \nthrough the OTC were 13.31 billion valued at \n=N=14.02 trillion in 91,884 deals, compared with 6.81 \nbillion shares worth =N=6.82 trillion in 54,985 deals \nrecorded in the corresponding period of 2008. \n \n2.6.3 New Issues Market \n \nIn the new issues market, 4.2 billion shares in favour of \neTranzact International Plc were admitted on the Daily \nOfficial list by way of introduction at the price of \n=N=4.80 per share. The Company was listed in the \nInformation Communication and Telecommunication \nsub-sector. Similarly, 400 million shares in favor of \nPortland Paints & Products Nigeria Plc were admitted \nat a price of =N=10.00 per share in the Chemical & \nPaints sub-sector. Also, 16.7 billion shares in favour of \nAfrican Alliance Insurance Company Plc were admit-\nted on the Daily Official List at a price of N3.50 per \nshare. The Company was listed in the Insurance sub-\nsector. By this action, the number of listed companies \nincreased to 211. Similarly, the =N=18.5 billion Imo \nState Government of Nigeria 15.5% Fixed Rate Bond \n2009/2016 Series 1 was admitted on the Daily Official \nList. By this action, the number of listed State Govern-\nment Bonds and securities increased to 7 and 294, re-\nspectively. During the review quarter, there were \ntwenty-one (21) supplementary listings, compared with \neight (8) in the preceding quarter. \n \nIn another development, five FGN bonds - the FGN \nBond 2009 (Special Pension), 3rd FGN Bond 2009 se-\nries 4, 6, and 11 were delisted from the Daily Official \nlist on maturity during the review period. \n \n2.6.4 Market Capitalization \n \nThe total market capitalization of the 294 listed securi-\nties declined by 11.4 per cent to =N=7.8 trillion from \nthe preceding quarter‘s level. The fall in market capi-\ntalization was attributed to the price losses recorded by \nthe highly capitalized stocks. The 211 listed equities \naccounted for =N=5.1 trillion or 65.8 per cent of the \ntotal market capitalization. \n \n2.6.5 NSE All-Share Index \n \nThe NSE All-Share Index, which opened at 26, 861.55, \nclosed at 22,065.00, representing a decline of 17.9 per \ncent from the level in the preceding quarter. Relative to \nthe closing value of 31,450.78 on December 31, 2008, \nthe year-to-date decline in the NSE All-Share-Index \nstood at 29.8 per cent. Also, the NSE-30 Index declined \nby 7.5 per cent to 835.68. The NSE Insurance Index \nfell by 15.1 per cent to close at 312.16, while the NSE \nFood/Beverage Index also declined by 10.4 per cent to \nclose at 451.46. The NSE Banking Index and NSE Oil/\nGas Index fell by 22.0 and 31.4 per cent to close, re-\nspectively, at 358.24 and 287.67. \n \n \n \n \n \n \n \n \n \n 6 \nFigure 5: Volume and value of traded securities\n0\n20\n40\n60\n80\n3rd\nQtr\n'07\n4th\nQtr\n'07\n1st\nQtr\n08\n2nd\nQtr\n'08\n3rd\nQtr\n'08\n4th\nQtr\n'08\n1st\nQtr\n09\n2nd\nQtr\n09\n3rd\nQtr\n09\nNo.\n0\n200\n400\n600\n800\n1000\n1200\nN'billion\nVolume of traded securities\nValue of securities\n \n \n \n \n3.0 \nFISCAL OPERATIONS \n \n3.1 \nFederation Account Operations \n \nAvailable data showed that total federally-collected \nrevenue during the third quarter of 2009 stood at \n=N=1,218.30 billion, representing a decline of 8.1 per \ncent from the proportionate budget estimate, but an \nincrease of 16.6 per cent over the receipts in the pre-\nceding quarter. At =N=716.81 billion, oil receipts, \nwhich constituted 58.8 per cent of the total, was lower \nthan the proportionate budget estimate by 7.9 per cent \nbut exceeded the receipts in the preceding quarter by \n2.9 per cent. The fall in oil receipts relative to the pro-\nportionate budget estimate was due to the significant \ndecline in oil production occasioned by the attacks on \noil facilities in the Niger Delta region. However, the \nincrease in oil revenue compared with the preceding \nquarter gives an indication of a positive impact of the \nFederal Government‘s amnesty initiative in the region. \n \nNon-oil receipts, at =N=501.49 billion or 41.2 per cent \nof the total, was lower than the budget estimate by 8.4 \nper cent but exceeded the receipts in the preceding \nquarter by 44.0 per cent. The decline relative to the \nbudget estimate was attributed largely to the fall in \ncustoms and excise duties occasioned by declining \ntrade volumes, Value-Added Tax (VAT) and Independ-\nent Revenue of the Federal Government (fig 7). \n \nAs a percentage of GDP, oil revenue was 10.6 per cent, \nwhile non-oil revenue stood at 7.4 per cent in the third \nquarter of 2009. \n \nOf the total federally-collected revenue during the re-\nview quarter, the sum of =N=717.54 billion was trans-\nferred to the Federation Account for distribution among \nthe three tiers of government and the 13.0 per cent deri-\nvation fund. The Federal Government received \n=N=346.26 billion, while the State and Local Govern-\nments received =N=175.63 billion and =N=135.40 \nbillion, respectively. \nThe balance of =N=60.25 billion went to the 13.0 per \ncent derivation fund for distribution by the oil producing \nstates. To bridge the shortfall in revenue for the period, \nthe sum of =N=197.36 billion was drawn from the excess \ncrude account and shared as follows: Federal Govern-\nment (=N=90.45 billion), State Governments (=N=45.88 \nbillion), Local Governments (=N=35.37 billion) and oil \nproducing states (=N=25.66 billion). \n \n3.2 \nThe Fiscal Operations of the Three Tiers \nof Government \n \n3.2.1 \nThe Federal Government \n \nAt =N=817.28 billion, Federal Government retained \nrevenue for the third quarter 2009, was higher than the \nproportionate budget estimate and the receipts in the pre-\nceding quarter by 36.1 and 57.4 per cent, respectively. \n \nAt =N=1,011.22 billion, total estimated expenditure for \nthe review quarter rose by 24.9 and 12.2 per cent over \nthe proportionate budget estimate and the level in the \npreceding quarter, respectively. The rise in total expendi-\nture relative to the budget estimate and the preceding \nquarter was attributed largely to the estimated increase in \ncapital releases and domestic interest payments during \nthe quarter. A breakdown of total expenditure showed \nthat the recurrent component accounted for 46.6 per cent, \ncapital component 49.7 per cent, while statutory transfers \naccounted for the balance of 3.7 per cent. As a percent-\nage of GDP, recurrent expenditure was 7.0 per cent, \nwhile capital expenditure and transfers stood at 7.4 and \n0.5 per cent, respectively. \n \nThe fiscal operations of the Federal Government in the \nthird quarter, 2009, resulted in an overall deficit of \n=N=193.94 billion, compared with the deficits of \n=N=382.23 billion in the preceding quarter and the budg-\neted sum of =N=209.15 billion. \n \nAs a percentage of GDP, the fiscal deficit was 2.9 per \ncent in the review quarter. The fiscal deficit was financed \nfrom additional issuance of FGN Bonds, privatization \nproceeds and signature bonus. \n \n \n \n \n \n \n 7 \nFigure 7: Components of Federally Collected Revenue(=N= Billion)\n716.81\n501.5\n0.00\n100.00\n200.00\n300.00\n400.00\n500.00\n600.00\n700.00\n800.00\nOIL \nNON OIL \n \n \n 3.2.2 Statutory Allocations to State Govern-\nments \n \nDuring the review quarter, total receipts, including the \n13.0 per cent Derivation Fund and share of VAT by the \nState Governments from the Federation Account stood \nat =N=354.81 billion. This represented a decline of \n10.7 and 25.6 per cent from the levels in the preceding \nquarter and the corresponding period of 2008, respec-\ntively. \n \nFurther breakdown showed that at =N=61.01 billion, \nreceipts from the VAT Pool Account rose by 9.5 per \ncent over the level in the preceding quarter, while re-\nceipts \nfrom \nthe \nFederation \nAccount \nstood \nat \n=N=293.80 billion. On monthly basis, the sum of \n=N=110.56 billion, =N=125.04 billion and =N=119.20 \nbillion were allocated to the 36 state governments in \nJuly, August and September 2009, respectively. \n \n3.2.3 Statutory Allocations to Local Govern-\nment Councils \n \n \nTotal receipts by the Local Governments from the Fed-\neration and VAT Pool Accounts during the third quar-\nter of 2009, stood at =N=213.48 billion. This was lower \nthan the level in the preceding quarter and the corre-\nsponding quarter of 2008 by 1.7 and 61.5 per cent, re-\nspectively. Of this amount, allocation from the Federa-\ntion Account was =N=170.77 billion or 80.0 per cent of \nthe total, while VAT Pool Account accounted for \n=N=42.71 billion or 20.0 per cent. On monthly basis, \nthe sums of =N=67.09 billion, =N=75.50 billion and \n=N=70.89 billion were allocated to the 774 local gov-\nernments in July, August and September 2009, respec-\ntively. \n \n3.3 \nConsolidated Federal Government Debt \n \nAt =N=3,635.88 billion or 13.5 per cent of GDP, the \ntotal Federal Government debt as at end-September \n2009, rose by 8.1 per cent over the level at end-June \n2009. The breakdown comprised of domestic debt of \n=N=3,058.19 billion and external debt of =N=577.70 \nbillion (US$3.86 billion). \n \n3.3.1 \nDomestic Debt \n \nThe domestic debt stock of the Federal Government \noutstanding at the end of the third quarter, 2009 was \n=N=3,058.19 billion, representing an increase of 8.7 \nper cent over the level at the end of the preceding quar-\nter. As a percentage of GDP, total domestic debt was \n11.3 per cent. The rise in domestic debt was accounted \nfor by the issuance of additional FGN Bonds, increase \nin treasury bills outstanding as well as the increase in \ndebt instruments via the introduction of promissory \nnotes during the quarter. \n4.0 \nDOMESTIC ECONOMIC CONDITIONS \n \n4.1 \nAgricultural Sector \n \nAgricultural activities during the review quarter cen-\ntered on harvesting of root crops, especially yams, irish \nand sweet potatoes, and ground nuts, while farmers \ncommenced the preparation of land and nurseries for \nthe cultivation of tomatoes, pepper, carrots, cabbage \nand other vegetables. Farmers also intensified the pro-\nduction of poultry products during the last month of the \nquarter in preparation for the end of year festivals. \n \nDuring the review period, a total of =N=3.38 billion \nwas guaranteed to 23,291 farmers under the Agricul-\ntural Credit Guarantee Scheme (ACGS). This amount \nrepresented an increase of 83.7 and 279.0 per cent over \nthe levels in the preceding quarter and the correspond-\ning period of 2008, respectively. \n \n \n \n \n \n \n \n \n 8 \nA ggregate output growth in the economy \nmeasured by the gross domestic product (GDP) was \nestimated at 7.6 per cent in the third quarter of 2009, \ncompared with 7.2 per cent in the preceding quarter. \nAgricultural activities centered on harvesting of root \ncrops and preparation of land and nurseries for culti-\nvation. Farmers also intensified the production of poul-\ntry products during the last month of the quarter in \npreparation for the end of year festivals. Crude oil pro-\nduction was estimated at 1.73 million barrels per day \n(mbd) or 159.16 million barrels for the quarter. The \nend-period inflation rate for the third quarter of 2009, \non a year-on-year basis, was 10.4 per cent, compared \nwith 11.2 per cent in the preceding quarter. The infla-\ntion rate on a 12-month moving average basis was 13.1 \nper cent, compared with the preceding quarter’s level \nof 13.7 per cent. \n \n \n A sub-sectoral analysis of the loans guaranteed indi-\ncated that the food crops sub-sector had the largest \nshare of =N=2.43 billion or 72.1 per cent to 21,104 \nbeneficiaries, while the livestock sub-sector received \n=N=633.25 million or 18.7 per cent to 1,124 benefici-\naries. Also, 352 beneficiaries in the fisheries sub-\nsector obtained =N=156.1 million or 4.6 per cent. In \nthe cash crops sub-sector, 507 beneficiaries got \n=N=129.21 million or 3.8 per cent, while 147 benefi-\nciaries in ‗others‘ had =N=22.2 million or 0.7 per \ncent. Further analysis showed that 33 states benefited \nfrom the scheme during the quarter, the highest and \nlowest sums of =N=474.5 million (14.0 per cent) and \n=N=5.9 million (0.2 per cent) went to Katsina and \nPlateau States, respectively. \n \nThe retail prices of most staples recorded increase in \nthe third quarter of 2009. Eleven of the fourteen com-\nmodities monitored recorded price increase, which \nranged from 2.6 per cent for groundnut oil to 18.7 per \ncent for brown beans over their levels in the preced-\ning quarter, while guinea corn, millet and yam flour \nrecorded price decline of 9.5, 15.1 and 22.5 per cent, \nrespectively. The increase in the price of most com-\nmodities was attributed to the subsisting food situa-\ntion in the country in the aftermath of the global food \ncrisis. \n \n4.2 \nIndustrial Production \n \nIndustrial activities during the third quarter of 2009, \nindicated marginal improvement relative to the pre-\nceding quarter. At 115.6 (1990=100), the estimated \nindex of industrial production rose by 0.9 per cent \nover the level attained in the preceding quarter but \ndeclined by 1.9 per cent from the level in the corre-\nsponding period of 2008. The increase reflected the \nimprovement in mining activities and electricity gen-\neration. \n \nThe estimated index of manufacturing production, at \n88.4 (1990=100), declined by 0.2 and 3.2 per cent \nfrom the levels in the preceding quarter and corre-\nsponding period of 2008, respectively. The estimated \ncapacity utilization also fell by 0.5 percentage points \nto 53.0 per cent during the review quarter. The de-\ncline was attributed to the lull in industrial production \ndue to rising production costs in the face of falling \ndemand. \n \nAt 125.9 (1990=100), the index of mining produc-\ntion increased marginally by 0.8 per cent over the \nlevel attained in the preceding quarter but declined \nby 1.7 per cent from the level in the corresponding \nperiod of 2008. The rise was accounted for by the \nrise in crude oil and gas production, resulting from \nthe amnesty programme of the Federal Government, \nwhich reduced the activities of militants in the Niger \nDelta region. \n \nAt 2,090.0 MW/h, estimated average electricity gen-\neration increased by 7.5 per cent over the level at-\ntained in the preceding quarter. The rise reflected \nthe increase in water levels at the hydro dams as \nwell as improvement in the supply of gas to thermal \nstations. \n \nAt 1,843.0 MW/h, estimated average electricity con-\nsumption rose by 10.2 per cent over the level in the \npreceding quarter. Of the total, residential consump-\ntion accounted for 52.6 per cent, commercial & street \nlighting accounted for 27.1 per cent, while industrial \nconsumption accounted for 20.3 per cent. The in-\ncrease in electricity consumption was attributed to the \nmarginal improvement in power supply experienced \nduring the review quarter. \n \n4.3 Petroleum Sector \n \nNigeria‘s crude oil production, including condensates \nand natural gas liquids was estimated at 1.73 million \nbarrels per day (mbd) or 159.16 million barrels (mbd) \nduring the third quarter of 2009, compared with 1.70 \nmbd or 156.70 mbd in the preceding quarter. This \nrepresented an increase of 1.8 per cent. The develop-\nment was accounted for by the relative peace being \nexperienced in the Niger Delta region as a result of \nthe Federal Government‘s amnesty programme. \n \nCrude oil export was estimated at 1.33 mbd or 122.36 \nmillion barrels in the review period, compared with \n1.30 mbd or 118.30 million barrels in the preceding \nquarter. Deliveries to the refineries for domestic con-\nsumption remained at 0.445 mbd or 40.94 million \nbarrels in the review quarter. \n \nAt an estimated average of US$70.05 per barrel, the \nprice of Nigeria‘s reference crude, the Bonny Light \n(37º API), rose by 14.6 per cent over the level in the \npreceding quarter. The average prices of other com-\npeting crudes namely, the West Texas Intermediate, \nthe U.K Brent and the Forcados also rose by 14.5, \n15.1 and 15.7 per cent to US$68.03, US$68.79 and \nUS$69.76 per barrel, respectively. \n \n \n \n \n \n \n \n 9 \nQt3. 07\nQt4. 07\nQt1. 08\nQt2. 08\nQt3. 08\nQt4. 08\nQt1. 09\nQt2. 09\nQt3. 09\nManuf.\n90.2\n90.1\n90.0\n88.0\n89.3\n86.4\n89.9\n88.6\n88.4\nMining\n133.5\n133.6\n132.9\n132.8\n132.5\n127.2\n127.6\n125.9\n125.9\nElectricity\n190.9\n191.3\n185.6\n185.6\n185.6\n185.6\n160.4\n160.4\n160.4\nAll Sectors\n126.3\n118.84\n118.75\n119.2\n120.9\n119.8\n115.9\n114.6\n115.6\n100.0\n110.0\n120.0\n130.0\n140.0\n150.0\n160.0\n170.0\n180.0\n190.0\n200.0\nIndices\nFigure 9: Index of Industrial Production (1990=100)\n \n \n The average price of OPEC‘s basket of eleven crude \nstreams also, rose by 15.8 per cent to US$67.78 over \nthe level in the preceding quarter. The increase in price \nwas attributed to investors‘ renewed optimism of a \nglobal economic recovery. \n \n4.4 \nConsumer Prices \n \nAvailable data showed that the all-items composite \nConsumer Price Index (CPI) for the end of the third \nquarter of 2009, was 212.4 (May 2003=100), repre-\nsenting an increase of 3.8 and 10.4 per cent over the \nlevels in the preceding quarter and the corresponding \nperiod of 2008, respectively. The development was \nattributed largely to the increase in the prices of food \nand non-alcoholic beverages. \n \nThe urban all-items CPI at the end of the third quarter \nof 2009, was 229.3 (May 2003=100), indicating an \nincrease of 2.6 and 8.1 per cent over the levels in the \npreceding quarter and the corresponding quarter of \n2008, respectively. Similarly, the rural all-items CPI \nfor the quarter, at 205.1 (May 2003=100), represented \nan increase of 4.3 and 11.5 per cent over the levels in \nthe preceding quarter and the corresponding period of \n2008, respectively. \n \n \n \nThe end-period inflation rate for the third quarter of \n2009, on a year-on-year basis, was 10.4 per cent, com-\npared with 11.2 and 13.0 per cent in the preceding \nquarter and the corresponding quarter of 2008, respec-\ntively. \n \nThe inflation rate on a twelve-month moving average \nbasis for the third quarter of 2009, was 13.1 per cent, \ncompared with 13.7 and 9.2 per cent recorded in the \npreceding quarter, 2009 and the corresponding period \nof 2008, respectively. \n \n5.0 \nEXTERNAL SECTOR DEVELOPMENTS \n5.1 \nForeign Exchange Flows \n \nForeign exchange inflow and outflow through the CBN \nin the third quarter of 2009 amounted to US$5.67 bil-\nlion and US$9.01 billion, respectively, representing a \nnet outflow of US$3.34 billion. Relative to the respec-\ntive levels of US$5.36 billion and US$9.14 billion in \nthe preceding quarter, inflow rose by 5.8 per cent, \nwhile outflow fell by 1.4 per cent. The increase in in-\nflow was attributed to the 41.5 per cent rise in oil re-\nceipts, while the fall in outflow was due largely to the \n2.5 per cent decline in Wholesale Dutch Auction Sys-\ntem (WDAS) utilization during the review quarter. \n \n \n \n \n \n \n 10 \nP rovisional data indicated that foreign \nexchange inflow through the CBN in the third quarter \nof 2009 rose by 5.8 per cent, while outflow fell by 1.4 \nper cent. Similarly, total non-oil export earnings re-\nceipts by banks declined by 11.4 per cent from the level \nin the preceding quarter. The weighted average ex-\nchange rate of the Naira vis-à-vis the US dollar, depre-\nciated by 2.1 per cent to =N=150.92 per dollar at the \nWholesale Dutch Auction System (WDAS). \n \n \n \nAvailable data on aggregate foreign exchange flows \nthrough the economy indicated that total inflow \namounted to US$17.29 billion, representing an increase \nof 34.1 per cent over the level in the preceding quarter \nand a decline of 39.2 per cent from the level in the cor-\nresponding period of 2008. Oil sector receipts, which \naccounted for 26.0 per cent of the total, stood at \nUS$4.57 billion, compared with the respective levels of \nUS$3.23 billion and US$13.81 billion in the preceding \nquarter and corresponding period of 2008, respectively. \nNon-oil public sector inflows, which accounted for 6.4 \nper cent of the total, however, declined by 48.1 per cent, \nwhile autonomous inflow, which accounted for 67.2 per \ncent increased by 54.3 per cent. \n \nAt US$9.24 billion, aggregate foreign exchange outflow \nfrom the economy declined by 1.0.4 and 18.0 per cent \nfrom the levels in the preceding quarter and the corre-\nsponding period of 2008, respectively. The fall in out-\nflow relative to the preceding quarter was accounted for \nlargely by the decline in funding of the WDAS segment \nof the foreign exchange market during the quarter under \nreview \n \n5.2 Non-Oil Export Proceeds by Exporters \n \nTotal non-oil export earnings by Nigeria‘s exporters \ndeclined by 11.4 per cent to US$335.84 million from the \nlevel in the preceding quarter. A breakdown of the pro-\nceeds in the review quarter showed that the proceeds of \nindustrial, food products, manufactured products, trans-\nport, agricultural, and minerals stood at US$213.93 mil-\nlion, US$9.15 million, US$74.29 million, US$0.03 mil-\nlion, US$35.38 million and US$0.01 million, respec-\ntively. \n \nThe shares of industrial, food products, manufactured \nproducts, transport, agricultural, and minerals sub-\nsectors in non-oil export proceeds were 64.3, 2.8, 22.3, \n0.0, 10.6 and 0.0 per cent, respectively, in the review \nquarter. The development was attributed largely to the \ndecline in the prices of the goods traded at the interna-\ntional market. \n \n5.3 Sectoral Utilisation of Foreign Exchange \n \n \nThe invisibles sector accounted for the bulk (34.5 per \ncent) of total foreign exchange disbursed in the third \nquarter of 2009, followed by the industrial sector (19.0 \nper cent). Other beneficiary sectors, in a descending \norder of importance, included: manufactured products \n(16.5 per cent), minerals & oil (14.7 per cent), food \n(10.4 per cent), transport (4.3 per cent) and agricultural \nproducts (0.6 per cent) (Fig.14). \n5.4 Foreign Exchange Market Developments \n \nForeign exchange demand by the authorized dealers \nstood at US$10.30 billion, indicating an increase of 6.5 \nper cent over the level in the preceding quarter. Relative \nto the level in the corresponding period of 2008, de-\nmand rose by 48.9 per cent. Consequently, a total \namount of US$7.34 billion was sold by the CBN during \nthe period, indicating a fall of 6.3 per cent from the \nlevel in the preceding quarter. \n \nUnder the WDAS, the weighted average exchange rate \nof the Naira vis-à-vis the US dollar depreciated by 2.1 \nper cent to =N=150.92 per dollar from =N=147.76 per \ndollar in the preceding quarter. It also showed a depre-\nciation of 22.0 per cent from the level in the correspond-\ning period of 2008. In the bureaux-de-change segment \nof the market, the naira traded at an average of \n=N=157.36 per dollar, compared with =N=175.68 and \n=N=119.00 per dollar in the preceding quarter and the \ncorresponding quarter of 2008, respectively. Conse-\nquently, the premium between the official and the bu-\nreaux-de-change rates narrowed from 18.9 per cent in \nthe preceding quarter to 4.3 per cent (fig. 16). \n \n \n \n \n \n \n 11 \n \n \n \n6.0 GLOBAL ECONOMIC CONDI-\nTIONS \nThe modest growth in the global economy experienced \nin the second quarter continued in the third quarter, \nfollowing the strong performance of Asian economies. \nIn the advanced economies, unprecedented public inter-\nvention has stabilised activity and has fostered a return \nto modest growth in several economies. Emerging and \ndeveloping economies were generally further ahead on \nthe road to recovery, led by rebound in Asia. The re-\ncent rebound in commodity prices and supportive poli-\ncies are helping many of these economies. World Bank \neconomists stated that such economic vital signs as \nindustrial production, trade, and foreign direct invest-\nments were picking up, though they were at considera-\nbly lower levels than before the financial crisis. But the \ngap between what the world can produce and what it \nwas actually producing is expected to remain very large \n— about 6 percentage points of GDP for developing \ncountries. Moreover, the higher borrowing costs and \nweak financial system would likely reduce the long run \npotential output of developing countries by as much as \n4.0 percent of their GDP. \n \nUncertainty and systemic risk in financial markets are \nnow lower. The triggers for the rebound were attributed \nto strong public policies across advanced and many \nemerging economies that have supported demand and \neliminated fears of a global depression. \n \nThese fears contributed to the steepest drop in global \nactivity and trade since World War II. Central banks \nreacted quickly with exceptionally large interest rate \ncuts as well as unconventional measures to inject li-\nquidity and sustain credit. Governments launched ma-\njor fiscal stimulus programs, while supporting banks \nwith guarantees and capital injections. Together, these \nmeasures reduced uncertainty and increased confi-\ndence, fostering an improvement in financial condi-\ntions, as evidenced by strong rallies across many mar-\nkets and a rebound of international capital flows. \n \nHowever, the environment remained very challenging \nfor lower tier borrowers. More generally, the risk of a \nreversal was a significant market concern, and a num-\nber of financial stress indicators remained elevated. \nLooking ahead, the policy forces that are driving the \ncurrent rebound would gradually lose strength, and real \nand financial forces, although gradually building, re-\nmained weak. Specifically, fiscal stimulus would di-\nminish and inventory rebuilding will gradually lose its \ninfluence. Meanwhile, consumption and investment are \ngaining strength only slowly, as financial conditions \nremained tight in many economies. The main short-\nterm risk was that the recovery would stall. Premature \nexit from accommodative monetary and fiscal policies \nseemed a significant risk because the policy-induced \nrebound might be mistaken for the beginning of a \nstrong recovery in private demand. \n \nIn general, the fragile global economy remained vul-\nnerable to a range of shocks, including rising oil prices, \na virulent return of H1N1 flu, geopolitical events, or \nresurgent protectionism. However, short-term risks \nwere not only on the downside, as evidenced by the \nrecent, more-rapid- than-expected improvement in fi-\nnancial conditions. In particular, the policy-induced \nreduction in fears about a 1930s-style crash in activity \nand the accompanying strong rebound in financial mar-\nket sentiment might induce a larger-than-expected \nsurge in consumption and investment across a number \nof advanced and emerging economies. Extending the \nhorizon to the medium term, there are other important \nrisks to sustained recovery, mainly in the major ad-\nvanced economies. \n \nOn the financial front, a major concern is that contin-\nued public skepticism toward what is perceived as bail-\nouts for the very firms considered responsible for the \ncrisis undercuts public support for financial restructur-\ning, hereby paving the way to a prolonged period of \nstagnation. On the macroeconomic policy front, the \ngreatest risk revolves around deteriorating fiscal posi-\ntions. \n \n \n \n \n \n \n \n \n 12 \nFigure 17: WDAS-BDC Exchange Rate Premium \n(Quarterly)\n0\n2\n4\n6\n8\n10\n12\n14\n16\n18\n20\n'4th Qtr-06\n2nd Qtr-'07\n4th Qtr-07\n2nd Qtr 08\n4th Qtr 08\n2nd Qtr 09\nPremium\n \n \n6.1 \nGlobal Inflation \n \nThe sharp drop in activity and rise in output gaps have \ndecreased inflationary pressures. At the global level, \nyear-on-year inflation moderated to 1.0 per cent in \nJuly, down from more than 6 per cent a year earlier. In \nthe advanced economies, headline inflation has been \nbelow zero since May, as oil prices have remained far \nbelow levels a year earlier despite their recent pickup. \nCore inflation has eased to 1.2 percent, down from just \nover 2 per cent a year earlier. Similarly, headline and \ncore inflation in the emerging economies have moder-\nated, falling to 4.2 per cent in July. However, develop-\nments have been uneven, with inflation falling mainly \nin emerging Asia and less so in emerging Europe. Pol-\nicy interest rates have been brought down considera-\nbly, close to the zero floor in many advanced econo-\nmies. Cuts in rates were generally smaller in emerging \neconomies, reflecting a combination of higher inflation \nat the onset of the crisis and pressure for exchange \nrates to depreciate in response to capital outflows. \nLooking ahead, some central banks in Asia and Latin \nAmerica may start to tighten again, if the strong re-\nbounds there are sustained, although some central \nbanks in emerging Europe are still exploiting room to \ncut rates in response to more stable external financial \nconditions. Central banks in most advanced economies \nand some emerging economies resorted to a range of \nunconventional measures to further ease financial con-\nditions during the past year. There have been a variety \nof different approaches, mainly reflecting different \nfinancial system structures. \n \n6.2 \nGlobal Commodity Prices \n \nThe rise in the global demand and price of commodi-\nties continued in the third quarter. World crude oil \noutput in the third quarter 2009, was estimated at 84.32 \nmillion barrels per day (mbd), while demand was esti-\nmated at 83.13 mbd, compared with 83.62 and 83.17 \nmbd supplied and demanded in the preceding quarter, \nrespectively. The increase in demand was due to re-\nnewed optimism of a global economic recovery. Crude \noil prices in particular have hovered between $70 and \n$80 per barrel during the quarter. Price developments \nwould partly depend on how strongly supply responds \nto recovering demand. With non-Organisation of Pe-\ntroleum Exporting Countries (OPEC) supply unlikely \nto pick up substantially—given high decline rates in \nsome large, matured fields, notably in the North Sea \nand Mexico, and given sluggish capacity buildup be-\ncause of barriers to investment in many countries—this \nresponse will depend largely on OPEC production. \nThe experience of recent episodes of deliberate produc-\ntion cuts suggests that OPEC members will respond \ngradually and with some lag to increasing demand and \nrising price pressure. Indeed, recent statements by key \nOPEC officials suggest that OPEC production increases \nwill be predicated on a substantial drawdown of Organi-\nsation for Economic Cooperation and Development \n(OECD) inventories to more normal stock-use levels and \non an oil price within the target range of $70−$80 per \nbarrel. \n \nAlso, in line with broad commodity market develop-\nments, most metal prices rebounded in the second quar-\nter of 2009. By end-July, the IMF metal daily index \nwhich had risen by nearly 60 per cent from its trough \nearlier in the year was led by copper, lead, and nickel. \nBesides, the improvement in near-term global economic \nand financial prospects, which elicited strong price re-\nsponses from the cyclically sensitive base metals, the \nprice rebound also reflected metal-specific factors. As in \nthe case of oil, a good part of the recovery in metal de-\nmand has already been priced in, and further strong \nprice increases in the near term seem unlikely at this \npoint because of substantial excess capacity. \n \nLooking ahead, as reflected in futures prices, food prices \nare expected to rise only gradually throughout the global \neconomic recovery. Demand is relatively insensitive to \nthe business cycle compared with other commodities, \nand future harvests are expected to be fairly abundant, \nalthough there is the prospect that the El Niño weather \npattern may affect production of some crops, particu-\nlarly soybeans, through 2010. However, there are upside \nrisks to prices. Agricultural supply-demand balances \nremain relatively tight, with the global stock-to-use ratio \nfor the major crops of corn, rice, soyabeans, and wheat \nexpected to remain below their average levels over re-\ncent. \n \nLow inventory ratios are a result, in part, of food de-\nmand in emerging economies, which rose quickly during \n2001−07. The renewed pickup in growth in these econo-\nmies over the coming years will keep market balances \ntight, and risks are that the increases in food price vola-\ntility observed over the past decade or so will be sus-\ntained. Another risk concern is the higher cost of energy, \nparticularly as oil prices remain well above their decade \naverages. Higher energy prices drive up the cost of farm-\ning through fuel inputs and fertilizer prices. An indirect \neffect of higher oil prices is the increased incentive to \ndivert food crops toward biofuel production. Acreage \ndedicated to biofuel production has increased signifi-\ncantly in recent years, helped by high oil prices and, \nparticularly in advanced economies, by policy incen-\ntives. \n \n \n \n \n \n \n \n 13 \n \n \nIn the United States, it is anticipated that the fall in the \noil price would lead to a sharp decline in ethanol-\nrefining margins and to industry consolidation. How-\never, the U.S. Department of Agriculture projects that \nthe proportion of U.S. corn production used for ethanol \nwill still rise in 2009−10, albeit at a slower pace than \nhad been projected in 2008. These emerging biofuel \nlinkages have led to an increase in the correlation be-\ntween food and energy prices, and although these prices \nwere possibly inflated by the effects of the extreme \nvolatility of 2008, they will likely remain higher than in \nthe past. \n \n 6.3 \nInternational Financial Markets \nThe nascent recovery was most evident in financial \nmarkets, although conditions were still very difficult \nfor many borrowers. Public intervention, low policy \ninterest rates, and expectations for recovery have \nspurred strong rallies in many markets as well as a re-\nbound in international capital flows. Initially, the main \ndriver was public policy, including guarantees for fi-\nnancial institutions, capital injections, provision of am-\nple liquidity, and intervention in credit markets. Now, \nimproving growth prospects were beginning to feed \nback into financial conditions, with declining risk aver-\nsion adding further momentum. However, the environ-\nment remained very challenging for lower-tier borrow-\ners, notably small and medium-size enterprises and \nmany households. Securitization markets are still heav-\nily impaired, which severely limits banks‘ capacity to \noriginate (and distribute) credit. More generally, the \nrisk of a reversal was a significant market concern, and \na number of financial stress indicators remain elevated. \nInvestors were allocating an increasing amount of \nfunds away from government bonds in search of higher \nyields. Confidence in advanced economy banking sys-\ntems has received a fillip from better-than-expected \nearnings results and a series of successful bank capital \nraisings. \nIn addition, stress-testing exercises, completed and \npublished in the United States and ongoing in various \nother countries, are helping to rebuild trust in banks. \nStill, questions remain about the sustainability of bank \nearnings and the implications of elevated credit risks, \nwith loan delinquencies continuing to increase and \ndelays by banks in recognizing loan losses. Interna-\ntional capital flows have recovered, including to \nemerging markets. Since the beginning of the year, \nsovereign spreads are down and sovereign issues are up \nfor both advanced and emerging economies, consistent \nwith a noticeable pickup in portfolio flows. The recov-\nery in activity has been better than expected, which has \nbuoyed market sentiment, particularly in Asia and \nLatin America. \nSince mid-year, emerging market corporate and sover-\neign deals have been oversubscribed and refinancing \nrisks have fallen sharply, although less so in emerging \nEurope and the Commonwealth of Independent States \n(CIS). As in mature markets, high-quality corporate \nborrowers can access funding fairly easily, but the bor-\nrowing capacity of those with weaker credit is more \nconstrained. Notwithstanding these favorable market \ndevelopments, vulnerabilities remain, especially in \nemerging Europe and other countries heavily depend-\nent on external financing. Cross-border funding for \nemerging market banks remains vulnerable to the need \nfor mature-market banks to further deleverage. Refi-\nnancing and default risks in the corporate sector con-\ntinue to be relatively high, especially in emerging \nEurope, but also for smaller, leveraged corporations in \nAsia and Latin America. \nThe return of some appetite for risk in international \nmarkets has contributed to depreciation of the dollar \nand yen and appreciation of emerging market curren-\ncies. This followed sharp movements in the opposite \ndirection at the height of the crisis. The euro recently \nstrengthened against both the dollar and the yen, al-\nthough it has held more or less steady at the level pre-\nvailing before the crisis in nominal effective terms. \nEven with improving financial market conditions, how-\never, many households and firms in both advanced and \nemerging economies will continue to face difficult con-\nditions. In particular, bank loans to the private sector \nare still stagnating or contracting in the United States, \nthe euro area, and the United Kingdom, consistent with \nsurveys among bank loan officers that point to a con-\ntinuation of very tight credit conditions. \n \n6.4 \nOther International Economic Develop-\nments and Meetings \n \nOther major international developments and meetings \nof relevance to the domestic economy during the review \nquarter included: the 9th meeting of the Special Imple-\nmentation Committee (SIC) of the Nigeria-South Africa \nBi-National Commission (BNC) held in Abuja from \nJuly 22- 23, 2009. The meeting had six working groups \non Foreign Affairs and Cooperation; Agriculture, Water \nResources and Environment; Social and Technical; \nTrade, Industry and Finance; Minerals and Energy; and \nDefence and Security (see July Report). \n \nThe Committee of Ten African Ministers of Finance \nand Governors of Central Bank (Committee of Ten) \nheld their third session in Abuja on July 14, 2009 under \nthe auspices of the African Development Bank, the Eco-\nnomic Commission for Africa and the African Union \nCommission. \n \n \n \n \n \n \n 14 \n \n \nThe objective of the meeting was to review the latest \ninformation pertaining to the impact of the global fi-\nnancial crisis on Africa; take stock of recent internal \nand international developments; and agree on African \nperspectives to be fed into the global discussions, in \nparticular during the G20 Leaders Summit in Pitts-\nburgh on September 26, 2009 (see July Report). \n \nAlso, the International Monetary Fund (IMF) con-\ncluded its Article IV Consultation Mission with the \nNigerian authorities on July 29, 2009 and noted that \nNigeria entered the global financial crisis from a posi-\ntion of strong macroeconomic stability. The reforms \nof recent years paid off, with oil savings, high interna-\ntional reserves, and a well-capitalized banking system \npreventing the type of economic crisis Nigeria wit-\nnessed during the oil price cycles of the early 1980s \n(see July Report). \nThe G8 Summit was held in L‘Aquila, Italy from July \n8 – 10, 2009. The G8 Leaders discussed the inter-\nlinked challenges of the economic crisis, poverty and \nclimate change among others. While noting some \nsigns of stabilisation and improved confidence, they \nreaffirmed their commitment to implementing the \ndecisions made at the Washington and London Sum-\nmits (see July Report). \nIn another development, the 33rd Ordinary Meetings \nof the Association of African Central Banks (AACB) \nheld in Kinshasa, Democratic Republic of Congo \n(DRC) from August 17—21 2009. The theme for the \n2009 AACB Annual Meetings was ―The Formulation \nof Monetary Policy in Africa: The Relevance of Infla-\ntion Targeting‖ (see August Report). \nIn a related development, the African Caucus, com-\nprising African Governors of the International Mone-\ntary Fund and World Bank met in Freetown, Sierra \nLeone from August 12 – 13, 2009. The Meeting con-\nsidered the draft Memorandum to be submitted to the \nHeads of the Bretton Woods Institutions (BWIs) at the \nIMF/World Bank Annual Meetings in October, 2009. \nThe Memorandum welcomed the reforms undertaken \nby the IMF to overhaul its low income countries \n(LICs) financing framework, notably by streamlining \nstructural conditionality, providing short-term and \nemergency financing, increasing the access limits and \nnorms of concessional instruments along with those \nfor General Resource Agreement (GRA) resources \n(see August Report). \nAlso, the United Kingdom Department for Interna-\ntional Development (DFID) met with the African \nGovernors of the BWIs on the role of International \nFinancial Institutions (IFIs) in supporting growth in \nAfrica. \nThe discussions were intended to articulate the position \nof Africa on the IFIs, especially the BWIs as input into \nthe presentation of the G-20 Chairman, Prime Minister \nGordon Brown to the upcoming G-20 Summit in the \nUSA (see August Report). \n \nThe International Monetary Fund (IMF) on August 28, \n2009 bolstered its members‘ reserves through an alloca-\ntion of Special Drawing Rights (SDRs) worth US$250 \nbillion, followed by an additional allocation of $33.0 \nbillion on September 9, 2009. With the two allocations \ntotaling $283.0 billion, the outstanding stock of SDRs \nwould increase nearly ten-fold to about $316 billion (see \nAugust Report). \n \nThe 8th African Growth and Opportunity Act (AGOA) \nForum was convened by the Government of the Repub-\nlic of Kenya in conjunction with the United States (US) \nGovernment in Kenya from August 1 – 6, 2009 on the \ntheme ―Realizing the Full Potential of AGOA through \nExpansion of Trade and Investment‖. The objective of \nthe forum was to create a platform on which both the US \nand the sub-Saharan African countries could articulate \ntheir views and concerns in order to foster closer eco-\nnomic ties for mutual benefit (see August Report). \n \nIn another development, the summit of the Group of \ntwenty (G-20) industrialized and emerging market \neconomies was held from September 24 – 25, 2009 in \nPittsburgh, USA. The major highlights of the summit \nwere as follows: \n \nThe leaders noted that the forceful policy response \nto the crisis had helped to stop a dangerous sharp \ndecline in global activity and stabilized financial \nmarkets. Industrial output was now rising in nearly \nall economies and international trade was recover-\ning, while IMF analysis indicate that the global \neconomy is expected to grow at nearly 3 per cent by \n2010. \n \n \n The G-20 leaders agreed to continue strengthening \nregulation of the international financial system; pro-\ntect consumers, depositors, and investors from abu-\nsive market practices; and encourage the resumption \nof lending to household and businesses. The Lead-\ners asked the IMF to help the G-20 with its analysis \nof how national or regional policy fit together. \n \n \nThe leaders noted that the collective response to the \ncrisis highlighted both the benefit of international \ncooperation and the need for a more legitimate and \neffective IMF. They welcomed the reform of IMF`s \nlending facilities including the creation of the inno-\nvative Flexible Credit Line. \n \n \n \n \n \n \n \n \n 15 \n \n \n \n They asked the IMF to support G-20 efforts under \ntheir new Framework for strong, Sustainable and \nBalanced growth through the Fund‘s surveillance of \ncountries policy framework and their collective im-\nplication for financial stability and the level and \npattern of global growth. They welcomed moves to \ncreate a stronger resource base for the fund, to im-\nprove global liquidity through allocation of special \nDrawing Rights (SDRs), and the decision to boost \nassistance for low-income countries. \n \n \nThe G-20 said that modernizing the IMF`s govern-\nance was a core element of efforts to improve the \nIMF`s credibility, legitimacy, and effectiveness. \nThey supported a shift in quota share to dynamic \nemerging market and developing countries of at \nleast five percent from over-represented to under-\nrepresented countries using the current quota for-\nmula as the basis to work from. They also stressed \ntheir commitment to protect the voting share of the \npoorest in the IMF. \nThe African Development Bank (AfDB) approved a grant \nof US$1 million to AB Microfinance Bank Of Nigeria \n(ABN) from the Fund for Africa Private Sector Assis-\ntance (FAPA) on September 7, 2009. The Technical As-\nsistance (TA) contribution from FAPA, which accounted \nfor 7.7 per cent of the overall TA package, will be used to \nco-finance the provision of technical assisted to ABN to \nbuild the capacity of the institution during its first few \nyears of operation. \n \nThe grant is attached to an equity investment of US$ \n1,013,186 made by the AfDB to launch the ABN in part-\nnership with a number of other Development Finance \nInstitutions that are also contributing to co-financing the \ntechnical assistance package supported by this grant for \nFAPA. The FAPA is a component of the enhanced Pri-\nvate Sector Assisted Initiative (EPSA), a billion dollar \njoint initiative of Japan and the AfDB to promote private \nsector development in Africa. The FAPA trust Fund pro-\nvides untied grants for studies, technical assistance and \ncapacity building for private sector projects and African \ninstitution such as ABN. \n \n \n \n \n \n \n 16", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/Quarterly_Economic_Reports/economic report for the third  quarter of 2009.pdf"}

clean/cb_requests/1125f7059a6166991655b1937c8ce2de.json

@@ -0,0 +1 @@
+{"doc_id": "1125f7059a6166991655b1937c8ce2de", "text": "CENTRAL BANK OF KENYA\nRemarks by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\naatt tthhee\nLLAAUUNNCCHH OOFF KKOOIINNAANNGGEE BBRRAANNCCHH OOFF PPAARRAAMMOOUUNNTT\nUUNNIIVVEERRSSAALL BBAANNKK LLTTDD..\nKOINANGE BRANCH\nFriday, October 23, 2009\n\nChairman;\nManaging Director,\nBoard Members;\nManagement and Staff;\nDistinguished Guests;\nLadies and Gentlemen:\n1. I wish to begin by thanking the Board and Management of Paramount\nUniversal Bank Limited for extending this invitation to me to preside over\nthe official opening of Koinange Street Branch. It is indeed an honour and\nprivilege this evening for me to join hands with the Board, management,\nstaff and customers of Paramount Universal Bank in celebrating the launch\nof this new Branch.\n2. Paramount Universal bank has come a long way. The opening of the new\nbranch is part of a long journey in the bank’s programme of expansion and\ngrowth and marks a milestone in the life of this bank as we witness the birth\nof a new Branch. I am sure many more will come as the bank expands its\nmarket niche.\n3. The bank is also launching a new product, FreeNo Account, which is open to\nall and is unique in the market, as it does not attract any charges. The\nlaunch of the product is a very important and laudable move, as it shall\nencourage the poor and majority of Kenyans who are generally very sensitive\nto charges at whatever level to access banking services.\n4. In the world we live in today, the customer is the king and as a result the\ndelivery of quality services and tailor made products is key to success of any\nbank. The paradigm shift is occasioned by knowledge facilitated by\ndevelopments in the communication sector and products in the market\nplace. It is therefore important that banks strive to reduce costs and increase\nefficiency in order to offer the required products and compete effectively.\nThis will lower unit costs, lower lending rates and raise deposit rates as well.\n5. To enhance access to financial services, the Central Bank together with the\nother stakeholders are working on a legal framework that will enable banks\nto carry out branchless banking through the use of third party agents such as\n2\n\nSACCO’s, microfinance institutions, retail outlets and petrol stations. It is\nexpected that once the process is completed, the level of access to financial\nservices by Kenyans will improve.\n6. In spite of the local and global hiccups experienced in the last two years, I\nam happy to note that the Kenyan banking sector continues to register good\nperformance in all parameters in the eight months to August 2009. The\ngood performance of the sector is achieved in the background of severe\ndrought and high inflation occasioned by high food prices. The impressive\nperformance has been made possible by the prudent risk management and\nadherence to the banking regulations, which is supported by sound legal and\nregulatory reforms that continue to be put in place in line with best practice.\nWe are happy to note that our commercial banks have been achieving\nhighest level of compliance.\n7. While commending the performance of the banking industry to date, I take\nthis opportunity to challenge all banks to lower their lending rates to\nsupport private sector lending and investment. By lowering the interest\nrates, banks will not only support economic activities but will also assist the\npoor both in the rural and urban areas to improve their living standards by\nengaging in income generating projects. In addition, lowering lending rates\nwill reduce the risk of defaults and encourage more participants to enter the\nmarket. Central Bank has shown the industry the way by the recent\nsuccessive reductions of the Central Bank Rate and Cash Reserve Ratio.\n8. With these very few remarks ladies and gentlemen, it is now my honour and\npleasure to declare Paramount Universal Bank – Koinange Street Branch –\nofficially opened and the FreeNo Account officially launched.\nThank You and God Bless you all.\n3", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2009/Governor%27s%20speech%20Paramount%20Universal%20Bank%20Oct.pdf"}

clean/cb_requests/11835680c284cfda27d69908ffe41a57.json

@@ -0,0 +1 @@
+{"doc_id": "11835680c284cfda27d69908ffe41a57", "text": "CENTRAL BANK OF KENYA\nRemarks by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\naatt tthhee\nUUNNVVEEIILLIINNGG OOFF CCOONNSSOOLLIIDDAATTEEDD BBAANNKK OOFF KKEENNYYAA’’SS\nNNEEWW LLOOOOKK\nThe Hilton Hotel, Nairobi\n4th June, 2010\n\nEunice Kagane, Chairlady, Consolidated Bank of Kenya Ltd;\nMr. David Ndegwa Wachira, Chief Executive Officer,\nConsolidated Bank of Kenya Ltd;\nBoard Members;\nManagement and staff;\nDistinguished Guests;\nLadies and Gentlemen:\n1. I am delighted to have been invited to this auspicious occasion of unveiling the new\nlook of Consolidated Bank of Kenya. Allow me at this early juncture to commend\nthe board, management and staff of Consolidated Bank of Kenya for their\ncontribution in the growth of the institution from the reigns of the failed institutions of\nthe 1980’s to where it is currently. It is a stark reminder of our failures in the past\nand how we have managed to turn it into an opportunity. The re-branding identity\nis a significant development aimed at achieving this goal.\n2. I am aware that Consolidated Bank of Kenya has come a long way since it was\nincorporated in 1989 under the financial sector reform program established by the\nGovernment with the objective of taking over and re-structuring various troubled\ninstitutions. The process of rationalising, reorganising and re-structuring of the failed\ninstitutions into a viable professionally managed commercial bank was initially\nexpected to take about five years and thereafter its shares were to be sold to the\npublic. However, the institution’s mandate was changed in 2001 to operate as a fully\nfledged commercial bank offering a full range of both retail and corporate banking\nservices.\n3. The banking industry has become very competitive in the recent past and for you to\ncompete effectively within your market niche you need to keep abreast of various\ninnovative technological advancements that will support the service platform of your\nmarket niche. It is therefore important that this re-branding is seen not only in terms\nof a corporate identity but should also reflect an improved service delivery by the\ninstitution as well.\n2\n\n4. The Government of Kenya unveiled the country’s development blueprint, ‘’Vision\n2030’’ in 2008. The vision for the financial sector is to ‘’Create a vibrant and\nglobally competitive financial sector, driving high levels of savings and\nfinancing Kenya’s investment needs’’ To achieve this, the Banking Sector is\nexpected to increase efficiency and banking services reach especially to rural areas\nto help drive increased domestic savings.\n5. In this regard, it is imperative for stakeholders to explore mechanisms to deliver\nfinancial services and push forward the financial inclusion frontiers in tandem with\nVision 2030. As a first step in pushing the initiative forward, the Banking Act was\namended through the Finance Act 2009 permitting banks to use third parties (Agent\nBanking) to provide certain banking services on their behalf. I take this opportunity\nto urge banks to take advantage of the new provision. The agent banking model was\ndesigned to assist banks to lower their cost of offering banking services while at the\nsame time improving their earnings as more Kenyans are offered an opportunity to\naccess financial services.\n6. The Kenyan banking Sector continues to perform well despite the global financial\nturbulences and challenges on the domestic front. The sector’s total assets increased\nby 21% from Ksh.1.20 trillion in March 2009 to Ksh.1.45 trillion in March 2010\nwhereas deposits increased by 23% to Ksh.1.14 trillion over the same period. Profit\nbefore tax for the sector increased by 33% from Ksh.12.8 billion in the first quarter of\n2009 to Ksh.17.0 billion in the first quarter of 2010. This is remarkable, especially\nagainst the backdrop of domestic shocks and global financial crisis.\n7. Despite the impressive performance by banks, customers still have to contend with\nhigh borrowing costs. Although many banks have responded to Central Bank’s plea\nof lowering interest rates, it is our expectation that all the banks should follow to\nsupport the economic growth via the support of expanded private sector credit at an\naffordable cost. On our part, we should now ask the real sector to access and\nnegotiate credit in line with their potential investment.\n3\n\n8. Finally, let me reiterate that Central Bank and indeed the Government of Kenya will\ncontinue to pursue policies that create a conducive environment for growth of the\nfinancial sector and encourage the provision of banking services to majority of the\nun-banked Kenyan population at affordable cost. For us to be successful in this, we\nneed to support strong institutional growth and remove underlying constraints that\ninhibit growth and financial reach.\n9. With these few remarks ladies and gentlemen, it is now my honour and pleasure to\ndeclare the new brand of Consolidated Bank of Kenya officially launched.\nThank you and God bless you all.\n4", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Consolidated%20Bank%27s%20New%20Look%20Launch.pdf"}

clean/cb_requests/12ca0d88c9e3aad45ac71549c59f5185.json

@@ -0,0 +1 @@
+{"doc_id": "12ca0d88c9e3aad45ac71549c59f5185", "text": "CENTRAL BANK OF KENYA\nKEYNOTE ADDRESS\nby\nPROFESSOR NJUGUNA NDUNG’U\nGOVERNOR\nCENTRAL BANK OF KENYA\nat the\nKENYA INSTITUTE OF BANKERS ANNUAL DINNER\n“ACHIEVEMENTS, CHALLENGES AND REFORM INITIATIVES\nFOR THE BANKING SECTOR IN KENYA”\nPanari Hotel, Nairobi\n20th November 2009\n\nChairman, Kenya Institute of Bankers;\nDistinguished Members of the Council here present;\nDistinguished Guests;\nLadies and Gentlemen:\n1. I am pleased to join members of the banking fraternity for the Kenya\nInstitute of Bankers (KIB) Annual Dinner. This event has over the years\nbecome the premier event for Kenyan bankers to toast to their successes,\nponder on the challenges in the year and more importantly reflect on\nopportunities in the coming year. I must therefore salute the Chairman\nand Council of the Kenya Institute of Bankers for consistently organizing\nthis forum over the years. I am honoured to be the one to deliver the\nKeynote Address at this important dinner. I will keep my remarks brief,\nas I do not want to stand between you and the festivities that follow\ntonight.\n2. The year has been a challenging one not just for the banking sector but\nalso for the economy at large. The global financial crisis that escalated in\n2008 drove down our efforts through second and third round effects.\nHowever efforts by all players to stimulate the economy dampened the\neffects of the crisis in Kenya. Globally, efforts by governments have\nstemmed the crisis and the green shoots of recovery are beginning to\nsprout.\n3. Ladies and Gentlemen: On the monetary policy front, the Central\nBank conducted a procyclical monetary policy in the year with a view to\nstimulating private sector credit and economic growth. The Monetary\nPolicy Committee (MPC) lowered the Central Bank Rate (CBR) from 8.5\npercent to 7.75 percent and the Cash Reserve Ratio (CRR) from 6.0\npercent to 4.5 percent between December 2008 and September 2009.\nThese efforts managed to lower and stabilize short-term interest rates.\nThe reduction of the Cash Reserve Ratio induced banks to expand credit\nto the private sector and thus stimulate economic growth. Analysis of the\nbanking sector indicators shows that gross loans to most sectors\nincreased in absolute terms.\n2\n\n4. But the cost of credit and interest rates spread remain high. The spread\nis a major challenge in the banking sector because it acts as an\nimpediment to expansion of credit and development of financial\nintermediation and signals inefficiency in the sector. We need to come\ntogether, the market and the regulators, to deal with structural binding\nconstraints that prevent the cost of credit to re-align itself with available\nincentives, market conditions as well as returns on investment.\n5. Ladies and Gentlemen: Allow me now to briefly focus on the\nperformance of the banking sector. In 2009, the Kenyan banking sector\nhas continued to exhibit resilience in the midst of the global financial\nturbulences. The performance posted by banks and mortgage finance\ncompanies in the first three quarters of 2009 surpassed expectations as\nexhibited by the following indicators as at the end of September 2009:-\n• The sector’s assets increased by 11 percent from Ksh.1.18 trillion in\nSeptember 2008 to Ksh.1.31 trillion at the end of September 2009 as\nbanks continued to expand their lending portfolio.\n• Deposits increased from Ksh.895 billion in September 2008 to Ksh.1\ntrillion on the back of deposit mobilization and expansion of branch\nnetworks by banks.\n• The Total Capital to Total Risk Weighted Assets Ratio stood at 20\npercent which was above the statutory minimum of 12 percent. This is\nan indicator that the sector has a reasonable cushion against periodic\nshocks.\n• The sector’s average liquidity at end of September 2009 was 40.8\npercent well above the statutory minimum of 20 percent.\n• The profit before tax for the banking sector increased by 7 percent\nfrom Ksh.34.68 billion for the period ended 30th September 2008 to\nKsh.36.95 billion for a similar period in 2009. This reflects the\nincreased business from expansion and diversification drives by\nbanks.\n• The number of branches stood at 918, an increase of 130 branches\nfrom the corresponding period in 2008.\n3\n\n6. Ladies and Gentlemen: It is worth noting that in the year, significant\nsteps were made in operationalising a credit information sharing\nmechanism for the banking sector. The Banking (Credit Reference\nBureau), 2008 Regulations became operational in February 2009. The\nRegulations empower the Central Bank to license and supervise Credit\nReference Bureaus (CRBs). The bureaus will collate credit information\nfrom banks that will facilitate credit risk decisions. This is the most\nsignificant step towards building information capital. It will allow us to\ninfluence the collateral technology in use currently. The licensed Credit\nReference Bureaus will join the family of financial sector actors.\n7. Ladies and Gentlemen: The National Payments System sits at the\ncentre of the financial system. It is imperative that payments systems are\nsecure and efficient. The Central Bank continues with its initiatives to\nmodernize the national payments system. Accordingly, from 1st October\n2009, value capping was effected with all payments above Kshs.1 million\nbeing made through the Real Time Gross Settlement System (RTGS).\nThis initiative will enhance the security and efficiency of high value\npayments. Let me at this juncture thank banks, government ministries\nand other market players for their support in implementing value\ncapping. The Central Bank will continue working with all concerned\nplayers to educate the public on value capping and to address\nimplementation bottlenecks that may arise.\n8. Whilst initiatives to modernize the payment system continue, we remain\ncognizant of the cash based nature of our economy. The Central Bank is\ntherefore reviewing currency management to ensure availability of\n“clean money” at a reasonable cost to Kenyans. The Bank is, in\nconjunction with the Kenya Bankers Association (KBA), exploring the\nestablishment of currency centres. These centres are expected to reduce\nthe operational costs incurred by banks in moving cash to existing\nCentral Bank branches. This move is also expected to support the\nprovision of “clean” notes and coins to Kenyans across the country. Pilot\ncurrency centres identified jointly with KBA in Nyeri, Meru and Nakuru\nare expected to be operational very soon once modalities are finalized.\n4\n\n9. Ladies and Gentlemen: As I draw to a close, let me briefly highlight\ndevelopments in the bond market with regard to infrastructure bonds.\nThe Central Bank successfully raised Ksh.18.5 billion for the Government\nthrough an infrastructure bond in February 2009. This bond has not\nonly facilitated financing of the Government’s infrastructure program\nbut also set the pace for the issuance of similar bonds by corporate\nentities.\n10. The recent successful bond issuances by KENGEN and Safaricom are\nillustrative of this trend. The success of these bonds undoubtedly would\nnot have been possible without the support of the banking sector. We\nlook forward to this continued support including the recently launched\nSecond Government Infrastructure Bond. This, coupled with automated\ntrading in the Nairobi Stock Exchange will be important for a vibrant\nbond market.\n11. Ladies and Gentlemen: These developments are in line with core\nmandates of the Central Bank and also the policy drive provided by the\nVision 2030 blueprint.\nFinally, as we draw towards the festive season, let me wish you happy\nholidays and a rewarding 2010.\nThank You and God bless you\n5", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2009/Governor%27s%20Remarks%20at%20KIB%20annual%20dinner.pdf"}

clean/cb_requests/12d6d9c9340c708c0640c542b8050121.json

@@ -0,0 +1 @@
+{"doc_id": "12d6d9c9340c708c0640c542b8050121", "text": "CENTRAL BANK OF KENYA\nKeynote Speech by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\nDDuurriinngg tthhee\nKKEENNYYAA IINNSSTTIITTUUTTEE OOFF BBAANNKKEERRSS ((KKIIBB)) DDIINNNNEERR\nHHeelldd aatt tthhee PPaannaarrii HHootteell,, NNaaiirroobbii\nOn 12th November, 2010\n\nMr. John Waka, Chairman, Kenya Institute of Bankers;\nMembers of the KIB Council Here Present;\nDistinguished Guests;\nLadies and Gentlemen:\nIt is my pleasure to join you this evening on this annual occasion when the banking\nfraternity celebrates its’ successes in the year and reflects on the challenges and the road\nahead. I commend the Kenya Institute of Bankers for consistently and effectively putting\ntogether this function over the years. The purpose of tonight’s’ event is really as it were to\n‘’break bread’’ outside the usual formal settings. In line with this, I will keep my remarks\nbrief to enable you spend more time networking and renewing old acquaintances.\nLadies and Gentlemen: 2010 has seen the Kenyan economy rebound on the backdrop\nof favorable weather conditions that supported the critical agriculture and energy sectors,\npromulgation of a new constitution and expanding opportunities in the East African\nCommunity. The economy is expected to grow at 5 percent having posted growth rates\nof 4.8% and 5.4% in the first and second quarters of 2010 respectively. The second\nquarter growth was driven by agriculture, construction, manufacturing and the financial\nsector. On the inflation front, the 12-month overall inflation declined from 8.6% in June\n2009 to 3.5 percent in June 2010 and to 3.1 percent in October 2010. The decline was\nlargely reflected in food prices due to the well distributed rainfall experienced in the last\nquarter of 2009 which continued in this year and of course the growth witnessed so far.\nDuring the year, the Kenya shilling depreciated against all major currencies. Against the\nUS dollar, the shilling weakened to exchange at Ksh 80.74 in October 2010 from Ksh\n75.79 in January 2010. The trend in the Kenya shilling largely reflected increased\ndemand for foreign currencies in the local foreign exchange market and the\nstrengthening of the US dollar as a safe haven following confidence crisis attributed to\neffects of the global financial crisis and subsequent economic recession including the\nGreek Crisis in the second quarter of 2010.\nLadies and Gentlemen: The performance posted by the banking sector in the first three\nquarters of 2010 surpassed expectations boosted by the favorable macroeconomic\n2\n\nenvironment. The highlights of the sectors’ performance as at 30th September 2010\nwere:-\n The banking industry’s assets increased by 25 percent from KSh.1.31 trillion in\nSeptember 2009 to KSh.1.64 trillion at the end of September 2010 as banking\ninstitutions expanded their lending portfolio.\n Deposits increased from KSh.1.0 trillion in September 2009 to KSh.1.27 trillion at\nend of September 2010 due to aggressive deposit mobilization and expansion of\nbranches and other delivery channels.\n The banking industry’s capital base was strong with Total Capital to Total Risk\nWeighted Assets Ratio at 20.6 percent at end of September 2010, compared to the\nstatutory minimum of 12.0 percent. This indicates that the Kenyan banking industry\nhas a reasonable cushion against shocks in the short and medium- term.\n The industry’s average liquidity as at the end of September 2010 was 46.7 percent\nwell above the statutory minimum of 20.0 percent.\n Banking industry profits before tax increased by 44 percent from KSh.36.95 billion\nfor the period ended 30th September 2009 to KSh.53.23 billion for a similar period\nin 2010. This reflects increased business from expansion and earnings from\ninnovative products introduced by commercial banks.\nLadies and Gentlemen: While acknowledging the excellent performance by the sector,\nthe cost of credit continues to be beyond the reach of most Kenyans. Let us not kill the\ngoose that continues to lay the golden eggs for us. With an overall inflation rate of 3.1%,\nlending rates of above 10% are not tenable. The Monetary Policy Committee has in the\nyear continued with its’ policy stance of stimulating private sector credit to support\neconomic growth. The Committee has also engaged the banking sector to gain a better\nunderstanding of the factors contributing to the high cost of credit. One of the\ncontributory factors cited by the sector has been the high cost of doing business. The\nCentral Bank has accordingly spearheaded various reforms in 2010 to reduce the cost of\ndoing business and promote competition. These reforms combined with other ongoing\nreforms by the Government have drastically reduced the cost of doing business and this\nshould translate into a lower cost of credit. Let me briefly highlight some of these reform\ninitiatives.\n3\n\nFirst, banks have cited information asymmetry between banks and borrowers as one of\nthe main contributors to the high cost of credit. Accordingly in July of this year, CBK in\nconjunction with the Kenya Bankers Association (KBA) rolled out the credit information\nsharing mechanism with the first data submissions to the Credit Reference Bureau in\nAugust. In the first two months after the rollout, a total of 765,586 records had been\nsubmitted to CRB Africa, by all institutions, whereas a total of 103,332 credit inquiries\nhave been made by the subscriber institutions. Credit information sharing is expected to\npromote competitive risk based pricing of credit facilities and development of information\ncapital for borrowers who may not have physical collateral.\nSecond, the Rolling Out of Agent Banking Model: Following the operationalisation of\nthe Agent Banking Guidelines in May 2010, three banks have been granted approval to\nrollout their agency networks, while the applications of four others are under\nconsideration by the Central Bank. As at the end of September 2010, the approved\nbanks had contracted almost 6,000 agents. The use of agents will substantially lower the\nservice delivery costs of banks while expanding their footprint.\nThird, the revision of the Banking Act to accommodate the changing market landscape;\nThe Banking Act has in recent years been amended to facilitate innovations such as\nSharia Compliant Banking and to enable the Central Bank to safeguard the market\nwithout stifling innovation.\nFourth, the introduction of currency centres. The Central Bank has in recent years\ntogether with market players’ embacked on modernization of national payment systems.\nHowever Kenya remains by and large a cash based economy and banks have been\nincurring substantial cash-in-transit costs. To ease these costs, CBK and KBA have\npartnered to set up currency centres on a pilot basis in Nyeri, Nakuru and Meru. The\nNyeri Currency Centre begun operations at the end of 2009 and is already serving 88\nbank branches in Central Kenya. The Centre accounts for an average of 9% of the\nnational currency transactions processed by CBK. The Nakuru Centre will become\noperational on 18th November 2010 while the preparatory groundwork for the Meru\nCentre is at an advanced stage.\n4\n\nFifth, swift approvals for new products using mobile phone delivery channels and are\ncost effective.\nFinally, on a broader scale the new constitution that allows a new legal framework to\nprotect the market.\nLadies and Gentlemen: As I draw to a close, let me underscore that the Central Bank\nremains committed to deepening its’ reform initiatives to ensure that Kenya’s banking\nsector is stable, efficient and inclusive. This will empower the sector to play its’ pivotal\nrole in financing Kenya’s development aspirations as articulated by Vision 2030.\nIt now remains for me to wish you happy holidays and a rewarding 2011.\nThank you\n5", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Speech%20to%20KIB%20by%20Governor.pdf"}

clean/cb_requests/1318813aa51b373e0643547f1e561c45.json

@@ -0,0 +1 @@
+{"doc_id": "1318813aa51b373e0643547f1e561c45", "text": "CENTRAL BANK OF KENYA\nKeynote Address\nBY\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\nSTANDARD CHARTERED/INTERNATIONAL FINANCE CORPORATION\nSME TRAINING PROGRAMME\nCCRROOWWNNEE PPLLAAZZAA,, NNAAIIRROOBBII\nTuesday, October 19, 2010\n\nMr. Richard Etemesi, Chief Executive Officer, Standard Chartered\nBank Kenya Limited;\nMr. Jean Phillippe Prosper, Director, Eastern and Southern Africa,\nInternational Finance Corporation; represented by Aida Kimemia, the\nIFC Eastern and Southern Africa Acting Country Director;\nFacilitators;\nDistinguished Guests;\nLadies and Gentlemen:\nI am greatly honoured to be accorded this opportunity to give a brief keynote\naddress at this important SME training and mentorship programme. Let me start\nby applauding the Standard Chartered Bank for responding to the United Nations\nBusiness Call to Action to engage the private sector in using their core business\nskills to help advance the Millennium Development Goals. I am informed that this\nprogramme was piloted in Pakistan in 2009 and I am delighted that it is being\nhosted in Kenya today.\nThe partnership between the International Finance Corporation (IFC) and\nStandard Chartered Bank to develop the capacity of small and medium sized\nenterprises (SMEs) is worth commending. As we all appreciate, the potential of\nSMEs to substantially contribute towards the desired economic growth is\nimmense. Through training and mentorship programmes such as this, SMEs are\nempowered to unleash their potential. The SME issue is now one of finance and\nbanks should take the lead.\nSME Financing has indeed been recognized globally as a critical component of\nfinancial sector development. This is in view of the critical role that SMEs can play\nin wealth and employment creation particularly in developing countries. As you\nmay be aware, the G20 has set up the Financial Inclusion Experts Group to\nexplore the twin themes of innovative access to finance for the poor and the\nSMEs. The Group is expected to make recommendations on scaling up successful\nmodels of SME Financing. These recommendations are expected to be tabled and\nadopted at the upcoming G20 Seoul Summit next month as part of the Financial\nInclusion agenda.\n2\n\nLadies and Gentlemen: The Vision 2030 envisages the strengthening of SMEs\nto become the key industries of tomorrow by improving their productivity and\ninnovation. But what constraints do the SMEs face?\n1) Majority are unbanked\n2) They are sensitive to costs of finance\n3) Their faces are not seen – most do not have a corporate identity\n4) Low investment levels and hence low returns\nSo we must make them banked and acquire a corporate identity through training\nand financial inclusion. To this end the Minister for Finance through the Finance\nBill for the Fiscal Year 2010/11 reiterated the role of SMEs in promoting Kenya’s\nsustainable development. The Minister established a revolving fund of Ksh.3.8\nbillion through which the Government will enter into a Credit Facility Agreement\nwith banks to support SMEs. Through this partnership, the Government expects\nbanks to match Ksh.5 at the minimum for every Ksh.1 invested by the\nGovernment to expand the Fund five-fold to Ksh.15 billion at the minimum. In\nthis regard, I commend the several banks that have already established\ndepartments dedicated to SMEs and launched niche products targeted at SMEs\nbecause they will push this agenda forward.\nLadies and Gentlemen: Allow me now to briefly share with you the initiatives,\npolicy and regulatory reforms the Government, the CBK and other players are\npursuing, geared towards addressing the challenges experienced by the promoters\nof SMEs that is, making them banked and to enjoy financial services fully.\n• First, the licensing and regulation of Deposit Taking Micro Finance\nInstitutions by the CBK has increased the avenues for financial services and\nfunding to SMEs since these institutions target the lower segments of the\nmarket which most promoters of SMEs occupy.\n• Second, the CBK has also initiated new banking models such as agent\nbanking which brings banking services closer to the consumers. This solves\nthe physical distances and costs associated with them. So far a total of\n3\n\n5,892 agents have been approved and the number is growing. This model\nnot only lowers the cost of doing business for banks but it also enhances\nservice delivery to SMEs in distant areas.\n• Third, the introduction of credit information sharing enables SMEs to build\ninformation capital which they can use as collateral for bank facilities. Lack\nof physical collateral and information asymmetry has constrained SMEs\nand individuals in accessing credit from banks.\n• Finally, we remain open to suggestions and options that can work better for\nthe market.\nLadies and Gentlemen: As I conclude, it is worth reminding the SMEs the\npotential benefits to be reaped from the larger EAC market. With the\noperationalisation of the Common Market Protocol in July 2010, it is an\nopportune moment for SMEs to exploit the business opportunities presented by\nthe free movement of resources. Similarly, I encourage SMEs to take advantage of\nthe investment avenues created by Kenya’s New Constitution. The confidence to\ncreate strong institutions to develop and protect the market will increase the level\nof economic activity.\nI take this opportunity to assure you that the CBK, as an agent of the\nGovernment, and through our partnership with the players in the banking sector,\nwill continue to discharge our mandate towards a safe, efficient, sound and\ninclusive financial system. To the commercial banks, your success hinges on your\nability, flexibility and capacity to satisfy your customers’ needs. The challenge of\nSMEs is one of finance, you can solve this, but SMEs must be financially included.\nWhen they are financially included, they will be mentored and receive financial\nservices and more credit through the market mechanism that works and\nexpand/grow their business.\n4\n\nWith these few remarks, I now take this opportunity to wish all the participants a\nfruitful training and mentorship programme and look forward to the increased\ncontribution of SMEs towards making Kenya a middle income country as\nenvisaged in Vision 2030.\nThank You for your attention\n5", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Stanchart%20IFC%20SME%20Training%20Programme.pdf"}

clean/cb_requests/159cde40332a8a0714325f607f4c79f8.json

@@ -0,0 +1 @@
+{"doc_id": "159cde40332a8a0714325f607f4c79f8", "text": "CENTRAL BANK OF KENYA\nRemarks\nby\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\ndduurriinngg tthhee\n22000099 AALLLLIIAANNCCEE FFOORR FFIINNAANNCCIIAALL IINNCCLLUUSSIIOONN ((AAFFII))\nGGLLOOBBAALL PPOOLLIICCYY FFOORRUUMM\nWindsor Golf Hotel and Country Club, Nairobi\nSeptember 14th, 2009\n\nRemarks at during the 2009 Alliance for Financial Inclusion (AFI) Global Policy Forum – September 14, 2009\nThe Right Honourable Prime Minister of the Republic of Kenya,\nMr. Raila Odinga;\nThe Deputy Prime Minister and Minister for Finance of the\nRepublic of Kenya, Mr. Uhuru Kenyatta;\nPermanent Secretaries here present;\nDr. Alfred Hannig, Executive Director, Alliance for Financial\nInclusion;\nDistinguished Guests;\nLadies and Gentlemen:\nRight Honourable Prime Minister, let me thank you most sincerely for\ngracing this important Forum. Your personal presence demonstrates the\nseriousness with which the Government of Kenya takes the role of the\nfinancial sector in the process of our nation’s economic development. May I\nalso heartily thank the Alliance for Financial Inclusion (AFI) for choosing to\nhost its inaugural Global Policy Forum in Nairobi. This is indeed a very\ngreat honour to our country. I also warmly welcome all the Forum\nparticipants and hope that in the course of the next three days, we shall\nhave fruitful discussions and emerge with smart policies to expand global\nfinancial inclusion. In this respect, I am delighted to be part of the Forum\nand to champion its course.\nMr. Prime Minister, this Forum is jointly hosted by the Alliance for\nFinancial Inclusion (AFI) and the Central Bank of Kenya (CBK). The CBK is\na member of the AFI Steering Committee. The AFI has over 60 member\ncountries that account for the majority, nearly 70 percent, of the world’s\n‘unbanked’ population. AFI’s vision is to expand financial services to at least\nfifty million people across the globe living on less than two dollars a day by\n2012.\nThe AFI currently concentrates on six policy areas, namely, Agent Banking,\nMobile Phone Banking, Diversification of Financial Service Channels and\nProviders, State Bank Reforms, Financial Identity and Consumer\nProtection. AFI’s mandate, however, will be widened as need arises. All\nthese thematic areas, which AFI champions are relevant to our country and\n2\n\nRemarks at during the 2009 Alliance for Financial Inclusion (AFI) Global Policy Forum – September 14, 2009\nare key to our financial sector if it has to become “a vibrant and\nglobally competitive financial sector’’ as stipulated in Vision 2030. A\nstrong and accessible financial sector is a key ingredient in Kenya’s vision of\nbecoming a middle income country by the year 2030.\nAs a country we are matching on towards all these fronts that AFI espouses.\nThe government in the current fiscal year 2009/10 proposed to introduce\nbranchless banking. This will enable banks to provide their services through\nAgents with wide distribution networks and therefore legalizing Agent\nBanking and reducing costs of financial services. There has been a\nsignificant reduction of the proportion of our population that remains\nunbanked from 38% in 2006 to 33% in 2009 according to the national\nfinancial access surveys conducted by the CBK and Financial Sector\nDeepening (FSD) Kenya. This reduction in the unbanked is greatly\nattributed to the contribution of mobile phones as a channel for money\ntransfer.\nThe recent Financial Access Survey also indicates that the proportion of our\npopulation accessing banking services increased from 19% to 23% between\n2006 and 2009. However, 33% of the population still has no access to any\nform of financial service and 27% access financial services from the informal\nfinancial sector. Despite the progress we have made towards expanding\nfinancial access, the majority of Kenyans still lack access to formal financial\nservices. We are therefore keen to draw on the wealth of experiences that\nare brought to the table by participants in this Forum. We will, over the next\nthree days, share experiences on smart financial inclusion policies that have\nworked elsewhere. We will thereafter adopt these policies to suit our\nrespective countries as we work together to push forward the global\nfinancial access frontiers.\nMr. Prime Minister, this Forum also comes at a time when the global\neconomy is suffering a slow down, with economic activities weakened\n3\n\nRemarks at during the 2009 Alliance for Financial Inclusion (AFI) Global Policy Forum – September 14, 2009\nconsiderably. Although there are signs of improvement, we are yet to see\nfull recovery. Globally, policy actions taken to mitigate the crisis have been\ngeared towards maintaining effective and well functioning financial systems\nand to reinforce their resilience in order to guard their integrity. We have\nacted accordingly to ensure that our financial system remains sound,\nsecure, stable, accessible and trusted. We are in constant vigilance that this\nremains the case and any action necessary to achieve this will be\nundertaken.\nWith these few remarks, it is now my pleasant duty and honour to welcome\nthe Deputy Prime Minister and Minister for Finance to make a few remarks\nand to welcome you to address this Forum.\nHonourable Deputy Prime Minister and Minster for Finance, You\nHave The Floor.\n4", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2009/Governor%27s%20Remarks%20during%202009%20AFI%20Global%20Policy%20Forum.pdf"}

clean/cb_requests/184ce91baa4f165c98ab28633a3ace30.json

@@ -0,0 +1 @@
+{"doc_id": "184ce91baa4f165c98ab28633a3ace30", "text": "ECONOMIC REPORT FOR THE FIRST HALF OF 1999 \nThe tempo of economic activities in Nigeria during the first half of 1999 was influenced \nby several factors, among which was the successful completion of the transition \nprogramme from military to civil rule, which commenced in the last quarter of 1998. The \nmain objective of this report is to analyze the economic developments during the first \nhalf of the year. In particular, it reviews and appraises macroeconomic policy pursuit, \nnoting the impact on domestic economic conditions. It also evaluates the influence of \ninternational developments on the economy, as well as Central Bank of Nigeria’s (CBN) \n policy initiatives and responses during the period. The report is in six parts. Part I is \nan overview of the report, while Parts II and III are the review and appraisal of major \neconomic developments during the period. Part IV gauges the influence of policy \npursuits on domestic economic conditions. Part V evaluates some CBN’s policy \nresponses, while the final part presents the outlook for the rest of the year. \n \nI. \nGENERAL OVERVIEW \n2. \nA review of economic policy for the period indicates that its overall objective was \nto attain a minimum of 3.0 per cent growth in non-oil GDP and sustain a single \ndigit inflation rate, which was subsequently revised to not more than 12.0 per \ncent. This was to be achieved through the pursuit of appropriate fiscal, monetary, \ntrade and exchange rate, and real sector policies. In particular, the fiscal policy \nplanned to curtail fiscal deficits to about =N100,000.0 million for the half-year, \nthrough cutback in capital outlays and curtailing the wage bill. Monetary policy \ntargeted the attainment of 4.1 and 10.0 per cent expansion in narrow and broad \nmoney respectively, through more active Open Market Operations (OMO) \ntransactions, raising the cash reserve requirement and liquidity ratios, and the \n \n \n2 \ntransfer of retail banking functions of CBN to deposit money banks. External \nsector policies eliminated the dual exchange rate system, liberalized the foreign \nexchange market, abolished pre-shipment inspection of imports and replaced it \nwith destination inspection. Among the sector-specific policies were completion \nof the turn-around maintenance of the refineries, incentives for promoting \nagricultural and industrial production, and support for infrastructure and social \nservices. \n \n3. \nAn appraisal of policy outcomes based on available information shows that the \nfiscal operations of the Federal Government resulted in an overall deficit of about \n =N245,701.0 million, surpassing the proportionate budgetary estimate by 143.2 \nper cent. This resulted mainly from substantial increase in expenditure in \nsupport of the transition programme, in spite of the modest improvement in \nrevenue performance compared to showed set targets. Provisional data also \nshow that the consolidated fiscal operations of the State Governments resulted \nin a deficit while that of the Local Governments was a modest surplus. The \nfinancial sector was characterized by rapid monetary expansion - as narrow and \nbroad money rose by 37.5 and 30.6 per cent, respectively, exceeding the set \ntargets of 4.1 and 10.1 per cent; relatively stable but wide divergence between \nlending and savings interest rates, and an active OMO transactions buoyed by \nimproved yield rates. The external sector was under severe pressure, as the \nbalance of payments resulted in an overall deficit of =N304,414.8 million (US \n$3,397.7 million) as against =N75,168.0 million (US $972.5 million) in the \ncorresponding period of 1998. The financing was mainly from accumulation of \n \n \n3 \narrears of external debt obligations and draw-down on the stock of external \nreserves. Exchange rate at the Autonomous Foreign Exchange Market (AFEM) \nwas relatively stable up to May, when it depreciated. On the average, the rate \ndepreciated by 7.0 per cent, compared to its level in the corresponding period of \n1998. \n \n4. The performance of the real sector was below expectation during the period. \nThe sub-sectoral analysis show that agricultural production expanded by 3.1 per \ncent compared with 2.0 per cent in the corresponding period of 1998. Industrial \nproduction fell by 4.8 per cent below the level in the first half of 1998, owing \nmainly to the fall in mining production, as manufacturing output and electricity \nconsumption rose marginally. Available data from the Federal Office of Statistics \n(FOS) put inflation rate at 12.2 per cent as at May, 1999, and it is projected at \n12.6 per cent in June, 1999. This could be explained by the expansionary fiscal \nand monetary policy outcomes during the period, as well as the rise in production \ncosts occasioned by the poor state of infrastructure and energy supply problems. \n \n5. \nWorld output grew at a lower rate than the previous year in spite of the resilience \nof industrialised countries, the apparent resolution of the East Asian financial \ncrisis of 1998, strengthened demand and firmed-up of key commodity prices, \nespecially crude oil. This led to further expansion in world trade. \n \n5. An appraisal of the CBN’s operations during the first half indicated that it faced \nenormous challenges, posed in part, by the excess liquidity in the banking \n \n \n4 \nsystem, precipitated by the huge government borrowing through ways and \nmeans advances, and the transfer of public sector accounts to the deposit \nmoney banks and partly to the deployment of these funds by financial \nintermediaries to speculative transactions in AFEM, with consequent adverse \nimplication for exchange rate management. It relied mainly on OMO as the main \ninstrument of monetary management, that became less effective and had to be \nsupported by complementary measures which included: the issuance of Special \nTreasury Bills in April and May, which mopped up =N161.1 billion from the \nsystem; collateralization of AFEM demand in June, with mandatory purchase of \ntreasury bills worth 200.0 per cent of the bid, in addition to 100.0 per cent cash \ncover; raising of the cash reserve requirement from 8.0 to 10.0 per cent and later \nto 12.0 per cent, among others. The bank intervened 26 times in the AFEM, at \nan average exchange rate of =N90.0 per US $1.00 and met in full the total \ndemand of US $2,887.3 million. It also engaged in increased surveillance of the \nbanking system. \n \n7. \nAn analysis of the economic outlook for the rest of 1999 indicated that aggregate \noutput performance may be sluggish owing to the prevalence of structural \nbottlenecks, while inflationary pressure may persist, arising mainly from fiscal, \nmonetary and exchange rates policy out-turns. In order to moderate these \neffects, the report stressed the need for further fiscal and monetary restraints, \nexpenditure restructuring and provision of the right incentives for private sector \ninitiatives in agriculture, industry and other key sectors of the economy. \n \n \n \n5 \nII. \nMACROECONOMIC AND SECTORAL POLICY REVIEW \n8. The main thrust of economic policy in 1999 was to ensure stable prices and \nexchange rate, as well as encourage private sector-led growth. The programme \npriorities for the year were the achievement of a minimum of 3.0 per cent overall \ngrowth in the non-oil GDP and an end-period inflation rate of not more than one \ndigit. This was subsequently revised to 12.0 per cent under the Staff Monitored \nProgramme (SMP). The attainment of these targets were predicated on effective \nimplementation of the following fiscal, monetary and credit, foreign trade, \nexchange rate and real sector policies that were proposed in the 1999 Budget as \nwell as under the SMP. \n \nFiscal Policy Measures \n9. \nFiscal policy for 1999 was designed to address some of the negative \ndevelopments in the preceding year, especially the adverse consequence on \ngovernment fiscal operations which resulted from international oil price decline \nand the disruption in crude oil production. To this end, emphasis was placed on \nstrengthening the non-oil revenue base of the Federal Government. The main \npolicy measures were focused on improved taxation and reduction in recurrent \nand capital expenditure. Specifically, excise duty on tobacco, cigarettes and spirit \nwere reinstated at 40.0 per cent, while the 25.0 per cent import duty rebate was \nabolished. In addition, the services of the Professional Import Duty \nAdministrators (PIDA) were discontinued with effect from June 30, 1999. In the \narea of direct taxation, tax authorities were strengthened for more effectiveness \nin the collection of personal and corporate income taxes. Specific measures \n \n \n6 \nincluded the broadening of the coverage and enhancing the collection of Value \nAdded Tax (VAT), reducing the number of exemptions and establishing eight \nzonal VAT tribunals. Moreover, state and local government’s shares of VAT \nrevenue were increased to 50.0 and 35.0 per cent from 45.0 and 30.0 per cent, \nrespectively, while the Federal Government’s share was reduced from 25.0 to \n15.0 per cent. Finally, the Federal Government reduced its outlay on capital \nexpenditure, while at the same time containing the growth in Federal \nGovernment wage bill. \n \n9. \nTotal federally-collected revenue was projected at =N667.0 billion, compared with \n=N424.0 billion in 1998. Of this amount, =N453.0 billion was estimated to come \nfrom crude oil sales, based on a reference price of US$9 per barrel and an \nexchange rate of =N86.0 to US$1, as against US$17 per barrel and an exchange \nrate of =N22 to US$1 in 1998. The expected revenue from non-oil sources was \nestimated at =N214.0 billion, compared to =N167.0 billion in 1998. A breakdown of \nthe estimated non-oil revenue shows that =N30.0 billion was expected from \ncompanies’ income tax, =N72.0 billion from Customs and Excise Duties, =N12.0 \nbillion from Federal government independent revenue, while =N50.0 billion each \nwas expected from Value Added Tax (VAT) and Petroleum Products Adjustment \nRevenue. The Federal Government’s share of total federally-collected revenue, \nwas estimated at =N296.0 billion, 35.8 per cent higher than that of 1998. \n \n10. \nTotal Federal Government planned expenditure was projected at =N498.0 billion, \nabout 20.0 per cent higher than the level in 1998. Total recurrent expenditure \n \n \n7 \nwas estimated at =N329.0 billion, while capital expenditure was expected to be =N\n169.0 billion, compared to =N116.5 billion and =N143.2 billion, respectively for \n1998. Expenditure on debt service was projected at =N168.0 billion (=N39 billion \nand =N129 billion for internal and external debt, respectively), compared with =N\n66.0 billion in 1998. The overall budget deficit was estimated at =N202.0 billion. \nThis was to be financed by draw-down on reserves/transfers from other accounts \nof =N168.0 billion, leaving an effective budget deficit of =N34.1 billion. In addition \nto the budget estimates, other policy initiatives for fiscal 1999 were as follows: \nplanned promulgation of a decree to give legal backing to the privatization \nprogramme, enhancement of the funding of small and medium scale industries, \nlifting of embargo on external borrowing in favour of concessional and project-\ntied loans, and intensification of efforts at facilitating the exploration and \nexploitation of solid minerals. \n \nMonetary and Credit Policies \n11. \nMonetary and credit policies adopted in 1999 were designed to maintain \nmacroeconomic stability and lay the foundation for a sustained economic \nrecovery. In order to achieve the objectives of the programme, monetary policy \nwas expected to be non-accommodating, so as to ensure efficiency in resource \nallocation, and to support private sector activities. \n \n \n \n12. \nSpecifically, the primary objectives of monetary policy were to maintain an \n \n \n8 \ninflation rate initially targetted at a single digit but revised to not more than 12.0 \nper cent and achieve a minimum GDP growth rate of 3.0 per cent, in addition to \npromoting employment growth and enhancing the overall efficiency of the \neconomy. Consistent with these goals, and bearing in mind the negative \ndevelopments in 1998, broad money (M2) and narrow money (M1) were targeted \nto grow at not more than 10.0 and 4.1 per cent, respectively, while government’s \nborrowing would not exceed 40.1 per cent. \n \n14. \nOpen Market Operations (OMO) was to be the primary instrument of monetary \nmanagement, complemented by reserve requirements, discount window \noperations, including repurchase agreements (REPOs), cash and liquidity ratio \nrequirements. As in the past, OMO was to be conducted weekly, while cash \nreserve requirement (CRR) for commercial banks was increased from 8.0 per \ncent to 10.0 and 12.0 per cent of their deposit liabilities in April and June, \nrespectively. The base on which the ratio was to be calculated included banks’ \ntotal deposit liabilities (demand, savings and time deposits), certificates of \ndeposit (CDs), promissory notes held by the non-bank public and other deposit \nitems. \n \n15. The exemption granted to merchant banks from observing cash reserve \nrequirement continued. Though an initial liquidity ratio requirement of 30.0 per \ncent for both commercial and merchant banks for fiscal 1999 was proposed, it \nwas raised to 40 per cent in June in the wake of the transfer of public sector \naccounts from CBN to trading banks. Banks were required to hold 40.0 per cent \n \n \n9 \nof their liabilities in eligible liquid assets. In addition, the base for calculating \nliquidity ratio was to comprise the total deposit liabilities, CDs and promissory \nnotes held by the non-bank public as well as inter-bank transactions. However, \nwith effect from June 1999, inter-bank and Discount Houses placements were \nclassified as loans and, therefore, not countable as part of a bank’s eligible \nassets for the purpose of meeting the new liquidity ratio requirement. Discount \nHouses were required to continue to invest at least 60.0 per cent of their total \ndeposit liabilities in treasury bills, while banks were allowed unhindered leverage \nin the structure of their liquid assets. \n \n16. \nOne of the major policy initiatives in the monetary sector was the transfer of \nretail banking functions of the CBN to commercial and merchant banks with \neffect from 31st March, 1999. In the wake of the surge in base money that \naccompanied the transfer of public sector accounts from the CBN, Special \nTreasury Bills were issued to banks in April and May 1999. These were 90-day \nsecurities that were not rediscountable for the initial period. The National \nSavings Certificate (NSC), a medium-to-long term security of between 3 – 5 \nyears’ maturity with relatively attractive yields, was introduced in the first half of \n1999. Both banks and the non-bank public were free to invest in the instrument. \nFinally, to promote soundness of the financial system, the cut-off date for \nmeeting the minimum paid-up capital requirement of =N500.0 million for banks \nwas not extended beyond 31st March 1999. \nExternal Sector Policy Measures \n17. \nThe main thrust of external sector policy was to maintain a viable balance of \n \n \n10 \npayment, and mitigate some of the negative developments of the preceding \nyear. In order to achieve these objectives, the dual exchange rate system \nwas eliminated with effect from 1st January 1999, and the prevailing AFEM \nrate was adopted for all foreign exchange transactions. In addition, all oil \nexploration, producing and service companies, were required to sell their \nforeign exchange receipts to the CBN at the prevailing autonomous rates. \nBanks were to continue approving all applications in respect of transactions \nnot valid for foreign exchange, while transactions involving the use of bills for \ncollection and open accounts were allowed. However, the transactions \nexecuted on private sector initiatives were to carry no government guarantee \nor obligations. The remittances were to be made through the AFEM subject \nto the prevailing conditions for payment and were to be channeled through \nthe authorized dealers. Government also resolved to abolish pre-shipment \ninspection schemes for imports with effect from 1st April, 1999 and replace it \nwith destination inspection. \n \n18. \nIn order to manage the steep decline in the external reserve position, \nauthorized dealers were required to provide treasury bill cover for their \nforeign exchange demand in the AFEM with effect from 23rd June, 1999. \nUnder the arrangement, banks bidding for foreign exchange were to provide \nthe initial cash backing, while the amount demanded was to be collateralized \nwith 200.0 per cent worth of treasury bills. The treasury bills were to be held \nfor an initial period of one month and were not discountable. \nReal Sector Policy Measures \n \n \n11 \n19. \nThe 1999 Federal Government budget projected real GDP growth of 3.0 per cent \nand a single digit rate of inflation. Fiscal, monetary and sector-specific policies \nwere designed to stimulate output growth in the real sector. The policy \nmeasures that were intended to boost agricultural production included capital \nallocation of =N5.8 billion or 4.3 per cent of total capital allocation for seed \nmultiplication, research activities and counter part funding of projects, as well as \nfor rehabilitation and completion of dams and other irrigation projects. Other \nsectoral policy measures for promoting agriculture included retention of import \nduty on fruit juice at 55.0 per cent, tomato puree at 45.0 per cent, while the \nimport of agricultural spraying guns remained duty free; reduction in import duty \non live/chilled chicken and eggs from 150.0 to 55.0 per cent and cooking oil from \n55.0 to 35.0 per cent. In furtherance of the effort aimed at promoting non-oil \nexports, beans, yam and rice were removed from the export prohibition list so as \n to encourage investment, boost farm gate prices and enhance the income of \nfarmers. \n \n20. \nRecovery in the industrial sector was to be achieved through generous funds \nallocation to some industry-related programmes such as substantial increase in \nwages to stimulate demand, rural electrification, procurement of beneficiation \n(upgrading) plants and other facilities for the National Iron Ore Mining Project, \nairborne geophysical survey of solid mineral deposits, strengthening the Nigerian \nMining Corporation, continued rehabilitation of the Nigerian Railway Corporation \nand reduction of the number of security and inspection agencies at the ports to \nsix in order to reduce the cost of imports and enhance faster clearance of goods. \n \n \n12 \n The measures that were intended to boost mining operations included allocation \nof US $2.0 billion to fund the NNPC joint venture cash calls, provision of \nadequate funds for the turn-around maintenance (TAM) of the Warri refinery and \nadditional incentives to the gas sub-sector. The budgetary allocations to the \nministries and departments in the social sector were increased to mitigate social \nproblems. \n \nIII. MACROECONOMIC DEVELOPMENTS \nFiscal Operations and Developments \n(a) Federal Government Finances \n \n21. \nThe Federal Government fiscal operations during the first half of 1999 resulted in \nan overall deficit of _245,701.0 million, \nwhich was 143.2 per cent higher than the \nproportionate budget estimate. The \ndeficit was financed largely through \nWays and Means Advances. Although, \nthere was improvement in revenue \nperformance compared with budget \nestimates, \nsubstantial \nincreases \nin \nexpenditure outlay led to deterioration in \ngovernment finances. \n \n22. \nProvisional data showed that total federally collected revenue amounted to \n-400\n-200\n0\n200\n400\n600\n1993\n1994\n1995\n1996\n1997\n1998\n1999\nRet. Rev.\nTot. Exp.\nOverall Balance \nChart I:Fed.Gov't Fiscal Operations\n(=N=Billion;Annualised Except 1999)\n \n \n13 \n_354,019.4 million, surpassing the budget estimate for the period by 6.1 per cent \nand indicating an increase of 43.2 per cent over the level in the corresponding \nperiod of 1998. The growth in revenue reflected largely the contribution of the oil \nsector, which grew by 52.4 per cent over the level in the corresponding period of \nlast year and exceeded the budget estimate by 11.9 per cent following sustained \nincrease in crude oil prices during the period. In addition, non-oil revenue \nrecorded an increase of 24.2 per cent, compared with the corresponding half of \n1998, although it fell short of budget projections by 6.1 per cent. \n \n23. \nAt =N161,789.9 million, the retained revenue of the Federal Government for the \nperiod was 17.4 per cent higher than the proportionate budget estimate and 6.8 \nper cent over the amount in the corresponding period of 1998. The retained \nrevenue was mainly made up of statutory allocation, excess crude oil earnings, \nindependent revenue and its share in value added tax. \n \n24. \nThe aggregate expenditure of the Federal Government, at =N407,491.0 million, \nrecorded a substantial increase of 103.9 per cent over the level in the first half of \n1998 and exceeded the budget projections by about 63.0 per cent. A breakdown \nof the aggregate expenditure showed that non-debt recurrent outlay, at =N\n98,400.0 million, exceeded its proportionate budget estimate by 22.2 per cent, \nwhile capital expenditure amounting to =N216,180.0 million also overshot its \nbudget estimate by 155.8 per cent. Debt service payments (internal and \nexternal) amounted to =N92,911.0 billion or 22.8 per cent of total expenditure. \n \n \n \n14 \n(b) State Governments’ Finances \n25. \nProvisional data on the consolidated fiscal operations of the State Governments \nindicated an overall deficit amounting to =N12,241.5 million. However, a current \naccount surplus which amounted to =N15,302.7 million was recorded, indicating a \ndecrease of 54.6 per cent, from its level in the corresponding period of 1998. \n \n26. \nAggregate revenue of the State Governments amounted to =N62,729.9 million, \nrepresenting a decrease of 11.6 per cent below the level in the corresponding \nperiod. This was accounted for by the general decline of 9.1 and 52.3 per cent \nin the statutory allocation and internally generated revenue of the State \nGovernments, respectively. Total receipts from VAT amounted to =N15,496.7 \nmillion, indicating an increase of 99.6 per cent over the corresponding half of \n1998. The share of VAT in total revenue was 24.7 per cent compared with 11.0 \nper cent in 1998. The substantial increase was due in part to the upward \nrevision of State Governments’ proportional share from 45.0 to 50.0 per cent in \n1999 and partly to increase in VAT proceeds during the review period. \n \n27. \nThe total expenditure of the State Governments rose by 8.3 per cent to =N\n74,971.4 million, compared with =N69,226.0 million in the corresponding half of \n1998. Their recurrent expenditure increased by 27.3 per cent to =N47,427.2 \nmillion and accounted for 63.3 per cent of the total outlay, while capital \nexpenditure decreased by 13.8 per cent to =N27,544.2 million and accounted for \nthe balance of 36.7 per cent. \n \n \n \n15 \n(c) Local Governments’ Finances \n28. \nThe fiscal operations of the local governments during the first half of 1999 \nresulted in an overall surplus of =N4,712.0 million, 64.4 per cent lower than the \nsurplus in the corresponding period of 1998. \n \n29. \nThe statutory allocation to the local governments declined by 4.8 per cent to =N\n26,905.4 million. However, allocation from VAT increased by 54.0 per cent to =N\n7,942.0 million during the period under review. This was as a result of the \nhigher ratio of VAT allocation from 25.0 to 30.0 per cent in favour of the local \ngovernments in the 1999 budget. Internally generated revenue also increased \nby 4.6 per cent to =N2,681.3 million. \n \n30. \n Recurrent expenditure showed an increase of =N1,751.5 million or 12.0 per cent \nwhen compared with the corresponding period of 1998, while capital expenditure \nincreased by a higher margin of 124.0 per cent to =N15,174.9 million. The rise in \ncapital expenditure resulted from the efforts of most local governments to \ncomplete on-going projects before the end of the political transition period.", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/Quarterly_Economic_Reports/HALF-YR1999.pdf"}

clean/cb_requests/1ab99cd136ec7e626c67640e4fd345c7.json

@@ -0,0 +1 @@
+{"doc_id": "1ab99cd136ec7e626c67640e4fd345c7", "text": "MONETARY POLICY\nREVIEW\nApril 2002\nSouth African Reserve Bank\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\n© South African Reserve Bank\nAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any\nform or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of\nthe publisher. The contents of this publication are intended for general information only and are not intended to serve\nas financial or other advice. While every precaution is taken to ensure the accuracy of information, the South African\nReserve Bank shall not be liable to any person for inaccurate information or opinions contained in this publication.\nEnquiries relating to this Review should be addressed to:\nThe Chief Economist\nResearch Department\nS A Reserve Bank\nP O Box 427\nPretoria 0001\nTel. 27-12-3133668/3944\nE-mail: sarbrsh@resbank.co.za\nhttp://www.reservebank.co.za\nISSN: 1609-3194\nSA RESERVE BANK\nContents \nMonetary Policy Review\nIntroduction...........................................................................................................................\n1\nRecent developments in inflation...........................................................................................\n4\nThe evolution of indicators of inflation..............................................................................\n4\nFactors affecting inflation.................................................................................................\n10\nMonetary policy.....................................................................................................................\n19\nThe outlook for inflation.........................................................................................................\n21\nThe international context.................................................................................................\n21\nOutlook for domestic demand and supply ......................................................................\n23\nSurveys of inflation expectations .....................................................................................\n23\nThe Reserve Bank inflation forecast ................................................................................\n25\nAssessment and conclusion..................................................................................................\n26\nMONETARY POLICY REVIEW April 2002\nMonetary Policy Review\nIntroduction\nSince the publication of the previous Monetary Policy Review in October 2001, there\nhave been a number of significant developments relevant to monetary policy. Firstly,\nthere was the announcement of the new inflation targets for 2003 up to 2005. The\nnew targets announced by the Minister of Finance in October 2001 were informed\nby technical input from the joint South African Reserve Bank/National Treasury\nInflation-Targeting Technical Committee. The committee made recommendations to\nthe Governor and the Minister of Finance, who jointly decided on the targets. The\nnew targets were for an unchanged range of 3-6 per cent for 2003, and a lower tar-\nget range of 3-5 per cent in 2004 and 2005. \nThe unchanged target for 2003 was recognition of the fact that monetary policy actions\nin late 2001 and 2002 would be reflected primarily in the 2003 inflation outcomes.\nEvidence from other countries suggests that the lag between monetary policy changes\nand their impact on inflation could vary between 3 and 12 quarters. Research shows\nthat the lag in South Africa is around 6-8 quarters and implies that the target must be\navailable at least two years in advance (see Box 1 in the October 2001 Monetary Policy\nReview). Although current changes in the monetary policy stance will have some impact\non 2002 inflation, the main impact is likely to be on the inflation outcome in 2003.\nThe second significant development was the continued depreciation of the rand,\naccelerating in November and December. This contributed to a turnaround in\nCPIX inflation that had fallen below the upper end of the 2002 target of 3-6 per\ncent in September and October. Until then there had been surprisingly little pass-\nthrough of the exchange rate depreciation to production prices and consumer\nprices. There was, however, an underlying concern that this was not a sustain-\nable situation. As is shown below, the category that contributed most to the\nacceleration of CPIX was food, which has become more subject to international\npricing than in the past. The Monetary Policy Committee (MPC) decided at an\nunscheduled meeting in January 2002 to raise the repo rate by 100 basis points\nto 10,5 per cent. This was primarily a pre-emptive move to forestall the possible\nsecond-round effects of the rand’s depreciation on inflation, particularly in the\nlight of the turnaround in inflation expectations. Since that move, the inflation fig-\nures have deteriorated significantly, as did other indicators of inflationary pres-\nsure, and expectations of higher inflation appear to have become more\nentrenched. Consequently the MPC increased the repo rate by a further 100\nbasis points to 11,5 per cent in March.\nAlthough the final inflation outcome for 2002 will only be known for certain early in\n2003, the Bank’s latest inflation forecast that incorporates the unexpectedly large\ndepreciation of the rand, indicates that there is a strong possibility that the CPIX tar-\nget for 2002 may not be achieved. At this stage however there is not much that mon-\netary policy can do in this regard, given the lags between monetary policy actions and\ntheir effects on inflation. South Africa is now beginning to feel the full brunt of the first-\nround effects of the rand’s depreciation, and monetary policy, as has always been the\nBank’s stated intention, will be focused on mitigating the second-round effects. The\nMPC is confident that the changes to the monetary policy stance effected since\nJanuary are consistent with achieving the target of 3-6 per cent in 2003. In the\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\n1\n2\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nabsence of major unexpected negative shocks, the Bank’s forecasts also suggest that\nthis target will be attainable. \nAs usual, the Monetary Policy Review analyses inflation developments and the factors\nthat impact on inflation. This is followed by an assessment of recent monetary policy\ndevelopments and a discussion of the inflation outlook as well as the Reserve Bank’s\ninflation forecast. Three topical issues are focused on in the boxes. The first box analyses\nthe new weights in the CPIX as calculated by Statistics South Africa. The second box\naddresses the issue of the food price increases and focuses on issues relating to the\nmaize price. The third box shows the results of research into the pass-through effect of\nexchange rate changes on import prices.\nBox 1 Re-weighting of the CPIX\nOnce every five years Statistics South Africa conducts a comprehensive Income and Expenditure\nSurvey of Households (IES) to determine the earnings and spending patterns of South African house-\nholds. These expenditure patterns change over time to reflect changes in the needs, tastes and buy-\ning preferences of households. This box highlights the impact of the IES conducted in October 2000\nand implemented in the compilation of the set of January 2002 consumer price indices (i.e. on the\nheadline, core CPI and CPIX measures).\nThe findings of the IES form the basis for determining the relative importance or weight of each item\nin the ‘basket’ of goods and services bought by an average household. The weight of a product is\ncalculated by dividing the amount spent by all households in the country on that product by the total\namount spent on goods and services by all households. The prices of the identified goods and ser-\nvices in the basket are then monitored on a monthly basis and adjusted by their weights to compile\nthe various consumer price indices.\nTable B1.1 depicts the new and previous weights for the CPIX measure targeted by the Reserve\nBank. The new weights reflect not only the changes in the importance of existing goods in the bas-\nket, but in some cases new goods are included in certain categories to capture changes in spend-\ning patterns that have emerged since the previous IES. The 2000 IES, for example, included goods\nand services not explicitly measured in the 1995 survey, in particular cellular phones, gambling, pri-\nvate security systems and expenditure on the Internet. \nThe weights assigned to the aggregate goods and services categories in the new and previous bas-\nkets remain broadly unchanged. The weight for goods increases by just over 1⁄2 a percentage point\nto 66,24 per cent at the expense of the weight for services. \nAt a more disaggregated level, significant shifts in the weights of goods and services in the basket are\nevident for: food, which increased from 21,92 per cent in 1995 to 25,66 per cent in 2000 (+3,74 per-\ncentage points); medical care and health expenses, which increased from 6,54 per cent to 7,70 per cent\n(+1,16 percentage points); and education, which increased from 2,05 per cent to 3,77 per cent (+1,72\npercentage points). Items that decreased in importance in the basket include: furniture and equipment,\nwhich decreased from 4,88 per cent to 3,15 per cent (-1,73 percentage points); clothing and footwear,\nwhich declined from 5,70 to 4,06 per cent (-1,64 percentage points); and the residual other goods and\nservices category which decreased from 7,63 per cent to 3,63 per cent (-4 percentage points). \nThe overall impact of the re-weighting exercise for measured CPIX inflation is ambiguous. The\nincreased weight given to the relatively volatile food component of the index, where prices are cur-\nrently growing at a faster rate, seems likely to increase measured inflation in the short term. In the\nlonger term, of course, the opposite may apply. This is why some countries exclude volatile compo-\nnents from their targeted price index, or give them a lower weight in the index than they would war-\nrant purely on the basis of surveyed expenditure.\n3\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nThe re-weighting exercise included administered prices, defined as those goods and services whose\nprices are directly determined by government departments or other public-sector agencies. In addi-\ntion to updating the weights in the index of administered prices, first compiled by the Reserve Bank\nin the March 2001 Monetary Policy Review, the opportunity also was taken to refine that index. The\nnew weights are presented in Table B1.2. \nTable B1.2 shows that the combined weight of the various administered prices in the CPIX is now 24,55\nper cent, slightly higher than the 23,90 per cent total obtained for these prices in the previous index.\nThe refined index of administered prices now includes assessment rates, sanitary services, refuse\nremoval, and licences and registration. Downward adjustments were made to the weights for medical\ncare and health expenses, where medical goods have been excluded from the revised index, and to\ntransport, where public transport now includes only buses and trains. As a result of the re-weighting\nexercise, the weight for petrol increased from 4,06 per cent in 1995 to 5,08 per cent in the 2000 bas-\nket (+1,02 percentage points). Diesel has been excluded from the new consumer basket since its\nweight accounted for less than the 0,01 per cent limit applied by Statistics South Africa. The weight for\npetroleum products (paraffin) increased from 0,11 per cent to 0,34 per cent (+0,23 percentage points)\nand as noted earlier education increased from 2,05 per cent to 3,77 per cent (+1,72 percentage points).\nTable B1.1\nCPIX weights\nComponent\n1995 weights\n2000 weights\nChange\nPer cent\nPer cent\nPercentage\npoints\nGoods ..................................................................\n65,71\n66,24\n0,53\nServices................................................................\n34,29\n33,76\n-0,53\nFood......................................................................\n21,92\n25,66\n3,74\nGrain products ...................................................\n4,20\n4,84\n0,64\nMeat...................................................................\n6,57\n6,95\n0,38\nFish and other seafood.......................................\n0,87\n0,78\n-0,09\nMilk, eggs and cheese .......................................\n2,27\n2,34\n0,07\nFats and oils.......................................................\n1,06\n0,93\n-0,13\nFruits and nuts ...................................................\n1,20\n1,26\n0,06\nVegetables .........................................................\n2,18\n2,43\n0,25\nSugar .................................................................\n0,82\n0,69\n-0,13\nCoffee, tea and cocoa........................................\n0,89\n1,27\n0,38\nOther food products...........................................\n1,86\n4,17\n2,31\nNon-alcoholic beverages .......................................\n0,92\n1,26\n0,34\nAlcoholic beverages...............................................\n1,32\n1,70\n0,38\nCigarettes, cigars and tobacco..............................\n1,17\n1,35\n0,18\nClothing and footwear ...........................................\n5,70\n4,06\n-1,64\nHousing.................................................................\n12,74\n11,57\n-1,17\nFuel and power......................................................\n3,98\n4,28\n0,30\nFurniture and equipment........................................\n4,88\n3,15\n-1,73\nHousehold operation .............................................\n5,48\n5,22\n-0,26\nMedical care and health expenses.........................\n6,54\n7,70\n1,16\nTransport ...............................................................\n15,36\n15,30\n-0,06\nCommunication .....................................................\n3,61\n3,19\n-0,42\nRecreation and entertainment................................\n2,45\n3,39\n0,94\nReading material....................................................\n0,78\n0,40\n-0,38\nEducation ..............................................................\n2,05\n3,77\n1,72\nPersonal care ........................................................\n3,47\n4,37\n0,90\nOther goods and services......................................\n7,63\n3,63\n-4,00\nTotal ......................................................................\n100,00\n100,00\nSource : Statistics South Africa\nRecent developments in inflation\nThis section analyses recent trends in the main inflation indices, and reviews develop-\nments in the primary factors impacting on inflation in South Africa.\nThe evolution of indicators of inflation\nSince the previous issue of the Monetary Policy Review, the downward trend in infla-\ntion has been interrupted and the various measures of year-on-year inflation have\nturned upward, largely reflecting the impact of the depreciation of the exchange rate\nand increases in food prices. Furthermore, in January the consumer price indices\nwere compiled for the first time using the updated weights based on the survey con-\nducted in 2000 (Box 1 provides more details about this). Although the new weights\ngive greater importance to categories which are currently recording higher inflation,\nsuch as food, the change in weights has little effect on the trends discussed here.\nPossibly more important is the fact that all prices in the indices were surveyed and\nincluded in the January consumer price data as a result of the re-weighting process.\nPrice increases that would only have found their way into the data in the coming\nmonths were therefore already included in the January figures. \nFigure 1 shows that year-on-year CPIX inflation (i.e. the consumer price index\nexcluding mortgage interest cost for metropolitan and other urban areas) trended\ndownward from 8,2 per cent in August 2000 to a low point of 5,8 per cent in\nSeptember 2001, before increasing to 7,5 per cent in February 2002. The inflation\nrate measured by the consumer price index (CPI) for metropolitan areas reached a\nlow of 4 per cent in October 2001 and by February 2002 inflation measured in terms\nof this index had increased to 6,1 per cent.\n4\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nTable B1.2\nAdministered prices\nPer cent\nWeight\nHome-owner's cost\nAssessment rates .................................................................................................\n1,64\nSanitary service ....................................................................................................\n0,27\nRefuse removal.....................................................................................................\n0,37\nWater....................................................................................................................\n1,81\nFuel and power\nElectricity .............................................................................................................\n3,55\nPetroleum products ..............................................................................................\n0,34\nMedical health services ...........................................................................................\n3,23\nTransport\nPetrol....................................................................................................................\n5,08\nBuses ...................................................................................................................\n0,37\nTrains....................................................................................................................\n0,16\nLicence and registration........................................................................................\n0,09\nCommunication........................................................................................................\n3,19\nRecreation and entertainment\nTelevision licences.................................................................................................\n0,68\nEducation.................................................................................................................\n3,77\nTotal.........................................................................................................................\n24,55\nSource : Statistics South Africa and SARB calculations\n5\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nFigure 1 \nConsumer price inflation: CPIX and CPI\nPercentage change over twelve months\n0\n2\n4\n6\n8\n10\n1998\n1999\n2000\n2001\n2002\nCPIX\nCPI\nSource: Statistics South Africa\nFigure 2 \nContributions to CPIX inflation\nPercentage points\n2000\n2001\n2002\nFood\nHousing\nTransport\nMedical care and health expenses\nSource: Statistics South Africa\n0.0\n0.5\n1.0\n1.5\n2.0\n2.5\n3.0\n3.5\nApr\nJun\nApr\nJun\nAug\nAug\nOct\nDec\nOct\nJan\nFeb\n6\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nThe weighted contribution of food prices has provided the main impetus to the\nrecent increase in the year-on-year CPIX inflation rate. As Figure 2 reveals, food\nprices contributed 3 percentage points to total CPIX inflation of 7,5 per cent in\nFebruary 2002, compared with the 1 percentage point they contributed to CPIX\ninflation of 5,8 per cent in September 2001. The contributions of the other main\ncomponents of the index in Figure 2 have been relatively constant over this period,\nalthough the downward trend in the contribution of transport prices appears to\nhave bottomed out as the effects of the depreciation of the rand and higher world\noil price became evident.\nThe food price index, whose weight in the CPIX has increased from 21,92 per cent to\n25,66 per cent as a result of the re-weighting exercise (see Box 1), is acknowledged\nto be one of the more volatile categories in the index. To highlight the important role\nfood prices have played in determining the recent path of CPIX inflation, Figure 3\nshows the effects of excluding these prices from the index. Since October 2001, it is\nclear that CPIX inflation would have been lower without the contribution of food prices.\nExcluding these prices, inflation in January 2002 would have been 5,7 per cent, rising\nto 6,1 per cent in February. The effect of excluding energy prices, which is also shown\nin Figure 3, reveals that these prices have been exerting downward pressure on CPIX\ninflation since August 2001. As the figure shows, however, these recent trends in food\nand energy prices are not representative of the entire period since 1999. Food prices\ngenerally had a restraining influence on CPIX inflation during this period (except for a\nperiod from April to October 2000), and the upward pressure that energy prices placed\non inflation from mid-1999 until July 2001 has been well documented.\nFigure 3\nThe effect of food and energy prices on CPIX inflation\nPercentage change over twelve months\n1998\n1999\n2000\n2001\n2002\nCPIX\nCPIX excluding energy prices\nCPIX excluding food prices\nSource: Statistics South Africa\n5\n6\n7\n8\n9\n7\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nFigure 4 shows that year-on-year inflation in the administered prices component of\nthe CPIX trended downward in 2001 as the contributions of petrol and diesel price\nincreases declined sharply. The inflation rate for administered prices did, however,\nremain above the rate measured by the overall CPIX throughout the year. At its low-\nest rate of 7,2 per cent in December, for example, it was still well above overall CPIX\ninflation of 6,5 per cent.\nVarious refinements to the index of administered prices, over and above the changes\nresulting from the re-weighting exercise, mean that the inflation rate measured since\nJanuary 2002 is not strictly comparable with the data for preceding months. These\nrefinements and changes are discussed in Box 1. The year-on-year inflation for this\nrevised index in February 2002 was 9,4 per cent, again above the overall CPIX infla-\ntion rate of 7,5 per cent for the month. The largest contributions to this administered\nprices inflation rate were made by education (2,7 percentage points) and medical\nhealth services (1,5 percentage points), while the contribution of petrol and diesel\nprices rose from being marginally positive in January to 1,2 percentage points.\nProduction price inflation averaged 8,4 per cent in 2001, dropping to below 8 per\ncent in August and September. As Figure 5 shows, inflation then increased sharply to\n11,5 per cent in January 2002, well above the rate expected by most forecasters.\nThe imported component of the index, which has a weight (27 per cent) that is sig-\nnificantly larger than that of imports in the consumer price indices, increased at a\nyear-on-year rate of 13,8 per cent. This reflects the weakening of the rand in the sec-\nond half of last year, although since production prices were surveyed early in January\nFigure 4 \nContributions to the administered price index\nPercentage points and percentage change over twelve months\n2000\n2001\n2002\nPetrol and diesel\nEducation services\nOther administered prices\nMedical health services\n-2\n0\n2\n4\n6\n8\n10\n12\nContribution of:\nAdministered price index\nSource: Statistics South Africa and SARB calculations\n8\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nit is unlikely that the full impact of the strong depreciation in December is evident yet.\nPerhaps of greater concern is the 10,7 per cent increase in inflation for the locally pro-\nduced component of the index. This is the largest increase in this index reported\nsince June 1995, and suggests that second-round effects may become an important\nfactor in domestic inflation. \nFigure 5\nProduction price inflation\nPercentage change over twelve months\n1999\n2000\n2001\n2002\nProduction price index (PPI)\nImported component of PPI\nDomestically produced component of PPI\nSource: Statistics South Africa\n0\n2\n4\n6\n8\n10\n12\n14\n16\n18\nBox 2 Grain prices and food inflation\nFood prices have played an important role in determining recent trends in CPIX inflation, as prices\nin the main components of the food price index have risen rapidly since mid-2001. Box 2 looks at\ninflation in the grain products price index, which has a weight of 4,84 per cent in the CPIX. More\nspecifically, the analysis focuses on the market for maize, a product that has wide economic signif-\nicance. White maize is a staple food for many South Africans (83 per cent of total production is used\nfor human consumption), and 90 per cent of yellow maize is used as feedstock in the meat, dairy,\npoultry and egg industries. Developments in the price of maize therefore have important implications\nfor consumer and production prices. The prices of both white and yellow maize more than doubled\nbetween June 2001 and January 2002.\nBecause traditional grain products are tradeable commodities, their prices are derived from dollar-based\nexport and import parities, as well as depending on supply and demand factors affecting crop outputs.\nThe export parity price of maize is a function of the exchange rate of the rand to the US dollar, as well\nas financing, loading and transport costs. Import parity prices are determined by the exchange rate of\nthe rand to the US dollar, and by insurance, import tariffs, financing and transport costs.\nAfter the liberalisation of agricultural pricing, export and import parity prices have set the (theoretical)\nlower and upper bounds to maize prices. As can be observed from Figures B2.1 and B2.2, in cases\nwhere there have been domestic maize surpluses such as in 2000/01 (when the volume of the white\nand yellow maize crops harvested was 32 per cent and 13 per cent higher than in the previous year\nrespectively), maize prices have more or less matched export parity prices. In instances where there\nwere domestic shortages, maize prices tended to trade at import parity prices. Following the depreci-\n9\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nation of the exchange rate of the rand, maize prices have increased to record rand price levels. By\nDecember grain product prices had moved away from trading at export parity prices to match (and even\ntrade above for a short period) the import parity prices (see Figures B2.1 and B2.2). A similar pattern is\nalso evident for other grain products such as wheat and sunflower seeds.\nFigure B2.2 Yellow maize price\nRand per ton\nRand per US dollar\n1997\n1998\n1999\n2000\n2001\n2002\nSouth African rand/US$\nExport parity price\nImport parity price\nSAFEX spot price\nSource: Grain South Africa\n0\n2\n4\n6\n8\n10\n12\n14\n0\n500\n1000\n1500\n2000\n2500\n0\n2\n4\n6\n8\n10\n12\n14\nFigure B2.1 White maize price\n1997\n1998\n1999\n2000\n2001\n2002\nSouth African rand/US$\nExport parity price\nImport parity price\nSAFEX spot price\nSource: Grain South Africa\n0\n500\n1000\n1500\n2000\n2500\nRand per ton\nRand per US dollar\n10\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nFactors affecting inflation\nMonetary policy decisions are made on the basis of current and expected develop-\nments in a number of variables. These variables are also the main drivers in the Bank’s\neconometric models, whose forecasts contribute to the decision-making process.\nSome of the main factors affecting inflation are discussed below.\nInternational economic developments\nInternational economic developments continued to have an important impact on the\ndomestic economy. The international slowdown continued into the fourth quarter of\n2001, as can be seen in Table 1. A significant feature of the downturn has been its\ndegree of synchronicity across regions. According to the IMF, this downturn has\nbeen the most synchronised for two decades. The Fund ascribes this partly to the\ncommon shocks of higher oil prices and the bursting of the information technology\nbubble, both of which had worldwide implications. Another factor is the increase in\ninternational linkages, particularly in the financial and corporate sectors, a trend\nwhich is likely to continue. Although output growth in South Africa did not decline to\nthe extent that it did in the rest of the world, the impact could be felt in commodity\nprices and export volumes. For example, merchandise export volumes declined by\n11 per cent in the third quarter and by 31⁄2 per cent in the fourth quarter. However,\nthe international downturn did contribute to a low world inflation environment which\nhelped mitigate the impact of imported inflation on South Africa.\nThe IMF reduced its growth estimates for most economies and regions in the wake\nof the September 11 attacks. World growth for 2001 was estimated to have been\n2,4 per cent, compared with the 2,6 per cent projection prepared before the attacks.\nDespite the significant slowdown in the United States, a recession was not record-\ned (in the sense of two consecutive quarters of negative growth). Real gross domes-\ntic product (GDP) declined by 1,3 per cent in the third quarter, but rebounded to\ngrow at a positive 1,4 per cent in the fourth quarter, much higher than anticipated\nand significantly higher than the initial estimate of 0,2 per cent. Overall US growth\nfor 2001 was 1,2 per cent compared with 4,1 per cent in both 1999 and 2000.\nAlthough the unemployment rate reached a peak in December at 5,8 per cent, a sig-\nnificant feature of the downturn was the extent to which consumer demand held up\ncompared to other downturns. \nThe high domestic price of maize can therefore be attributed to exchange rate developments as well as\nto lower domestic production and exceptionally high regional demand. On the regional front, poor crops\nin some countries and the fact that traditional Zimbabwean producers did not plant their normal crops\nhave resulted in shortfalls in a number of countries. The Southern African Development Community is in\na deficit position and this has widened the import gap. Because South Africa is the most logical supplier\nof maize to these countries, this has put pressure on the domestic supply of maize and contributed to\nthe increase in the domestic maize price. \nAlthough domestic maize prices have moved to lower levels on the back of lower international grain prices\nas well as the strengthening in the exchange rate in January, the inflationary consequences of increases in\nprices during December 2001 are yet to be realised in full. However, rand prices are expected to fall given\nan expectation of a strengthening of the rand as well as a fall in the dollar price of maize. The price in mid-\nMarch of yellow maize was around R1 500 per ton with July 2002 futures at R1 317 per ton, the US gulf\nprice was at $89,44 per ton and the July Chicago Board of Trade futures price was at $84,25 per ton.\nThese current market indicators imply an expectation that domestic maize prices will decline although they\nwill still be significantly above the 2001 levels, when the average price in June was around R800 per ton.\nThe actual volume of output at harvest time, both domestically and regionally, as well as fluctuations in the\nexchange rate will influence future developments in these prices. \n11\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nThere are now increasing indications that the upswing in the US has begun with the turn-\ning of the inventory cycle. Unemployment claims have been falling and other indicators\nsuch as recovering retail sales and high productivity growth suggest the beginning of the\nrecovery. If this is indeed the case, then it will have been one of the mildest US recessions. \nThe latest data for the euro area show that third-quarter annualised growth was 0,4\nper cent, marginally higher than in the previous quarter. However, fourth-quarter\ngrowth is expected to be minimal if not negative. The IMF estimate for 2001 is 1,5\nper cent compared with 3,4 per cent in 2000. Within the euro area, the German\neconomy remained in recession, although the latest indicators suggest that the\ntrough of the business cycle may have been reached.\nThe recession in the Japanese economy intensified, and overall growth of -0,5 per cent was\nrealised in 2001. Japanese consumers’ reluctance to spend continued and in December\nalone household spending declined by 6,6 per cent from a year earlier. Burgeoning gov-\nernment debt and low interest rates have failed to reverse the Japanese deflation. \nNot surprisingly, emerging markets were hard hit by the downturn in the industrialised\ncountries. This was particularly the case with the technology-intensive exporters in Asia,\nwhere, for example, Malaysia, Taiwan and Singapore experienced recessions. However,\nthere are indications that strong rebounds were experienced in the last quarter of 2001,\nexcept in Hong Kong. Developments in Latin America have been overshadowed by the\ncrisis in Argentina, although contagion in the region has apparently been limited.\nThe downturn resulted in subdued inflationary pressures internationally. Average\nworld inflation was estimated at 4,5 per cent in 2001. World inflation has not only\nbeen lower, but also less volatile, and reflects factors such as enhanced central bank\ncredibility, lower commodity prices, greater competition arising from increased glob-\nalisation and sustained higher productivity growth in some economies. \nOil prices\nThe downward trend in international inflation rates is attributable in part to lower inter-\nnational oil prices. Oil prices trended downwards during the course of 2001, and after\nTable 1\nAnnual percentage change in real gross domestic product and\ninflation rates\nReal GDP\nInflation rates\n2000\n2001\n2000\n2001\n(estimate)\n(estimate)\nWorld .....................................\n4,7\n2,4\n4,6\n4,5\nAdvanced economies.............\n3,9\n1,1\n2,3\n2,3\nUSA...................................\n4,1\n1,0\n3,4\n2,9\nJapan ................................\n2,2\n-0,4\n-0,8\n-0,7\nEuro area ...........................\n3,4\n1,5\n2,4\n2,7\nUnited Kingdom.................\n2,9\n2,3\n2,1\n2,3\nDeveloping countries..............\n5,8\n4,0\n5,9\n6,0\nAfrica .................................\n2,8\n3,5\n13,5\n12,8\nAsia ...................................\n6,8\n5,6\n1,9\n2,8\nWestern hemisphere..........\n4,1\n1,0\n8,1\n6,3\nCountries in transition.............\n6,3\n4,9\n20,1\n16,0\nSource: IMF World Economic Outlook, December 2001\n12\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\na spike to around US$30 per barrel after the September 11 attacks, the Brent price\ndeclined to below US$17 in November. The lower prices were partly a result of high-\ner inventories, lower refinery runs and weak demand due to the global downturn. The\nresponse of the Organisation of Petroleum Exporting Countries (OPEC) was to reduce\noutput quotas further. In January 2002, OPEC and non-OPEC output was reduced by\nover 500 000 barrels per day. This stabilised the Brent price at around US$20 in\nJanuary and February, although by March prices were edging higher into the target\nprice range of between US$22-28 for the OPEC basket of crude. OPEC’s ability to\nprevent the price falling further was due critically to the co-operation of the non-OPEC\nproducers, particularly Russia. The strength of the cartel in future will therefore depend\nlargely on the co-operation of non-members.\nWorld interest rates\nThe worldwide trend of an easing in monetary policy continued throughout the fourth\nquarter of 2001. In December the US reduced the federal funds rate to 1,75 per cent,\nmaking this the eleventh cut during 2001. Subsequent Federal Open Market\nCommittee meetings left the rate unchanged. Similarly, as Table 2 shows, none of the\nmajor industrialised countries, with the exception of Canada, has lowered its official\nrates since the beginning of 2002, indicating that the international interest rate cycle\nhas probably bottomed out. Indeed, Sweden and New Zealand have raised their rates\nin March. By contrast, a number of emerging-market economies have continued with\nmonetary easing during January and February. This included Brazil where the inflation\nrate reached 7,7 per cent, significantly above the upper limit of 6 per cent of the tar-\nget range for 2001. Prior to the lowering of interest rates in February, Brazil was one\nof the few countries that had raised rates in the latter half of 2001.\nExchange rate developments\nThe most significant development for inflation over the past few months has been the\nbehaviour of the exchange rate of the rand. As mentioned in the previous Monetary\nPolicy Review, until late last year the impact of the more or less continuous depreci-\nation of the nominal exchange rate since the beginning of 2000 had been surpris-\ningly small. More surprising was the benign effect on the production price index. In\nthe October Monetary Policy Review, it was questioned whether this situation would\npersist given that the rand was declining against most of the major currencies. As\nnoted earlier, the exchange rate is beginning to have a significant and noticeable\nimpact on the measured rate of inflation.\nThe declining trend in the value of the rand accelerated substantially during\nNovember and December. At the end of November, the rand went above the R10\nlevel against the US dollar for the first time and reached an all-time low of R13,84 on\n21 December. After this date it appreciated gradually and in the first week of January\nit was below R12 against the US dollar. During most of January and February 2002\nit fluctuated around the R11,50 level against the US dollar. \nWhereas in 2000 and the first half of 2001 the rand’s depreciation was primarily\nagainst the US dollar, after July the depreciation became more generalised. As can be\nseen in Figure 6 the rand began depreciating significantly against the euro in July and\nagainst the Australian dollar in September. It can also be seen that the rand has per-\nformed poorly against the Brazilian real since September, when the real began to\nrecover from the impact of the crisis in Argentina. Against a trade-weighted basket,\nthe rand decreased by over 34 per cent between June 2001 and 21 December 2001.\n13\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nTable 2\nKey central bank interest rates\nPer cent\nCountries \n1 Jan 2001 \n22 March 2002 \nLatest change\n(Percentage points)\nUSA ..................................\n6,50\n1,75\n11 Dec 2001 \n(-0,25)\nJapan (overnight call rate) .\n0,25\n0,00\n19 Mar 2001 \n(-0,15)\nEuro area ..........................\n4,75\n3,25\n8 Nov 2001 \n(-0,50)\nUnited Kingdom................\n6,00\n4,00\n8 Nov 2001 \n(-0,50)\nCanada.............................\n5,75\n2,00\n15 Jan 2002 \n(-0,25)\nDenmark...........................\n4,75\n3,25\n9 Nov 2001 \n(-0,50)\nSweden ............................\n4,00\n4,00\n20 Mar 2002 \n(+0,25)\nSwitzerland .......................\n3,00 – 4,00\n1,25 – 2,25\n7 Dec 2001 \n(-0,50)\nAustralia............................\n6,25\n4,25\n5 Dec 2001 \n(-0,25)\nNew Zealand.....................\n6,50\n5,00\n20 Mar 2002 \n(+0,25)\nIsrael.................................\n8,00\n4,40\n25 Feb 2002 \n(+0,60)\nHong Kong .......................\n8,00\n3,25\n12 Dec 2001 \n(-0,25)\nMalaysia............................\n5,50\n5,00\n20 Sep 2001 \n(-0,50)\nSouth Korea......................\n5,25\n4,00\n19 Sep 2001 \n(-0,50)\nTaiwan ..............................\n4,63\n2,13\n27 Dec 2001 \n(-0,12)\nThailand ............................\n1,50\n2,00\n21 Jan 2002 \n(-0,25)\nBrazil.................................\n15,75\n18,75\n20 Feb 2002 \n(-0,25)\nChile .................................\n5,00\n4,75\n12 Mar 2002 \n(-0,75)\nMexico*.............................\n18,46\n7,42\n31 Jul 2001 \n(-50m pesos)\nCzech Republic.................\n5,25\n4,25\n31 Jan 2002 \n(-0,25)\nHungary............................\n11,75\n8,50\n18 Feb 2002 \n(-0,50)\nPoland ..............................\n19,00\n10,00\n31 Jan 2002 \n(-1,50)\nRussia...............................\n25,00\n25,00\n4 Nov 2000 \n(-3,00)\n*\nThe Bank of Mexico uses the “shortage” to influence liquidity conditions, while the interest rate is\nmarket determined.\nSource: National central banks\nFigure 6\nUS dollar per rand, euro, Brazilian real and Australian dollar\nIndex: 2 January 2001 = 100\n55\n60\n65\n70\n75\n80\n85\n90\n95\n100\n105\n2001\n2002\nUS$/euro\nUS$/Australian dollar\nUS$/South African rand\nUS$/Brazilian real\n14\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nThere are a number of factors that contributed to the decline of the rand, although\nthere is to date no clear explanation for the timing or the extent of the fall. As can\nbe seen from Figure 6 the rate of decline against the dollar increased firstly around\nJuly in the wake of the crisis in Argentina which impacted negatively on a number of\nemerging markets. After September 11 the rate of depreciation increased further.\nThe following are among the factors that contributed to the depreciation:\n-\nThe impression created that the Reserve Bank’s activities in reducing the net\nopen foreign currency position (NOFP) created a one-way bet on the rand. It\nwas believed that the need to buy up US dollars from the market (albeit selec-\ntively) reduced the potential for the rand to appreciate;\n-\nnet sales of South African bonds by non-residents. This was a reflection of\nincreased risk aversion on the part of international investors. Non-residents\nwere also net sellers of equities in November;\n-\nthe turnaround in the current account of the balance of payments in the third\nand fourth quarters of 2002;\n-\nleads and lags in foreign payments and receipts;\n-\nother factors such as regional instability particularly in Zimbabwe, the lack of\nprogress with privatisation and the handling of the HIV/Aids issue. \nBox 3 Exchange rate pass-through and South African import prices\nThe recent depreciation of the rand has renewed interest in the nature of the ‘pass-through’ relation-\nship from exchange rate movements to domestic prices. The extent to which a depreciation in the\nexchange rate of the rand is reflected in higher import prices and ultimately in increased domestic\nconsumer price inflation, and the rate at which this occurs, is therefore highly topical. This box reports\non research into the first stage of the relationship, linking changes in the rand exchange rate to the\ndomestic currency price of imports, which is commonly known as exchange rate pass-through.\nExchange rate pass-through is traditionally measured using an import price equation. The simplest\ncase is where a country is small and a price-taker on perfectly competitive world markets. Assuming\naway tariffs, transport costs and other distortions to trade, arbitrage will ensure that the ‘law of one\nprice’ holds, i.e.\nIP = SP*\n(1)\nwhere IP is the domestic price of the imported good, P* is the foreign-currency price of the correspon-\nding good, and S is the nominal exchange rate (quoted as the domestic currency price of the foreign\ncurrency). The implication is therefore that the same traded good will sell at the same price when\nexpressed in a common currency in different destinations.\nEquation (1) provides the basis for an aggregate import price equation. Defining IP and P* in terms of\naggregate prices, the long-run exchange rate pass-through relationship can be estimated from a log-\nlinear transformation which allows for a constant\nLIPt = 0 + 1 LSt + 2 LP*t + t\n(2)\nwhere t is the stochastic error term, and 1 is the elasticity of exchange rate pass-through to aggre-\ngate import prices. Given the definition of the exchange rate variable S, a depreciation of the curren-\ncy (i.e. an increase in S) is expected to raise the domestic rand price of imports. It is therefore\nexpected that 011; there is no exchange rate pass-through effect when 1 = 0, and complete\npass-through when 1 = 1. Similarly, an increase in foreign prices is expected to lead to an increase\nin import prices with a result that 021. In fact, the theoretical underpinnings provided by Equation\n(1) imply that the pass-through coefficients from exchange rate and foreign price changes should be\nequal in magnitude, i.e. 1 = 2.\nStudies of exchange rate pass-through, particularly those undertaken for the same country, have\nshown that estimates of pass-through are sensitive to the choice of data as well as to the methodolo-\ngy employed in the study (Menon, 1995a: 225).1 Given restrictions on data availability, this study\nopted to use the nominal effective exchange rate of the rand (NEER) as the exchange rate variable,\n1 Menon (1995a) lists 7 studies\nthat estimate the aggregate\npass-through of exchange rate\nchanges to import prices for the\nUS; the estimates range from\n48,7 per cent to 91 per cent.\n15\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nLabour markets \nThe inflationary impact of developments in the labour market depends not only on\nwage settlements, but also on productivity changes. A key indicator in this regard is\ntherefore unit labour cost, measured as the ratio of nominal remuneration per work-\ner to output per worker. \nAs Figure 7 shows, the year-on-year growth in remuneration per worker was 8,8\nper cent in the third quarter of 2001, up from 7,4 per cent in the second quarter,\nand above the 4,6 per cent increase in headline CPI over the corresponding peri-\nod. This increase was supported by the continued gradual decline in measured\nlabour productivity growth, which has been evident since early in 2000 as changes\nin employment have lagged changes in output growth. Productivity growth slowed\nthe imported component of the PPI as the proxy for import prices, and an index of foreign whole-\nsale price indices weighted on the same basis as the NEER as the proxy for foreign prices. All data\nare at the monthly frequency, with the sample running from January 1980 to December 2001. Since\nunit root tests found the variables in Equation (2) to be integrated of order one, the equation was\nestimated using a Johansen-type vector error-correction model (VECM). \nUsing this approach, the estimated long-run pass-through relationship is2\nLIPt = 0,776 LSt + 0,776 LP*t\n(3)\nA 10 per cent depreciation in the NEER is therefore estimated to increase import prices by approx-\nimately 7,8 per cent in the long run. Although this pass-through coefficient is relatively high, as would\nbe expected for an open economy such as that of South Africa,3 tests suggest that even in the long\nrun pass-through is not complete (i.e. 1, 2 = 1).4\nThe dynamics of adjustment to this long-run equilibrium are revealed by the restricted VECM, which\nexplains changes in import prices as a function of changes in the NEER and foreign prices, and an\nerror-correction term. The coefficient on the error-correction term, which measures the feedback of\nthe (lagged) disequilibrium in the long-run cointegrating relation (3) onto the import price variable,\nshows that the adjustment to shocks is gradual. The coefficient has a value of -0,059 and is highly\nsignificant. This suggests that import prices adjust to correct about 6 per cent of any disequilibrium\nin the long-run relationship each month. A 10 per cent depreciation in the exchange rate will there-\nfore increase import prices by 0,46 per cent within a month (i.e. -0,059 * -7,76), and each suc-\nceeding month the disequilibrium will be reduced by progressively smaller increments until the\nlong-run pass-through of 7,76 per cent is achieved. The half-life of this process is just over 11\nmonths, i.e. this is approximately how long it would take for half of the adjustment to the long-run\nexchange rate pass-through to occur.\nThe econometric results reported here therefore suggest that around 78 per cent of an exchange rate\nchange passes through to import prices in South Africa, and that half of this adjustment occurs in less\nthan one year. The finding that pass-through is not complete even in the long run, which is common in\nstudies of this type, could be explained by a number of factors. At a more disaggregated level, the\npass-through coefficient is influenced by the homogeneity and substitutability of the goods concerned,\nthe degree of market concentration, and the currency in which imports are denominated. It could also\nbe that foreign exporters engage in ‘pricing to market’ behaviour, and set their prices relative to those\nof domestic competitors rather than on the basis of foreign costs and exchange rates.\nReferences\nGoldberg, P.K. and Knetter, M.M. 1996. Goods prices and exchange rates: what have we \nlearned? NBER Working Paper No 5826, NBER, Cambridge, MA.\nMenon, J. 1995a. Exchange rate pass-through, Journal of Economic Surveys, 9(2): 197-231.\nMenon, J. 1995b. Exchange rates and import prices for a small open economy, Applied \nEconomics, 27: 297-301.\nNell, K.S. 2000. Imported inflation in South Africa: an empirical study, University of Kent at \nCanterbury, Department of Economics, Studies in Economics, No 00/05, May.\n2 The Johansen trace and maxi-\nmal eigenvalue tests, conducted\non the basis of a VAR with 3 lags\nand an unrestricted constant\nterm, selected a single cointe-\ngrating relationship between the\nvariables in Equation (2). The\nrestriction that 1=2 was tested\nand could not be rejected. Weak\nexogeneity tests also revealed\nthat the cointegrating vector and\nthe adjustment coefficients enter\nonly the import price equation in\nthe VECM. Equation (3) is\nobtained by imposing these\nrestrictions and normalising on\nthe coefficient of the import price\nvariable.\n3 Many recent studies find evi-\ndence of incomplete pass-\nthrough. Goldberg and Knetter\n(1996) argue that pass-through\nis close to 60 per cent for the US,\nand Menon’s (1995a) survey\ncites estimates of 58 per cent for\nKorea and 74 per cent for\nTaiwan. Menon (1995b) reports\npass-through of around 66 per\ncent for Australian manufactured\nimports. \n4 These results for the long-run\npass-through coefficient confirm\nthe findings obtained by Nell\n(2000) from a wider ranging\nstudy of imported inflation in\nSouth Africa. Nell reports a coef-\nficient that has a value of 0,82,\nand is significantly different from\none, estimated using quarterly\ndata for 1987-97. \n\n16\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nfrom 4,5 per cent in the second quarter to 3,4 per cent in the third quarter. Overall\ntherefore, growth in unit labour cost was 5,2 per cent in the third quarter, higher\nthan the 2,8 per cent growth reported in the second quarter, but at the same level\nas growth in the fourth quarter of 2000 and the first quarter of 2001. Growth in unit\nlabour cost in the manufacturing sector rose from 1,2 per cent in the second quar-\nter to 7,1 per cent in the third quarter.\nDemand and output\nGrowth in real GDP in the South African economy was 21⁄2 per cent on a quarter-on-\nquarter basis in the fourth quarter of 2001 (Table 3). Despite this being a relatively\nrobust performance in an international context, slower growth earlier in the year\nFigure 7 \nRemuneration per worker, labour productivity and unit labour \ncost in the formal non-agricultural sectors\nPercentage change over four quarters\n1999\n2000\n2001\nRemuneration per worker\nLabour productivity\nNominal unit labour cost\n-2\n0\n2\n4\n6\n8\n10\n12\nTable 3\nGrowth in real gross domestic product and expenditure components\nPer cent\n2000 2001Q1 2001Q2 2001Q3 2001Q4 2001\nFinal consumption expenditure (households) ....\n3,3\n2,7\n2,3\n2,6\n3,4\n2,8\nFinal consumption expenditure (government)....\n0,5\n1,5\n2,3\n2,6\n2,8\n1,4\nGross fixed capital formation ............................\n0,3\n4,9\n3,1\n3,0\n5,7\n3,3\nChange in inventories (R billion) ..................\n7,0\n2,6\n-2,3\n5,3\n6,2\n3,0\nGDE .................................................................\n2,9\n2,7\n0,1\n6,2\n3,2\n1,8\nExports of goods and services .........................\n8,3\n-10,1\n18,8\n-30,2\n-4,5\n2,4\nImports of goods and services .........................\n7,2\n-7,5\n14,5\n-20,2\n-2,9\n0,4\nGDP .................................................................\n3,4\n1,5\n1,8\n1,2\n2,5\n2,2\nQuarterly data refer to quarter-on-quarter growth at annualised rates of seasonally adjusted data\n17\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nmeant that the overall GDP growth for the year 2001 was 2,2 per cent, compared\nwith 3,4 per cent in 2000.\nReal gross domestic expenditure (GDE), which grew at 6,2 per cent in the third\nquarter of 2001, slowed somewhat in the fourth quarter to grow at 3,2 per cent.\nThis slower growth in the fourth quarter was largely the result of a moderation in\nthe rate of net inventory investment. Growth in real final consumption expenditure\nby households, by contrast, accelerated from 2,6 per cent in the third quarter to\nan annualised rate of 3,4 per cent in the fourth quarter of 2001. This was largely\na reflection of household’s increased expenditure on durable and semi-durable\ngoods, partly motivated by the expectation of future price increases related to the\ndepreciation of the exchange rate of the rand.\nFiscal policy\nFiscal policy continues to support monetary policy. The 2002/03 Budget was mildly\nexpansionary, cognisant of the global slowdown and the sluggish domestic economy.\nAlthough it was growth-oriented with a real increase in expenditure, the overall deficit\nis expected to be a prudent 2,1 per cent of GDP. The Budget provides for declining\ndebt service and intensified spending on poverty alleviation and infrastructure develop-\nment. An amount of R15 billion was also allocated in the form of personal tax relief. \nTable 4 shows that in the fiscal year 2001/02 revenue is estimated to improve sig-\nnificantly compared with previous years, bolstered by higher corporate tax receipts.\nWith improved tax administration measures in place and higher profit-earnings,\nparticularly in the resources sector, revenue levels are expected to improve.\nFollowing a period of contained expenditure since 1997/98, government con-\nsumption expenditure is expected to pick up in key areas conducive to spurring\non economic growth and fighting poverty. The privatisation proceeds expected in\ncoming years from identified state enterprises are expected to provide resources\nfor priority areas. The resultant deficit is expected to decline relative to GDP.\nTable 4:\nPublic finance: ratios to gross domestic product (fiscal years) \nPer cent\n1998/99 1999/00 2000/012001/02*2002/03 2003/04 2004/05\n.................................................\nMedium-term estimates\nNational government\nRevenue .............................\n24,4\n24,1\n23,7\n25,1\n24,5\n24,5\n24,5\nExpenditure .......................\n26,7\n26,2\n25,7\n26,5\n26,6\n26,4\n26,2\nDeficit (-) .............................\n-2,3\n-2,0\n-2,0\n-1,4\n-2,1\n-1,9\n-1,7\nTotal loan debt....................\n47,5\n45,6\n43,6\n42,9\n40,3\n38,8\n37,4\nPSBR**.....................................\n3,5\n0,6\n0,9\n0,5\n1,4\n1,6\n1,7\n*\nEstimate\n**\nPublic-sector borrowing requirement\nSource: National Treasury, Budget Review 2002\n18\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nMonetary conditions\nDuring 2001, growth in monetary aggregates was strong and ended the year at dou-\nble-digit levels (Table 5). Although high monetary growth rates can be seen as reflect-\ning stronger growth in the real economy, in a number of months these figures were\ndistorted by various factors. For example, in July and August the flow of funds ema-\nnating from the takeover of De Beers by Anglo American was significant. Broad money\nsupply (M3) growth averaged 14,1 per cent for 2001, although the quarterly growth\nrate slowed to 9,2 per cent in the fourth quarter. Growth over twelve months in M3 was\nstill at a high level of 19,3 per cent for January 2002. This was in part a result of an\nincrease in its statistical counterpart net foreign assets, which increased by R25 billion\nin January 2002 mainly because of a transfer of a syndicated loan amounting to R17,5\nbillion from the Reserve Bank to the National Treasury. \nInitially, the high growth rates in M3 were driven by an increase in deposits with a\nmaturity of six months and longer, but in the last quarter of 2001 and in January\n2002, the biggest contribution was from high growth in cheque and other demand\ndeposits. The corporate sector, rather than the private household sector, was\nresponsible for the major share of the increase in M3 for 2001 and January 2002.\nThis trend clearly indicates a greater preference for liquidity by the corporate sector\nand can be partly attributed to uncertainty about global economic conditions and\nthe depreciation of the rand. \nRobust growth in nominal domestic final demand was also reflected in credit extend-\ned to the private sector. The twelve-month growth rate in domestic private-sector\ncredit extension showed a strong increase in December and January 2002, moving\nfrom 9 per cent in November 2001 to 12,1 and 14,1 per cent in the respective\nmonths. Quarter-to-quarter growth rates also strengthened from an annualised rate\nof 5 per cent in the second quarter to 14,2 and 17,9 per cent in the third and fourth\nquarters of 2001. The category other loans and advances was responsible for the\nhigh growth rate in private-sector credit extension in December 2001. It is likely that\nthis reflected pre-emptive spending in anticipation of steep increases in consumer\nprices following the sharp depreciation in the value of the rand. In January 2002, the\nTable 5\nPercentage change in monetary aggregates \nTwelve-month change\nM1A\nM1\nM2\nM3\n2001: January......................................................\n0,2\n7,1\n7,5\n9,2\nFebruary.....................................................\n0,3\n3,3\n8,0\n9,4\nMarch ........................................................\n-1,1\n6,4\n11,9\n12,9\nApril ...........................................................\n3,2\n7,3\n11,1\n12,3\nMay............................................................\n2,9\n9,0\n11,7\n13,5\nJune...........................................................\n6,7\n8,6\n11,0\n13,8\nJuly ............................................................\n15,9\n14,5\n14,7\n17,7\nAugust .......................................................\n15,3\n16,8\n15,9\n17,9\nSeptember.................................................\n8,9\n10,7\n12,2\n14,5\nOctober .....................................................\n16,3\n11,8\n12,9\n14,8\nNovember..................................................\n20,2\n16,7\n13,5\n16,6\nDecember..................................................\n19,4\n18,6\n15,5\n17,0\nAverage.....................................................\n9,0\n10,9\n12,2\n14,1\n2002: January......................................................\n18,0\n22,3\n18,2\n19,3\n19\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nmortgage advances and instalment sale credit categories contributed to the high\nyear-on-year growth rate in private-sector credit extension, partly due to the ‘base\neffect’ which results from calculating growth rates on low levels of the credit aggre-\ngates measured twelve months ago. The bigger share of credit extended to the pri-\nvate sector in 2001 and in January 2002 was to the corporate sector, partly reflecting\nthe growth in real gross fixed capital formation in the fourth quarter of 2001.\nMonetary policy\nThe turbulence in the foreign exchange market has had a significant impact on the\nstance of monetary policy. CPIX inflation had declined to below the upper limit of the\n2002 target by September 2001, and at that time it was expected that the down-\nward trend would be sustained, albeit at a slower rate. Although during the course\nof 2000 and 2001 the rand had come under sustained pressure, the degree of pass-\nthrough was relatively muted. At the same time, since the beginning of 2001, the\ndownward trend in international oil prices had a moderating effect on the inflation\nrate. The exchange rate movements since June however were of an order of mag-\nnitude that made a reversal in the downward trend of CPIX inflation inevitable. \nAn important challenge for monetary policy during this period was resisting the temp-\ntation to use interest rate policy to defend the currency directly. This was particularly\nthe case as the depreciation was not seen as having been caused primarily by\ndomestic macroeconomic factors. As has been reiterated in the past, the Reserve\nBank does not have a target for the exchange rate. For this reason, there was no\nchange in the monetary policy stance during the worst of the exchange rate move-\nments in November and December of 2001. \nNevertheless, the MPC cannot be impervious to the impact of exchange rate\nchanges on the measured inflation rate. Monetary policy can do little to offset the first-\nround effects of exchange rate changes on the measured inflation rate. Nor is this\nnecessarily true inflation, defined as a continuous increase in the general level of\nprices. A one-off depreciation and consequent price level increase not related to\nexcessive expenditure or money supply growth would not merit an offsetting interest\nrate increase. By contrast, if the depreciation and initial price increase result in or\nthreaten higher wage demands and further price-raising behaviour, then monetary\npolicy could play a role in moderating these second-round effects. \nIt had been decided that the MPC would only have four scheduled meetings during\n2002, with the timing intended to coincide with the availability of quarterly data.\nHowever, given the long gap between the November and March meetings, and given\nthe adverse developments in the foreign exchange market, an unscheduled meeting\nwas convened on 15 January to consider these developments and their consequences\nfor inflation and monetary policy. The outcome of this meeting was a decision to raise\nthe repo rate by one hundred basis points, with the expectation that banks would fol-\nlow by increasing their prime overdraft and other lending rates accordingly. Figure 8\nshows the movement of the repo rate and other short-term rates since January 2001.\nThe primary reason for this increase was pre-emptive. The main concern at that time\nwas the evidence of higher inflation expectations that could feed through to higher\nwage demands and further price increases. In addition, although excess spending in\nthe economy was still relatively moderate, there were signs of excessive increases in\nthe money supply and credit extension data. Although some of this may have been\ndue to pre-emptive buying ahead of expected price increases, the MPC felt it was\nappropriate to impact on inflation expectations before an inflationary spiral set in.\n20\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nBy the time the MPC met on 13 and 14 March 2002, it was apparent that the\nadverse exchange rate developments during late 2001 were having a significant\nimpact on the CPIX as well as the PPI, as discussed earlier. The MPC felt that a fur-\nther tightening of the monetary policy stance was justified to reinforce the January\nincrease, so as to prevent second-round price increases. Therefore the MPC decid-\ned to increase the repo rate by 100 basis points to 11,5 per cent per annum from\n15 March 2002. \nThere were a number of factors influencing this decision. As was the case at the time\nof the January meeting, there was further evidence of a rise in inflationary expecta-\ntions, as reflected in the Bureau for Economic Research survey, and other financial\nmarket indicators (discussed more fully below). It was felt that a tightening of the\nmonetary policy stance at this stage, if successful in dampening wage and price\nincreases, would avoid the need for more drastic increases in future.\nA further factor was that domestic spending had begun to exceed national\nincome. Although the resultant deficits on the current account in the third and\nfourth quarters were relatively small, the Bank’s projections indicate that the cur-\nrent account is likely to remain in deficit for most of 2002. In addition, money sup-\nply growth and domestic credit extension also became a cause for concern. As\nseen above, credit extension by banks to the private sector increased at an an-\nnualised rate of 17,9 per cent in the fourth quarter of 2001 and all of the mone-\ntary aggregates, including the narrowest ones, increased at a high rate. Although\nthe MPC felt that the money supply developments, particularly with respect to the\nnarrower aggregates, could indicate a preference for liquid precautionary balances\nat a time of general economic uncertainty, these balances could accommodate\nincreased spending in the future.\nFigure 8\nThe repo and short-term interest rates\n2001\n2002\nPrime overdraft rate\nRepo rate\n3-month NCD rate\n8\n9\n10\n11\n12\n13\n14\n15\n16\nPer cent\n21\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nFinally, there was also a concern that there was a change in the trend of unit labour cost.\nOver the past two years, unit labour cost increases had been low, and along with low\nlevels of capacity utilisation, helped to reduce domestic pressures on inflation. As dis-\ncussed, unit labour cost increased during 2001, and although the average increase of\n4,3 per cent was still below the upper end of the inflation target, the direction of the trend\ncontributed to the decision to tighten the stance of monetary policy.\nThe Bank’s forecasts show that the tightened monetary policy stance should enable\nthe target of a 3-6 per cent increase in CPIX to be achieved in 2003. Although it was\nacknowledged that the higher interest rates could have a negative short-term impact\non domestic economic growth, this would be offset in part by the positive impact of\nthe more competitive exchange rate and the tax relief granted in the recent Budget.\nIn addition it was felt that a decisive move was important, not only in the interest of\nhigher sustainable long-term growth, but also because the quick containment of a\npossible inflation spiral would avoid the need for even higher increases in the future.\nThe outlook for inflation\nAs seen in the forecast below, it is expected that CPIX inflation will continue to rise\nover the next few months as recent events filter through, but this trend is expected\nto reverse later on in the year. The outlook, risk and uncertainties relating to some of\nthe factors that determine the forecast are discussed below.\nThe international context\nIn the wake of the September 11 attacks on the United States, the IMF revised downwards\nits forecasts of world growth. Table 6 shows the original and revised forecasts. It can be\nseen that in all cases the forecasts were revised downwards, although to differing degrees.\nImplicit in the IMF forecast is that the US recovery will begin in the course of this year.\nThere are signs that the upswing in the US has already begun. Fourth-quarter\ngrowth in 2001 was higher than expected at 1,4 per cent, the inventory cycle has\nbottomed out, consumer confidence and industrial production have picked up,\nTable 6\nIMF projections of world growth and inflation for 2002\nPer cent\nReal GDP\nInflation\nOriginal\nRevised\nOriginal\nRevised\nWorld....................................................................\n3,5\n2,4\n3,5\n3,4\nAdvanced economies...........................................\n2,1\n0,8\n1,7\n1,3\nUSA .................................................................\n2,2\n0,7\n2,2\n1,6\nJapan...............................................................\n0,2\n-1,0\n-0,7\n-1,0\nEuro area .........................................................\n2,2\n1,2\n1,7\n1,4\nUnited Kingdom...............................................\n2,4\n1,8\n2,4\n2,4\nDeveloping countries ............................................\n5,3\n4,4\n5,1\n5,3\nAfrica ...............................................................\n4,4\n3,5\n8,0\n8,3\nAsia..................................................................\n6,2\n5,6\n3,3\n3,0\nWestern hemisphere ........................................\n3,6\n1,7\n4,9\n5,2\nCountries in transition...........................................\n4,1\n3,6\n10,7\n11,0\nSource: IMF World Economic Outlook, December 2001\n22\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nunemployment is beginning to decline and the US stock markets have rebounded\nsignificantly. Although there is general agreement that the recovery is imminent,\nthere are uncertainties about the strength of the recovery. Some analysts foresee a\nstrong recovery, but others, including the US Federal Reserve, caution that the fact\nthat consumer expenditure held up so well during the downturn may preclude\nstrong consumption expenditure growth and therefore result in a weak recovery.\nOthers are even more pessimistic and see the accumulated debt of US consumers\nputting a brake on the recovery.\nThere are also signs that the cycle has bottomed out in the euro area and some of\nthe emerging-market economies. Although the euro area is expected to follow the\nUS, the recovery is likely to be weaker than that of the US. A number of Asian\neconomies which are particularly dependent on exports to the OECD had already\nshown signs of recovery by the fourth quarter of 2001 and growth in this region is\nexpected to be strong. \nThe one area where uncertainties persist is Japan, where deflationary trends have\ncontinued and essential reforms to the banking system have yet to take place. The\npicture in Latin America is also mixed, as crises in Argentina, Venezuela and Ecuador\nare casting uncertainties over the region. However, it is expected that the contagion\neffects of the Argentine economic crisis will be limited, although there is a risk that\nthis may change.\nAs the recovery proceeds, it will have a positive impact on commodity prices,\nbenefiting commodity producers such as South Africa. Export volumes which\nhave been negatively affected by the world recession, will also improve. How\nstrongly commodity prices and export volumes recover will depend to a large\nextent on the strength and sustainability of the recovery in the industrialised\neconomies.\nThe implication of the above is that the world has probably seen an end to the\ndownward trend in the interest rate cycle. It is clear that the aggressive reductions\nin interest rates in the US and the UK have ended. We are likely to see a period of\nstable interest rates until the extent of the recovery is clearer. At present the major\ncentral banks do not see inflation as an imminent threat, although the monetary\nstimulation in 2001 is likely to have some impact during the course of the recovery.\nAt present there appear to be few inflationary pressures internationally. Even during\nthe previous boom it was clear that the world had entered a generally more\nfavourable inflation environment. This means that the threat of a resurgence of\nworld inflation during the recovery is fairly limited and is only likely to occur once the\nrecovery is well under way. \nThe oil price, which in the past has been an important factor in imported inflation, is\nexpected to remain relatively stable around current levels with a possible upward\nbias. As the international recovery gets into full swing, demand for oil will increase,\nalthough this will partly be offset by the fact that the northern hemisphere winter is\nnearly over. The OPEC output quota reductions in the course of 2001 mean that\nthere could be pressure within the cartel to increase output as pressure on prices\nrises. This could therefore have a moderating impact on price increases. The down-\nside risk to the oil price depends on the OPEC cartel’s ability to prevent ‘cheating’\nnot only among its own members, but more significantly among non-members that\nvoluntarily restricted output. This is particularly true in the case of Russia which has\nnot as yet committed itself to maintaining output at lower levels. \n23\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nOutlook for domestic demand and supply\nThe outlook for exports is becoming more favourable. Apart from the benefits to\nexporters from the real depreciation of the rand, export volumes and prices are\nexpected to improve as world demand improves with the general recovery. This will\nhelp keep the current account at manageable levels, particularly if import demands\nare constrained by the tighter monetary policy stance.\nDomestic expenditure has held up relatively well throughout 2001, although it rose\nat a slower pace in the fourth quarter. Higher interest rates are expected to damp-\nen consumption expenditure and credit demand. Domestic consumption expendi-\nture is also likely to be negatively affected by the depreciation of the rand. Mitigating\nthis are the tax cuts provided for in the latest Budget and the mildly stimulatory fis-\ncal policy. Although a rise in domestic expenditure is not seen to be the main threat\nto inflation, there is a danger that the recent higher trend in inflation could result in\nhigher wage demands and pressure on unit labour cost. It is hoped, however, that\nthe monetary policy actions could have pre-empted this. Output growth is expect-\ned to be buoyed by rising fixed capital formation and export growth, and should not\nrun into supply bottlenecks since capacity utilisation is at fairly low levels.\nAs usual it is the exchange rate that is the most difficult to forecast. The rand’s\ndepreciation in November and December was clearly overdone, and the rand has\nrecovered some of its lost ground. Barring unforeseen circumstances, further signif-\nicant weakening is not expected, particularly if the current account improves strong-\nly and capital flows to emerging markets increase. Given the international climate,\nincreased flows to emerging markets may be forthcoming although developments in\nthe region, particularly in Zimbabwe, will be critical in determining the extent to which\nSouth Africa will benefit.\nSurveys of inflation expectations\nThe Bureau for Economic Research (BER) at the University of Stellenbosch con-\nducts quarterly surveys of inflation expectations in the South African economy\nwhich are regularly reported in this Review. The findings of these surveys of expect-\ned CPIX inflation for 2001 undertaken since the third quarter of 2000, are repro-\nduced in Table 7. The results suggest that respondents’ expectations were on\naverage above the actual CPIX inflation outcome of 6,6 per cent for 2001. The\ntable suggests that the expectations of business sector and labour respondents\nwere higher than the actual outcome, whereas those of financial sector analysts\nwere generally accurate. \nTable 7\nCPIX inflation expectations for 2001\nPer cent\nSurvey\nAnalysts\nBusiness\nLabour\nAverage\n2000: 3rd quarter...............................................\n6,6\n7,7\n7,0\n7,1\n4th quarter ...............................................\n6,7\n7,8\n8,0\n7,5\n2001: 1st quarter ...............................................\n6,1\n7,9\n7,9\n7,3\n2nd quarter ..............................................\n6,6\n7,9\n8,0\n7,5\n3rd quarter ...............................................\n6,6\n7,8\n7,3\n7,2\n4th quarter ...............................................\n6,6\n7,8\n7,4\n7,3\nSource: Bureau for Economic Research, University of Stellenbosch\n24\nSA RESERVE BANK\nThe findings of the latest survey of CPIX inflation expectations, undertaken in the first\nquarter of 2002, are reported in Table 8. The average expectation for 2002 inflation\nis 7,5 per cent, with business sector expectations being the highest at 7,8 per cent\nand those of labour the lowest at 7,1 per cent. This average is above the 7,1 per cent\nexpected in the survey undertaken in the fourth quarter of last year. Looking further\nahead, the average expectation is that CPIX inflation will decline to 7,1 per cent in\n2003 and to 6,8 per cent in 2004. \nThe findings of this survey reflect respondents’ changed expectations following the\nlarge depreciation of the rand in the last quarter of 2001 and the increases in agri-\ncultural prices. As Figure 9 shows, this has resulted in a sharp upward revision in the\nexpectations of the financial sector analysts. Whereas they previously expected CPIX\ninflation to fall within the 3-6 per cent inflation target range, they now expect the tar-\nget to be missed in 2002. \nTable 8\nBER survey of CPIX inflation expectations (1st quarter 2002)\nPer cent\n2002\n2003\n2004\n1. Finance......................................................\n7,5\n6,5\n5,8\n2. Business ....................................................\n7,8\n7,7\n7,5\n3. Labour .......................................................\n7,1\n7,2\n7,1\nAverage 1 - 3...................................................\n7,5\n7,1\n6,8\nSource: Bureau for Economic Research, University of Stellenbosch\nFigure 9\nCPIX inflation expectations for 2002 surveyed quarterly\nPer cent\nQ3\nQ4\nQ1\nQ2\nQ3\nQ4\nQ1\n2000\n2001\n2002\nFinancial analysts\nBusiness\nLabour\nAverage\nSource: Bureau for Economic Research, University of Stellenbosch\n5\n6\n7\n8\n9\nMONETARY POLICY REVIEW April 2002\n25\nSA RESERVE BANK\nMONETARY POLICY REVIEW April 2002\nThe BER-surveyed inflation expectations of the financial sector are confirmed by the\nconsensus forecast produced from the Reuters monthly survey of long-term fore-\ncasts for the South African economy. The average forecast for CPIX inflation in 2002\nincreased from 7,4 per cent in the December survey to 7,6 per cent in January and\n7,8 per cent in February. The February forecast is the mean of 11 individual forecasts\nranging between 7,2 per cent and 9,1 per cent. The consensus forecast is that CPIX\ninflation will then decline to marginally below 6 per cent in 2003, and further to 5,6\nper cent in 2004. \nOther indicators of inflation expectations confirm the trends indicated by these sur-\nveys. The recent increase in the monthly average implied or break-even inflation rate,\nwhich equates the nominal return on government’s conventional long-term bonds\nwith the real yield on inflation-linked bonds, and the higher and steeper yield curve\nare both relevant in this regard.\nThe Reserve Bank inflation forecast\nThe Reserve Bank’s latest projection for CPIX inflation over the forecast period from\n2002 to 2003 is presented in Figure 10. This forecast again employs the fan chart\ntechnique to indicate the uncertainties surrounding the central projection. The fore-\ncast also assumes an unchanged monetary policy stance.\nNote: The fan chart uses confidence bands to depict varying degrees of certainty. The darkest band of\nthe fan chart covers the most likely 10 per cent of probable outcomes foreseen for CPIX infla-\ntion, including the central projection. Each successive band, shaded slightly lighter and added\non either side of the central band, adds a further 10 per cent to the probability until the whole\nshaded area depicts a 90 per cent confidence interval (see Box 4 ‘Understanding the fan chart’\non p 27 of the March 2001 Monetary Policy Review ).\nFigure 10\nCPIX forecast\nPer cent\n1998\n1999\n2000\n2001\n2002\n2003\n0\n2\n4\n6\n8\n10\n12\n26\nMONETARY POLICY REVIEW April 2002\nSA RESERVE BANK\nThe Bank’s forecast shows that the annual average rate of CPIX inflation may\nexceed the 3-6 per cent target range in 2002, but that it is likely to decline sufficiently\nto fall within the target range in 2003. Figure 10 shows that the central projection for\nCPIX inflation peaks during the second quarter of 2002 and remains at this level for\nmost of the remainder of this year. However, the forecast suggests that CPIX rates\nof inflation could decline to below the upper limit of the target range by as early as\nthe second quarter of 2003. The major difference between the fan chart shown in\nthis Review and that published in the October Review is that it now incorporates the\nlarge depreciation of the rand that took place towards the end of 2001. The other\nsignificant difference is that the current forecast incorporates the monetary policy\nactions taken in January and March 2002.\nAs is always the case with any forecast, there are many risks (both foreseen and\nunforeseen) that could cause the actual rate of CPIX inflation to miss the central\nprojection on either side of the spectrum. Factors contributing to inflation being\nbelow the central projection include the possibility that the expected economic\nrecovery in the USA and the rest of the world might be less robust than assumed,\nand the possibility that the exchange rate of the rand might perform more strong-\nly than expected. By contrast, detrimental factors such as higher-than-expected\noil prices, a further strong depreciation of the currency, and the emergence of\nsecond-round inflationary pressures from the decline in the value of the rand\ncould cause the actual outcome of CPIX inflation to exceed the central projection\nforecast.\nAssessment and conclusion \nThe reversal of the downward trend in CPIX inflation and the rise in inflation expec-\ntations made a change in the monetary policy stance inevitable. Since the beginning\nof 2002 the MPC has raised the repo rate by 200 basis points in an effort to bring\ninflation back to within the target range of 3-6 per cent. It is sometimes argued that\nmuch of South Africa’s inflation is of a cost-push variety and that there is little mon-\netary policy can do to influence the inflation rate. Even if it is true that cost-push fac-\ntors dominate, monetary policy nevertheless has an important role to play in\npreventing an inflation spiral from setting in. For example, monetary policy can help\nto moderate inflation expectations and prevent the first-round effects of a currency\ndepreciation from feeding through to wage demands and pricing behaviour that\nresult in higher inflation.\nThe international recovery could have important implications for the inflation outlook.\nOn the one hand, oil prices have already started on an upward trend although the\nextent of this is likely to be limited. In addition, international interest rates are likely\nto resume an upward trend once the recovery is well under way. On the other hand,\nhigher exports and more favourable commodity prices will benefit the rand, which\ncould help mitigate the effects of imported inflation.\nMonetary policy developments over the next few months will be determined by the\nextent to which wages and prices respond to the recent monetary policy actions. To\nthe extent that inflation expectations and wage-setting and price-setting behaviour\nare moderated, a further tightening of monetary policy could be avoided. Indeed, the\ndecisive monetary policy actions taken recently are aimed at avoiding more drastic\naction in future. However, if inflationary pressures continue to intensify, a further\ntightening cannot be ruled out.", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/MPR042002-1-.pdf"}

clean/cb_requests/1cb1c235ef2a68751b8bcf13c73269df.json

@@ -0,0 +1 @@
+{"doc_id": "1cb1c235ef2a68751b8bcf13c73269df", "text": "Kenya Government\nBenchmark Bond Programme\nGeneral Guidelines\nOctober 2021\n\n1. Introduction was to improve bond market liquidity and achieve a\nbenchmark yield curve by minimizing bond market\nThis document provides general guidelines on the\nfragmentation (see Annex III).\nKenya Government Benchmark Bond Programme\n(BBP). 4. Enhancing Kenya’s Benchmark Bonds\nProgramme\n2. Definition of Terms\nThe following main strategies continue to enhance\nThe definition of terms used in this document is\nthe benchmark bond programme:\npresented in the Glossary (Annex I).\ni. Sustained Building of Benchmark Bonds\n3. Legal and Regulatory Provisions\nA comprehensive benchmark building programme\n3.1 Public Finance Management Act, 2012 (PFMA)\nin place takes into consideration the following\nAs the Fiscal Agent of Government, CBK prepares a\na) A bond reopening schedule complete with\ndomestic debt programme and market development\nproposed candidate bonds, reopen timing\n(DPMD) strategy and a Borrowing Plan at the start of\nand justification for the choices.\nevery financial year aligned to the prevailing Medium\nb) Complementary strategic initiatives to fast\nTerm Debt Strategy (MTDS). A key element of the\ntrack the benchmark building programme.\nDPMD strategy is the Benchmark Bond Programme\nii. Liability Management Operations (LMOs)\n(BBP), and takes into account the following desired\nobjectives:\nLiability Management Operations are debt\nmanagement operations aimed at establishing\na) To meet the domestic borrowing target;\na targeted bond consolidation and refinancing\nb) To manage the cost of debt by developing\nprogramme through initiatives such as bond\nand maintaining a well-priced stable yield\nswitches and buybacks to reduce refinancing risk.\ncurve;\nc) To minimize debt maturity risk by extending\nA comprehensive bond exchange programme\nbond tenor and targeting a higher ratio of\nincludes the following elements:\nT-Bonds to T-Bills;\nd) To contribute to stable liquidity flows; a) A bond switching schedule complete with\nproposed candidate bonds, switch timing,\ne) To support market development.\nswitch sizes and justification for the choices.\nThe benchmark bond programme focuses on a\nb) Bond buy backs.\ncomprehensive plan for building benchmark bonds\nc) Complementary strategic initiatives to fast\nand conducting liability management operations\ntrack the bond switch programme.\nwith an aim to strengthen secondary market\nThe following strategies continue to be implemented\nliquidity, maintain a stable and reliable benchmark\nyield curve and reduce the debt cost. to enhance building of benchmark bonds:\nThe benchmark bonds programme in Kenya was a) National Treasury and CBK coordination\n- continue close collaboration between\nmooted in 2007 with the identification and adoption\nNational Treasury and CBK to achieve\nof benchmark tenors of 2, 5, 10, 15, 20 and 25 years\nthe desired debt programme and market\nalong the yield curve. The aim of the programme\ndevelopment objectives.\nCENTRAL BANK OF KENYA 1\nKenya Government Benchmark Bond Programme\n\nb) Stakeholder and market engagement - 5.2 Number of benchmarks – there are six (6)\nsustain engagements on bond issuance benchmark maturities of 2, 5, 10, 15, 20 and\nprogramme and market development 25 years along the yield curve. The issuance\nagenda through monthly consultation programme continues to focus on building size\nforums and other engagements.\naround these benchmark maturities.\nc) Reopening of benchmark tenors - where\n5.3 Size of benchmarks – To improve bond liquidity\nbonds are undersubscribed or few bids\nand reduce market fragmentation, ceiling sizes per\naccepted due to aggressive pricing to\ncontinue to build volume on the bonds. benchmark maturity were initially set at KES 30bn\nfor 2, 5 year and KES 40bn for 10, 15, 20 and 25 year\nd) Incentivizing the bonds - package attractive\ntenors respectively (Annex III). The considerations\nfeatures on the bonds such as maturities\nmix and timing of issuance. for these volume ceilings at the time included the\nneed to manage refinancing risk on maturity of\ne) Green Shoe Option (GSO) – use of GSO to\nthe bonds while taking into account the size of\nmanage pricing behavior at the auction and\nthe overdraft facility limit. The market has evolved\nincrease liquidity at the secondary market.\nsince 2007, with the subscription rates for Treasury\nbonds increasing catalyzing an active secondary\nEnhancing the benchmark bond programme is\nmarket trading environment. Larger benchmark\nexpected to result in the following benefits:\nsizes will help to reduce the number of series\ni. Maintain an appropriate T-bond average per benchmark maturity, increase secondary\ntime to maturity (ATM) currently at 8.6-years market liquidity, and sustain a stable and reliable\nas at June 2021. benchmark yield curve.\nii. Achieve fewer larger size bonds in the 5.4 Selection of benchmarks - All on-the-run issues\nportfolio. are regarded as benchmark bonds as they create\na new basis of reference for other similar bonds.\niii. Increase bond market liquidity and sustain a\nOn-the-run bonds are the most recently issued\nstable yield curve.\nbonds (for a certain bond maturity) which the\nmarket treats as benchmarks because they tend\niv. Increase participation by non-bank players\nto be actively traded and more liquid issues.\nsuch as pension sector firms, Insurance\nBonds cease to be on-the-run issues when they\ncompanies and foreign investors.\nare replaced by new bonds of the same original\n5. General Guidelines for the Kenya maturity.\nBenchmark Bonds Programme\n5.5 Bond standardization – to increase fungibility of\nThe following are the general guidelines for the benchmarks, bonds issued under the benchmark\nbenchmark bonds programme: programme are standardized marketable\nsecurities in terms of the following features; tenor\n5.1 Legal and regulatory provisions – the applicable or maturity, semi-annual fixed coupon rates and\nlaws and regulations relating to the Government\nyield basis, benchmark size, frequency of issuance\nsecurities market in Kenya are presented in Annex\nas well as identification of on-the-run and off-the-\nII.\nrun issues for purposes of bond reopening.\n2 CENTRAL BANK OF KENYA\nKenya Government Benchmark Bond Programme\n\n5.6 Considerations for the benchmark • Bonds with RTM of 18-22.9 years are\nprogramme – the choice of instruments in the classified under 20-year benchmark\nissuance programme takes into account important bucket\nconsiderations such as investor preferences for • Bonds with RTM of 23-27.9 years are\ncertain maturities at points in time, prevailing classified under 25-year benchmark\nsecondary market bond pricing along the yield bucket\ncurve, debt programme objectives, market cycles b) Reopening of long-term instruments in\nand seasonality, private-sector events such different maturity buckets is preferred as long\nas corporate bond issuance, IPOs or dividend as the coupon rates are aligned with market\npayments among others. pricing and conditions.\nc) Reopening of on-the-run benchmark series\n5.7 Provisions for bond reopening\nconsiders adjustment of bond’s duration and\nThe following bond reopening provisions are its target size to ensure that its coupon rate is\nconsidered: within market levels, and enhance its market\ndemand both at the reopening auction and\na) Existing bond series are eligible for reopening\nsecondary market trading.\nat any time during the life of the bonds,\nd) Both benchmark issuance and reopening are\ndepending on the following reopen maturity\ncomplimented with liability management\nbucket criteria;\noperations (switches and buy backs) to reduce\n• Bonds with remaining time to maturity\nrefinancing risks and improve liquidity of the\n(RTM) of 2-3.9 years are classified under\noff-the-run bonds.\n2-year benchmark bucket\ne) Larger bond issuance size is aimed at\n• Bonds with RTM of 4-7.9 years are\nincreasing available tradable volume and\nclassified under 5-year benchmark bucket\npromoting price discovery, with a careful\n• Bonds with RTM of 8-12.9 years are\nbalance and understanding of investor\nclassified under 10-year benchmark\npreferences to increase auction performance.\nbucket\n• Bonds with RTM of 13-17.9 years are\nclassified under 15-year benchmark\nbucket\n6. Enquiries and Additional Information\nFor enquiries please contact Central Bank of Kenya, Financial Markets Department on 2860000 or send an email\nto ndo@centralbank.go.ke or visit the CBK website on www.centralbank.go.ke\nFinancial Markets\nAugust 2021\nCENTRAL BANK OF KENYA 3\nKenya Government Benchmark Bond Programme\n\nAnnex I : Glossary\nBenchmark bond A government bond that provides a standard against which the performance of other\nbonds in the market can be measured. There are different ways of determining or selecting\nbenchmark issues based on different country practices, including on-the-run issues for\neach bond maturity, specific bond maturity with large outstanding size and being traded\nnear par value or bonds that are candidates for successful reopening1.\nBond Switch A switch also referred to as a “bond exchange” is a liability management operation that is\nused to alter the profile of a debt portfolio.\nLiability Management These are debt management operations aimed at establishing a targeted bond\nbond Operations (LMOs) consolidation and refinancing programme through initiatives such as bond switches and\nbuy backs to reduce refinancing risk.\nOn-the-run bond An on-the-run issue is the most recently issued bond (for a certain bond maturity), and is\nusually treated by the market as a benchmark bond because it tends to be the most liquid\nor actively traded issue around that term-to-maturity. The new bond is considered the\non-the-run issue until it is replaced by a new bond of the same original term-to-maturity.\nA bond ceases to be an on-the-run when it becomes a seasoned issue, often referred to as\nan off-the-run issue. Most countries do not have official rules on selection of benchmarks.\n(IMF & WB, 2021, 1999)\n1Bond reopening refers to a re-issuance of a bond that had been issued earlier at the primary market, without changing the bond’s features such as\ntime to maturity, coupon rate and coupon basis and taxation among others. A bond can be reopened several times during its life with the objective\nof increasing its outstanding volume and enhance its liquidity.\n4 CENTRAL BANK OF KENYA\nKenya Government Benchmark Bond Programme\n\nAnnex II: Legal and Regulatory Provisions\ni. Public Finance Management Act, 2012 (PFMA)\nThe Public Finance Management Act, 2012 (PFMA) Section 53 (4) states that the authority of the Cabinet Secretary to\nborrow money includes the authority to borrow money by issuing national government securities.\nSection 63 (e) of the PFMA provides that the Public Debt Management Office (PDMO) shall be the Principal in the\nissuance of government debt securities on behalf of the National Treasury. Section 50 (9) gives the Cabinet Secretary\npowers to appoint and to enter into agreements with agents for the purpose of raising loans and issuing, managing\nor redeeming national government securities.\nPursuant to the PFMA Section 53 (8) (c) Government securities are issued by the Central Bank of Kenya as a borrowing\nagent appointed by the Cabinet Secretary on behalf of the Government.\nSection 197 (1) of the Public Management (PFM) Act Regulations criteria for issuance of government securities states\nas follows;\n197. (1) The issuance of government securities to raise debt capital shall be by way of auction or such other method\nas Cabinet Secretary may determine.\n197 (6) Where national government securities are to be issued other than by auction, their terms and conditions shall\nbe subject to the prior approval of the Cabinet Secretary.\nii. Central Bank of Kenya Act (CBKA)\nThe Central Bank of Kenya Act (CBKA) Section 44 authorizes the Bank to act as fiscal agent of and banker to the\nGovernment. The Bank in its capacity as fiscal agent is assigned the function to administer the public debt including\nissuance of, payment of a return on, and redemption of, bonds and other securities of the government under Section\n45 (c).\niii. Agency Agreement between National Treasury & Central Bank of Kenya\nIn line with the above-mentioned legal provisions, there is in place an agency agreement between the National\nTreasury (NT) and Central Bank of Kenya (CBK) through Financial Markets Department. The agreement appoints\nCBK as the fiscal agent of NT for the purpose of implementing the government borrowing programme as well as\nissuance, management and redemption of government securities on behalf of the National Treasury.\nCENTRAL BANK OF KENYA 5\nKenya Government Benchmark Bond Programme\n\nAnnex III: Box 1: Benchmark Bonds Programme in Kenya\nThe benchmark bonds programme in Kenya was mooted in 2007 with the identification and adoption of benchmark\ntenors of 2, 5, 10, 15, 20 and 25 years along the yield curve. The aim of the programme was to improve bond\nmarket liquidity and achieve a benchmark yield curve by minimizing bond market fragmentation. Ceiling sizes per\nbond maturity were set at KES 30bn for 2, 5 year and KES 40bn for 10, 15, 20 and 25 year tenors respectively. The\nconsiderations for the above volume ceilings at the time, included the need to minimize refinancing risk on bond\nmaturity dates. Over the years, the bond portfolio size has increased substantially, growing by 732 per cent to KES 2.2\ntrillion in August 2021 from KES 272.2bn in June 2007. Total T-bond portfolio including infrastructure bonds stands\nat KES 3.0 trillion.\nThe current portfolio was built through a reopening programme undertaken since 2008 as one of the benchmark\nbuilding strategies. The benchmark portfolio has 48 fixed coupon bonds (FXDs) accounting for 75% (KES 2.3 trillion)\nof the KES 3.0 trillion stock of bonds. As at August 2021, the average outstanding size on the 48 bonds was KES\n47.1bn, with majority (12) in the 5-y maturity bucket accounting for 27.1% (KES 613.2bn) of the benchmark stock. Five\n(5) bonds have outstanding size range of KES 50-60bn each; with fourteen (14) bonds at over KES 60bn each (Table\n1 below). Secondary market liquidity for government bonds has improved significantly over the period 2007 to 2021\nwith highest annual turnover in 2020 (KES 636.6bn), 2019 (KES 571.6bn) and 2012 (KES 522.89bn) compared to 2007\n(KES 84.14bn). As a result of increased liquidity, the yield curve has sustained stability and resilience.\nEleven (11) bonds in the portfolio have up-to 2-years to maturity while 37 bonds are candidates for future reopening.\nTable 1: Benchmark Portfolio Summary as at August 2021\nSize per bond No. of Bonds by Remaining Maturity Bucket\n<2-Year 2-Year 5-Year 10-Year 15-Year 20-Year 25-Year Total\n>=KES 20bn 1 0 1 0 1 0 0 3\nKES 20-30bn 3 1 1 1 1 1 0 8\nKES 30-40bn 6 4 2 1 0 1 0 14\nKES 40-50bn 0 1 1 0 1 0 1 4\nKES 50-60bn 1 0 3 1 0 0 0 5\nKES 60-70bn 0 1 3 1 1 0 0 6\nKES 70-80bn 0 0 0 2 1 0 0 3\n>KES 80bn 0 0 1 2 1 1 0 5\nTotal 11 7 12 8 6 3 1 48\nStock (KES bn) 338.6 283.5 613.2 510.4 316 162 41.4 2,265.10\n% of B. Stock 14.95 12.51 27.07 22.53 13.95 7.15 1.83 100\nNotes\n1. 11 bonds will mature within 2-years as at August 2021 – These will not be considered for current and future reopening.\n2. 37 bonds are candidates for current and future reopening.\n3. Bonds with RTM of 2-3.9 years are classified under 2-year benchmark bucket\n4. Bonds with RTM of 4-7.9 years are classified under 5-year benchmark bucket\n5. Bonds with RTM of 8-12.9 years are classified under 10-year benchmark bucket\n6. Bonds with RTM of 13-17.9 years are classified under 15-year benchmark bucket\n7. Bonds with RTM of 18-22.9 years are classified under 20-year benchmark bucket\n8. Bonds with RTM of 23-27.9 years are classified under 25-year benchmark bucket\n6 CENTRAL BANK OF KENYA\nKenya Government Benchmark Bond Programme\n\nAnnex IV: Box 2: Liability Management Operations (LMOs)\nThese are debt management operations aimed at establishing a targeted bond consolidation and refinancing\nprogramme through initiatives such as bond switches and buybacks to reduce refinancing risk.\nA switch also referred to as a “bond exchange” is a liability management operation that is used to alter the profile of\na debt portfolio. Switches have been used across the world in Brazil, Hungary, Malaysia, Poland, United Kingdom,\nCanada and South Africa amongst others. These countries have used switching to smooth bond maturities, manage\nmarket liquidity, lengthen the maturity profile and reduce market risk. In some jurisdictions, switching is done\nregularly on a bi-weekly, monthly or quarterly basis.\nThe idea of switching Government securities was mooted in February 2020 with the objective of lengthening the\nmaturity profile of existing debt by targeting upcoming maturities of T-bills. At the time, the largest share of the\nTreasury bills in the domestic debt portfolio was the 364-day bills accounting for 86.5 percent (KES 797.3bn) of the\ntotal outstanding stock of T-bills (KES 921.5bn).\nThe inaugural Government securities switch was successfully conducted on June 1, 2020 and involved the 364-day\nT-bill Issue No.2236/364 with a stock of KES 25.6 billion, as the source instrument and a 6-year (effective 4.5 years)\n10.2 percent coupon amortized Infrastructure Bond (IFB), Issue No. IFB1/2020/6 as the destination bond. Total bids\nreceived at the IFB auction amounted to KES 21.2bn against the source T-bill maturity of KES 25.6bn, representing\n83% subscription rate. KES 20.2bn was accepted at an average yield of 11.602% compared to the overall market\nweighed yield of 11.634%.\nThe success of the inaugural switch was driven by the appeal of the product to the investor pool, close engagement\nwith stakeholders, attractive features in the destination bond and sustained consistent messaging by CBK to the\nmarket that helped to strengthen confidence and credibility. CBK continues to review the regular issuance programme\nto include a switch strategy at appropriate points, to rebalance the portfolio and support market development.\nBuilding on the proof of concept and operational success of the inaugural switch, additional improvements have\nbeen considered including exploring switch transactions capable of migrating maturing obligations ahead of\nmaturity dates to allow larger benchmark issues and support a more resilient benchmark yield curve.\nCENTRAL BANK OF KENYA 7\nKenya Government Benchmark Bond Programme\n\nAnnex V: General guidelines for the Kenya Government Securities Switch Transactions\nThe rationale for Government securities switch is to;\na) Reorganize the maturity profile of outstanding debt through issuance of longer dated bonds.\nb) Reduce refinancing risk by smoothing the domestic maturity profile, as a cash management tool.\nc) Manage market liquidity through reducing the number of illiquid small issues, and consolidating them into larger\nmore liquid stocks.\nThe general guidelines for Kenya Government securities switch are as follows:\ni. Switch bonds are issued as destination instruments targeting the holders of specific T-bills and T-bonds (source\ninstruments) due to mature in the near future.\nii. All holders of the identified source instruments can participate in the switch, but on voluntary and optional\nbasis. Excluding investors who do not hold the T-bills will prevent incentivizing the whole market as this could\ndestabilize the yield curve.\niii. Investors who wish to participate in the switch auction must reinvest the entire maturity value in the source\ninstrument.\niv. The switch destination bonds are issued through a multiple price auction with both competitive and non-\ncompetitive bidding.\nv. The switch destination bonds can be reopened in future to reduce bond market fragmentation and both existing\nand new investors invited to participate at the reopen auction.\nvi. Both the source and destination instruments are taxed at the prevailing tax rates as per the Income Tax Act.\nvii. The minimum amount allowed for the destination switch bond is KES 100,000 for Infrastructure bonds (IFBs) and\nKES 50,000 for benchmark bonds.\nviii. The Central Bank reserves the right to accept bids in full or part thereof or reject them in total without providing\nany reason.\nix. Conduct of switch auction.\nThe switch offer is announced through the CBK website and issued for a specific sale period. Duly completed switch\napplication forms must be submitted to any branch of the Central Bank in the specified tender box or through CBK\nInternet Banking by 2.00pm on the auction Date and results obtained the next working day by Investors on details of\namounts payable for successful bids from Central Bank of Kenya.\n8 CENTRAL BANK OF KENYA\nKenya Government Benchmark Bond Programme\n\nReferences\n1. IMF and World Bank, 2001. Developing Government Bond Markets: A Handbook.\nhttp://pubdocs.worldbank.org/en/926021510086386497/PDM-Publication-DomesticDebtMarketDevelopment-Dev\nelopingGovernmentBondMarketsAHandbook.pdf\n2. IMF and World Bank, 2021. Guidance Note for Developing Government Local Currency Bond Markets.\nhttps://www.imf.org/en/Publications/analytical-notes/Issues/2021/03/17/Guidance-Note-For-Developing-\nGovernment-Local-Currency-Bond-Markets-50256\n3. National Treasury, 2020. Medium Term Debt Management Strategy (MTDS).\nhttps://www.treasury.go.ke/medium-term-debt-management-strategy/\nCENTRAL BANK OF KENYA 9\nKenya Government Benchmark Bond Programme\n\n10 CENTRAL BANK OF KENYA\nKenya Government Benchmark Bond Programme", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke/wp-content/uploads/2021/11/BBP.pdf"}

clean/cb_requests/2392a83f68395cb8125d018338d00bc5.json

@@ -0,0 +1 @@
+{"doc_id": "2392a83f68395cb8125d018338d00bc5", "text": "RESEARCH DEPARTMENT \n \nCENTRAL BANK OF NIGERIA \n Volume 4, Issue 4 \nDecember 2009 \nECONOMIC REPORT FOR \nTHE FOURTH QUARTER OF \n2009 \n \n \n \nCENTRAL BANK OF NIGERIA \n \nQUARTERLY ECONOMIC REPORT \n \n \nEDITORIAL BOARD \n \nEditor-In-Chief \nC.N.O. Mordi \n \nManaging Editor \nB. S. Adebusuyi \n \nEditor \nS. N. Ibeabuchi \n \nAssistant Editor \nS. A. Olih \n \nAssociate Editor \nU. Kama \n \nThe Central Bank of Nigeria Quarterly Economic Report is designed for the dis-\nsemination of financial and economic information on the Nigerian economy on current \nbasis. The Report analyses developments in the financial, fiscal, real and external sectors \nof the economy, as well as international economic issues of interest. The Report is di-\nrected at a wide spectrum of readers including economists and financial analysts in gov-\nernment and the private sector, as well as general readers. \n \nSubscription to the Quarterly Economic Report is available without charge to in-\nstitutions, corporations, embassies and development agencies. Individuals, on written re-\nquest, can obtain any particular issue without a charge. Please direct all inquiries on the \npublication to the Director of Research, Central Bank of Nigeria, P.M.B. 187, Garki, \nAbuja, Nigeria. \n \n \n \n \n \n \n i \n \n \n \nTABLE OF CONTENTS \n \n \nEDITORIAL BOARD … \n \n \n… \n \ni \n \nTABLE OF CONTENTS … \n \n \n… \n \nii \n1.0 \nSUMMARY \n \n \n… \n \n \n… \n1 \n2.0 \nFINANCIAL SECTOR DEVELOPMENTS \n… \n... \n3 \n \n2.1 \nMonetary and Credit Developments … … \n3 \n2.2 \nCurrency-in-Circulation and Deposits at the CBN \n… \n... \n3 \n2.3 \nMoney Market Developments \n… \n... \n... \n… \n4 \n2.3.1 Interest Rate Developments \n… \n… \n... \n… \n4 \n2.3.2 \nCommercial Papers (CPs) \n… \n… \n… \n… \n4 \n2.3.3 \nBankers Acceptances (BAs) \n… \n… \n… \n… \n4 \n2.3.4 \nOpen Market Operations \n… \n… \n… \n… \n4 \n2.3.5 \nPrimary Market \n… \n… \n… \n… \n… \n5 \n2.3.6 \nBonds Market \n \n… \n… \n… \n… \n… \n5 \n2.3.7 \nCBN Standing Facilities … \n… \n… \n… \n… \n5 \n \n2.4. \nDeposit Money Banks‟ Activities \n... \n… \n... \n5 \n \n2.5 \nDiscount Houses‟ Activities \n... \n… \n \n… \n5 \n2.6 \nCapital Market Developments \n... \n... \n… \n... \n6 \n2.6.1 Secondary Market \n… \n… \n… \n… \n… \n6 \n \n2.6.2 \nOver-The-Counter (OTC) Bonds Market \n… \n… \n… \n6 \n2.6.3 \nNew Issues Market \n… \n… \n… \n… \n… \n6 \n2.6.4 \nMarket Capitalization \n… \n… \n… \n… \n… \n6 \n2.6.5 \nNSE All-Share Index \n… \n… \n… \n… \n… \n6 \n3.0 \nFISCAL OPERATIONS \n… \n \n… \n \n7 \n3.1 \nFederation Account Operations \n… \n... \n… \n... \n7 \n3.2 \nThe Fiscal Operations of the three tiers of Government \n… \n7 \n3.2.1 \nThe Federal Government \n… \n... \n… \n... \n7 \n3.2.2 \nStatutory Allocations to State Governments \n… \n... \n8 \n3.2.3 \nStatutory Allocations to Local Government Councils ... \n... \n8 \n3.3 \nConsolidated Federal Government Debt \n… \n… \n… \n8 \n3.3.1 \nDomestic Debt \n \n \n \n... \n… \n… \n8 \n4.0 \nDOMESTIC ECONOMIC CONDITIONS \n… \n... \n8 \n4.1 \nAgricultural Sector \n \n… \n... \n... \n… \n8 \n4.2 \nIndustrial Production \n \n… \n... \n... \n… \n9 \n4.3 \nPetroleum Sector \n \n… \n... \n... … 9 \n4.4 \nConsumer Prices \n… \n \n \n… \n... 10 \n5.0 \nEXTERNAL SECTOR DEVELOPMENTS \n… \n... 10 \n5.1 \nForeign Exchange Flows … \n \n \n… \n... 10 \n \n \n \n \n \n \n \nii \n \n \n5.2 \nNon-Oil Export Proceeds by Exporters \n… \n \n... \n11 \n5.3 \nSectoral Utilisation of Foreign Exchange \n... \n… \n... 11 \n5.4 \nForeign Exchange Market Developments \n \n… \n... \n11 \n6.0 \nGLOBAL ECONOMIC CONDITIONS \n... \n… \n \n12 \n \n6.1 \nGlobal Inflation \n… \n… \n… \n… \n… \n13 \n6.2 \nGlobal Commodity Prices … \n… \n… \n… \n… \n13 \n6.3 \nInternational Financial Markets… … \n… \n… \n… \n14 \n6.4 \nOther International Economic Developments and Meetings \n… \n14 \n \nF I G U R E S \n \n1. \nAggregate Money Supply in Nigeria \n \n \n… \n3 \n2. \nAggregate Domestic Credit to the Economy \n \n… \n3 \n3. \nSelected Bank Interest Rates \n \n \n … 4 \n4. \nVolume and Value of Traded Securities \n \n \n… \n6 \n5. \nMarket Capitalization and Value Index \n \n \n… \n7 \n \n6. \nComponents of Federally Collected Revenue \n \n… \n7 \n7. \nTrends in Oil and Non-Oil Share of GDP \n \n \n… \n8 \n8. \nIndex of Industrial Production \n \n \n \n… \n9 \n9. \nTrends in Crude Oil Price \n \n \n \n… \n10 \n10. \nQuarterly Consumer Price Indices in Nigeria \n \n... 10 \n11. \nInflation Rate in Nigeria \n \n \n \n… 10 \n12. \nForeign Exchange Flows through the CBN \n \n... 11 \n13. \nSectoral Utilisation of Foreign Exchange \n \n \n… \n11 \n14. \nDemand for and Supply of Foreign Exchange \n \n… \n11 \n15. \nAverage Exchange Rate Movements \n… \n… \n… \n12 \n16. \nWDAS-BDC Exchange Rate Premium \n… \n… \n… \n12 \n17. \nSelected Macroeconomic Indicators Tables \n \n... \n17 \n \n \n \n \n \n \niii \n \n \n1.0 Summary \n \nProvisional data from the National Bureau of Statistics \n(NBS) estimated GDP growth in the fourth quarter of 2009 \nat 9.0 per cent, compared with 7.1 per cent in the preceding \nquarter. The projected growth was driven mainly by the non\n-oil sector which contributed 85.4 per cent of total GDP. \nBroad money (M2) grew by 13.5 per cent, relative to the \npreceding quarter. The increase in M2 was due largely to \nthe rise in aggregate banking system credit to the domestic \neconomy (net). Narrow money (M1), also, declined by 14.6 \nper cent over the level in the preceding quarter. \n \nAvailable data indicated a general decline in banks’ deposit \nrates, while lending rates increased. The spread between \nthe weighted average term deposit and maximum lending \nrates widened from 10.49 percentage points in the preced-\ning quarter to 11.40 percentage points. The margin between \nthe average savings deposit and maximum lending rates, \nhowever, narrowed from 20.02 to 19.74 percentage points \nduring the period. The weighted average inter-bank call \nrate fell to 6.25 per cent from 12.68 per cent in the preced-\ning quarter, reflecting the liquidity condition in the inter-\nbank funds market. \n \nThe value of money market assets outstanding fell by 4.6 \nper cent from the level in the preceding quarter to \n=N=3,322.3 billion. The decline was attributed largely to \nthe fall in Commercial Papers (CPs). Activities on the Nige-\nrian Stock Exchange were mixed during the review quarter. \n \nTotal federally-collected revenue in the fourth quarter, \n2009 stood at =N=1,371.51 billion, representing an in-\ncrease of 3.4 and 13.9 per cent over the proportionate \nbudget estimate and the preceding quarter’s level. At \n=N=936.27 billion, oil receipts constituted 68.3 per cent of \nthe total revenue was higher than the proportionate budget \nestimate and the receipts in the preceding quarter. The rise \nin oil receipts relative to the proportionate budget estimate \nwas attributed to the improvements in both the volume and \nprice of crude oil in the international oil market. Non-oil \nreceipts, at =N=439.24 billion or 31.7 per cent of the total, \nwas lower than the proportionate budget estimate and the \nreceipts in the preceding quarter. The decline in non-oil \nreceipts relative to the budget estimate was attributed \nlargely to the fall in customs and excise duties, Value-\nAdded-Tax (VAT) and independent revenue of the Federal \nGovernment. \n \nFederal Government retained revenue for the fourth quar-\nter 2009 was =N=765.44 billion, while total expenditure \nwas =N=1,041.28 billion. Thus, the fiscal operations of the \nFederal Government resulted in an estimated overall defi-\ncit of =N=275.83 billion, compared with the budgeted defi-\ncit of =N=209.15 billion. \n \nAgricultural activities centered on harvesting of tubers, \nfruits, vegetables, late maturing grains as well as pre-\nplanting operations in preparation for dry season planting. \nIn the livestock sub-sector, farmers were engaged in fatten-\ning and other management activities in anticipation of the \nend of year sales. \n \nNigeria’s crude oil production, including condensates and \nnatural gas liquids, was estimated at 1.96 million barrels \nper day (mbd) or 180.32 million barrels for the quarter. \nCrude oil export was estimated at 1.51 mbd or 138.92 mil-\nlion barrels for the quarter, while deliveries to the refiner-\nies for domestic consumption remained at 0.445 mbd or \n40.94 million barrels. The average price of Nigeria’s refer-\nence crude, the Bonny Light (370 API), estimated at \nUS$78.25 per barrel, rose by 11.7 per cent over the level in \nthe preceding quarter. The end-period inflation rate for the \nfourth quarter, 2009, on a year-on-year basis, was 12.0 per \ncent, compared with 10.4 and 15.1 per cent recorded at the \nend of the preceding quarter and the corresponding quarter \nof 2008, respectively. Inflation rate on a twelve-month mov-\ning average basis for the fourth quarter, was 12.4 per cent, \ncompared with 13.1 and 11.6 per cent recorded in the pre-\nceding quarter and the corresponding quarter, 2008, re-\nspectively. \n \nForeign exchange inflow and outflow through the Central \nBank of Nigeria (CBN) amounted to US$5.84 billion and \nUS$6.40 billion, respectively, resulting in a net outflow of \nUS$0.56 billion during the quarter. Foreign exchange sales \nby the CBN to the authorized dealers amounted to US$4.74 \nbillion in the review quarter. The weighted average ex-\nchange rate of the Naira vis-à-vis the US dollar, appreci-\nated by 0.6 per cent to =N=150.05 per dollar at the WDAS. \nIn the bureaux de change segment of the market, the naira \nalso appreciated from =N=157.36 per dollar to =N=153.16 \nper dollar. Non-oil export earnings by Nigerian exporters \nincreased by 189.2 per cent over the level in the preceding \nquarter to US$971.17 million. The development was attrib-\nuted largely to the increase in the prices of all the com-\nmodities traded at the international commodities market \nduring the period. \n \nGlobal output growth was projected to decline by 1.1 per \ncent in 2009, as against the rise in output growth of 3.0 per \ncent in 2008.This historic decline was due to the global \nfinancial and economic crisis. Nevertheless, the unprece-\ndented monetary, financial and fiscal policy interventions \nsuch as, large interest rate cuts, injection of liquidity and \nfiscal stimulus programs helped to reduce uncertainty and \nincreased confidence and improvement in the financial con-\nditions of the global economy. With these interventions the \nglobal output growth in many countries showed sign of \npositive recovery in the fourth quarter of 2009. World crude \noil output in the fourth quarter 2009, was estimated at \n85.57 mbd, while demand was estimated at 85.46 mbd, \ncompared with 84.46 and 84.67 mbd supplied and de-\nmanded in the preceding quarter, respectively. The increase \nin demand was due to optimism of a global economic recov-\nery. Price developments would partly depend on how \nstrongly supply responds to recovering demand. \n \n \n \n \n \n \n \n \n \n \n \n \n \nOther major international economic developments of rele-\nvance to the domestic economy during the quarter in-\ncluded: the 2009 Annual Meetings of the Inter-\nGovernmental Group of Twenty-Four (G-24) on Interna-\ntional Monetary Affairs and Developments, the Board of \nGovernors of the World Bank Group and the International \nMonetary Fund (IMF) held in Istanbul, Turkey from Octo-\nber 1 – 7, 2009. (see October 2009 Report). \n \nAlso, the Joint Ministerial Committee of the Board of Gov-\nernors of the Bank and the Fund on the Transfer of Real \nResources to Developing Countries (Development Com-\nmittee) met on October 5, 2009 in Istanbul. The Committee \nnoted that the global economy was showing signs of recov-\nery, but risks remained (see October 2009 Report). The \ngovernment of Canada tripled its share at the African De-\nvelopment Bank with a callable capital of US$2.6 billion. \nThe action of the Canadian government is to demonstrate \nits commitment to strengthen support for international \nfinancial institutions in line with the G-20 countries com-\nmitment. (see October 2009 Report). \n \nIn another development, the 12th Meeting of the Legal and \nInstitutional Committee of the West African Monetary \nZone (WAMZ) was held in Accra, Ghana from October 13 \n–16, 2009. The meeting discussed, among other issues, the \ndraft Memorandum of Understanding (MoU) between the \nWAMZ national central banks in the areas of Licensing, \nSupervision and Regulation of Financial Institutions and \nthe Draft Fiscal Responsibility Act (FRA) (see October \n2009 Report). The meeting of the 26 current participants \nin the International Monetary Fund’s New Arrangements \nto Borrow (NAB) with representatives of 13 potential new \nparticipants was held in Washington D.C. on November \n24, 2009. At the meeting, participants agreed to expand \nthe \nNAB \nand \nincrease \ncredit \narrangements \nto \nUS$600 billion. They also agreed to introduce more flexi-\nbility to the NAB (see November 2009 Report). \n \nThe International Monetary Fund’s African Department \nselected Ghana as the site of its second Regional Techni-\ncal Assistance Centre in West Africa (AFRITAC West 2) in \nNovember 2009. \n \nSince inception in 1993, the IMF has established a total of \nseven regional technical assistance centres that are lo-\ncated in Africa (Tanzania, Mali, and Gabon), the Pacific \n(Fiji), the Caribbean (Barbados), the Middle East \n(Lebanon), and Central America (Guatemala). (see No-\nvember 2009 Report). \n \nAlso, the Board of Directors of the African Development \nBank (AfDB) approved an equity investment of US$ 30 \nmillion to the African Infrastructure Investment Fund 2 on \nNovember 25, 2009 (see November Report). \n \nIn a related development, the Board of Directors of the \nAfDB approved a Line of Credit of US$ 30 million to the \nAfrican Banking Corporation Holdings Ltd (ABCH) under \nAfDB’s Liquidity Facility window. The proposed Line of \nCredit would feature a 5 year tenor and a 2-year grace \nperiod and will benefit ABCH’s banking subsidiaries in \nBotswana, Mozambique, Tanzania and Zimbabwe and \ncontribute towards financing the ABCH’s pipeline projects \ntotaling US$ 96 million (see November 2009 Report). \n \nIn another development, the 37th Ordinary Meeting of the \nCommittee of Governors of Central Banks of ECOWAS \nmember States was held on December 16, 2009 in Accra, \nGhana. The meeting was presided over by Mr. Sanusi La-\nmido Sanusi, Governor of the Central Bank of Nigeria and \nChairman of the Committee of Governors. \n \nAlso, the 25th Meeting of the Convergence Council of Min-\nisters and Governors of the West African Monetary Zone \n(WAMZ) was held in Accra, Ghana. All the member States, \nthe ECOWAS Commission and the West African Monetary \nInstitute (WAMI) were represented at the meeting. The \nRepublic of Liberia participated as observer. \n \nLastly, the African Development Bank (AfDB) and the \nUnited Bank for Africa Plc (UBA) signed two loan agree-\nments for a total of US$150 million on December 16, 2009. \nThe loan agreements were signed under the AfDB Emer-\ngency Liquidity Facility (ELF) and Trade Finance Initia-\ntive (TFI) designed for the rapid injection of liquidity into \nAfrican markets via strong private sector partner institu-\ntions. \n \n \n \n \n \n \n \n \n2 \n \n \n 2.0 FINANCIAL SECTOR DEVELOPMENTS \n \n2.1 Monetary and Credit Developments \nProvisional data indicated that monetary aggregates \ngrew in the fourth quarter, 2009. Broad money (M2) \nrose by 13.5 per cent to =N=10,730.8 billion, compared \nwith the increase of 4.2 per cent in the preceding quar-\nter. Narrow money (M1) also, rose by 14.6 per cent to \n=N=4,967.3 billion over the level in the preceding quar-\nter. The rise in M2 was due to the 12.7 per cent increase \nin aggregate banking system credit to the domestic \neconomy (net), reinforced by the 9.6 per cent rise in \nforeign assets (net) (fig. 1 and table 1). \n \nAt =N=7,875.5 billion, aggregate banking system credit \n(net) to the domestic economy rose by 12.7 per cent in \nthe fourth quarter of 2009, compared with the increase \nof 23.1 per cent in the preceding quarter. The develop-\nment reflected the 19.2 per cent rise in claims on the \nFederal Government, reinforced by the 3.5 per cent in-\ncrease in claims on the private sector. \n \nBanking system‟s credit (net) to the Federal Govern-\nment increased by 19.2 per cent to negative =N=2,279.9 \nbillion, compared with the increase of 2.1 per cent in \nthe preceding quarter. The rise was accounted for \nlargely \nby \nthe \nincrease \nin \ndeposit \nmoney \nbanks‟ (DMBs) holding of Federal Government securi-\nties. \n \nBanking system‟s credit to the private sector increased \nby 3.5 per cent to =N=10,155.4 billion, compared with \nthe increase of 14.7 per cent in the preceding quarter. \nThe rise reflected largely the 3.2 per cent increase in \nDMBs claims on the sector (fig 2). \n \nAt =N=7,548.5 billion, foreign assets (net) of the bank-\ning system grew by 9.6 per cent, as against the decline \nof 9.9 per cent in the preceding quarter. The develop-\nment was attributed largely to the 10.6 per cent increase \nin the CBN‟s holdings. \n \nQuasi money increased by 12.5 per cent to =N=5,763.5 \nbillion, compared with the increase of 11.6 per cent in \nthe preceding quarter. \n \nThe development was attributed to the rise in all the \ncomponents namely, time, savings and foreign cur-\nrency deposits of the DMBs. \n \nOther assets (net) of the banking system, however, \ndeclined by 6.2 per cent to =N=4,693.2 billion, com-\npared with the decline of 4.1 per cent in the preceding \nquarter. The fall reflected largely the decline in un-\nclassified assets of the CBN during the quarter. \n \n2.2 Currency-in-circulation and Deposits at \nthe CBN \n \nAt =N=1,185.0 billion, currency in circulation rose by \n14.8 per cent in December 2009 over the level in the \npreceding quarter. The increase was attributed wholly \nto the 19.5 per cent rise in currency outside the bank-\ning system during the period. \n \nTotal deposits at the CBN amounted to =N=5,105.3 \nbillion, indicating an increase of 3.2 per cent over the \nlevel in the third quarter, 2009. The development was \nattributed largely to the increase in private sector de-\nposits. The shares of the Federal Government, banks \nand “others” in total deposits at the CBN were 77.8, \n9.5 and 12.7 per cent, respectively, compared with the \nshares of 86.2, 9.1 and 4.7 per cent, in the third quar-\nter, 2009. \nM ajor monetary aggregates rose, while \nbanks’ deposit and lending rates indicated mixed devel-\nopments in the fourth quarter of 2009. The value of \nmoney market assets declined, following largely the fall \nin Commercial Papers (CPs). Transactions on the Nige-\nrian Stock Exchange (NSE) recorded mixed develop-\nments during the review quarter. \n4th \nQtr 07\n1st \nQtr 08\n2nd \nQtr 08\n3rd \nQtr 08\n4th \nQtr 08\n1st \nQtr 09\n2nd \nQtr 09\n3rd \nQtr 09\n4th \nQtr 09\nQCP\n7.3\n3.9\n13.3\n10.4\n7.8\n2.1\n4\n14.7\n3.5\nQCG\n-7.8\n1.9\n-8.6\n-19.4\n-3.8\n-9.6\n15.4\n2.1\n19.2\nQAC\n6.9\n5.5\n16.6\n4.4\n16.7\n-2.6\n17.8\n23.1\n12.7\nCCP\n90.8\n18\n33.6\n47.5\n59.4\n2.1\n6.2\n21.7\n26.0\nCCG\n-22\n5.6\n-14.7\n-36.9\n-31.2\n-9.6\n7.3\n9.3\n26.6\nCAC\n276\n28.8\n50.2\n56.8\n84.2\n-2.6\n14.7\n41.2\n59.0\n-100\n-50\n0\n50\n100\n150\n200\n250\n300\nPer cent \nFigure 2: Aggregate Domestic Credit to the Economy (Quarterly and \nCummulative Growth Rate)\n \n \n \n \n \n \n 3 \n \n \n 2.3 \nMoney Market Developments \n \nMoney market activities remained relatively stable dur-\ning the fourth quarter, reflecting the effects of the vari-\nous policy measures taken to ensure the soundness of \nthe banking system and boost the economy. Direct auc-\ntions at the open market remained suspended in line \nwith the Bank‟s policy thrust, while deals were not con-\nsummated at the two-way quote trading platform as \nrates quoted were considered speculative and inconsis-\ntent with the prevailing market rates. The Bank‟s win-\ndow remained open, providing the deposit money banks \nand discount houses an avenue to meet their short-term \nliquidity requirements. Public participation at the pri-\nmary auction of Nigerian Treasury Bills (NTBs) and \nFederal Government of Nigeria (FGN) Bonds remained \nimpressive, indicating market players‟ preference for \ngovernment securities due to its safety. In continuation \nof the banking system reforms, the sum of =N=200.00 \nbillion was injected to ease the operations of the five \nDMBs that had liquidity problems. In order to encour-\nage trading amongst DMBs, the interest on the standing \ndeposit facility was reduced to 2.0 per cent, from 4.0 \nper cent. \n \nProvisional data indicated that the value of money mar-\nket assets outstanding at end-December 2009 was \n=N=3,322.3 billion, representing a decline of 4.6 per \ncent from the level at end-September 2009. The fall \nduring the period was attributed largely to the 29.5 per \ncent decline in Commercial Papers (CPs). \n \n2.3.1 \nInterest Rate Developments \n \nAvailable data indicated a general decline in banks‟ \ndeposit rates in the fourth quarter, 2009, while lending \nrates increased. With the exception of the average sav-\nings deposit rate, which rose by 0.58 percentage points \nto 3.38 per cent, all other rates on deposits of various \nmaturities declined from a range of 6.81 – 13.84 per \ncent in the preceding quarter to 6.40 – 13.10 per cent. \nSimilarly, at 11.72 per cent, average term deposit rate \ndeclined by 61 basis points from the level in the preced-\ning quarter. On the other hand, the average prime and \nmaximum lending rates increased by 37 and 30 basis \npoints to 18.75 and 23.12 per cent, respectively. Conse-\nquently, the spread between the weighted average term \ndeposit and maximum lending rates widened from \n10.49 percentage points in the preceding quarter to \n11.40 percentage points. The margin between the aver-\nage savings deposit and maximum lending rates, how-\never, narrowed from 20.02 percentage points in the pre-\nceding quarter to 19.74 percentage points. With head-\nline inflation rate at 12.0 per cent at end-December, all \ndeposit rates, with the exception of average savings and \n7-day rates, were positive in real terms. \n \n \nAt the inter-bank call segment, the weighted average \nrate, which stood at 12.68 per cent in the preceding \nquarter, fell to 6.25 per cent, reflecting the liquidity \ncondition in the inter-bank funds market. Similarly, the \nweighted average rate at the Open Buy Back (OBB) fell \nfrom 6.92 per cent in September to 4.86 per cent at the \nend of the fourth quarter. In tandem with activities at \nthe inter-bank market, Nigeria Inter-bank Offered Rate \n(NIBOR) for the 7- and the 30-day tenors declined to \n8.74 and 13.52 per cent at the end of the fourth quarter \nfrom 14.18 and 15.91 per cent respectively, in the third \nquarter 2009 (fig. 3). \n \n2.3.2 Commercial Papers (CPs) \n \nInvestment in Commercial Papers (CPs) as a supple-\nment to bank credit to the private sector fell in the re-\nview period. The value of CPs held by DMBs fell by \n=N=213.44 billion to N509.1 billion at end-December \n2009, as against the increase of =N=120.05 billion at \nend-September 2009. Thus, CPs constituted 15.3 per \ncent of the total value of money market assets out-\nstanding at end-December 2009, compared with 20.7 \nper cent at the end of the preceding quarter. \n \n2.3.3 Bankers’ Acceptances (BAs) \n \nHoldings of BAs by DMBs fell by 43.1 per cent to \n=N=62.2 billion as at end-December 2009, as against \nthe increase of 47.4 per cent in the preceding quarter. \nThe fall reflected the decline in investments by deposit \nmoney banks and discount houses. Consequently, BAs \naccounted for 1.9 per cent of the total value of money \nmarket assets outstanding at the end of the fourth quar-\nter, compared with 3.1 per cent at the end of the preced-\ning quarter. \n \n2.3.4 Open Market Operations \n \nAggressive mop–up of excess liquidity remained sus-\npended and there was no direct auction at the open mar-\nket. In the same vein, there was no purchase or sale of \ngovernment securities through the two-way quote plat-\nform due to the unattractiveness of the offer rates \nquoted at the trading sessions. \n \n \n \n \n \n 4 \n \n \n 2.3.5 Primary Market \n \nAt the primary market, NTBs of 91, 182 and 364-day \ntenors were offered fortnightly during the review pe-\nriod in line with the issue program. Total NTBs issued \nand allotted was =N=453.05 billion, compared with \nthe =N=322.22 billion apiece issued and allotted in the \nthird quarter. Public subscriptions stood at =N=873.30 \nbillion, compared with =N=513.13 billion in the third \nquarter. The range of issue rates for the 91-, 182- and \n364-day NTBs was from 2.50-7.30 per cent, compared \nwith the range of 2.80-6.75 per cent for the same ten-\nors in the preceding quarter. All the auctions were \noversubscribed as market players showed stronger \npreference for the risk-free government securities. The \nliquidity surfeit occasioned by the various injections \nalso boosted activities at the primary market. In line \nwith market realities, the marginal rates for the issues \ntrended downward in the last two months of the review \nperiod. \n \n2.3.6 Bonds Market \n \nFGN Bonds of 3-, 5- and 20-year tenors were re-\nopened (in line with the restructuring of the domestic \ndebt profile to longer tenors) and offered to the public \nin the period under review. Total issue and allotment \nduring the fourth quarter, 2009 stood at =N=180.0 bil-\nlion, compared with =N=170.0 billion, in the preced-\ning quarter. Total subscriptions stood at =N=259.61 \nbillion. A breakdown of the total issues and allotments \nshowed that =N=35.00 billion, =N=30.00 billion and \n=N=66.00 billion, were issued for the 3-, 5- and 20-\nyear tenors, while the total subscriptions were \n=N=76.29 billion, =N=66.32 billion and =N=117.00 \nbillion, respectively. In the preceding quarter, issue \nand allotment for the respective tenors were =N=54.00 \nbillion 3-year, =N=66.00 billion 5-year and =N=60.00 \nbillion 20-year. The FGN Bonds were offered and al-\nlotted at marginal rates ranging between 6.75-8.25, \n8.32– 12.49 and 8.50– 12.00 per cent, respectively, for \nthe 3-, 5– and 20– year tenors, as against the issue rate \nrange of 7.88-8.14, 8.14– 9.39 and 10.39– 11.00 per \ncent, in the preceding quarter. The impressive sub-\nscription, especially for the 20-year tenor, reflected \nmarket players‟ confidence in the Nigerian economy \nand perceived stable and attractive yields on the instru-\nments. \n \n2.3.7 CBN Standing Facilities \n \nAnalysis of activities indicated that there was im-\nproved liquidity in the banking system in the quarter \nunder review. Consequently, cumulative lending facil-\nity granted to the DMBs at end-December 2009 stood \nat =N=2,360.80 billion, compared with =N=10,659.29 \nbillion in the third quarter of 2009. Total deposits \nstood at =N=5,613.25 billion. The lending and deposit \nrates were fixed at 8.00 and 2.00 per cent, respectively, \n(plus 2 and minus 4 per cent above and below the \nMonetary Policy Rate). \n2.4 \nDeposit Money Banks’ Activities \n \nAvailable data indicated that the total assets/liabilities \nof the DMBs amounted to =N=17,522.9 billion, repre-\nsenting an increase of 4.7 per cent over the level in the \npreceding quarter. The development was attributed \nlargely to the 17.6 per cent increase in reserves, rein-\nforced by the 14.5 per cent rise in claims on central \ngovernment. \n \nFunds, which were sourced mainly from the accumula-\ntion of capital accounts and time, savings and foreign \ncurrency deposits were used mainly for the settlement \nof unclassified liabilities. \n \nAt =N=11,097.2 billion, credit to the domestic econ-\nomy rose by 5.5 per cent over the level in the preced-\ning quarter. The development was attributed wholly to \nthe 3.2 per cent increase in claims on the private sec-\ntor. \n \nCentral Bank‟s credit to the DMBs rose by 37.5 per \ncent to =N=409.2 billion in the review quarter, reflect-\ning largely the increase in CBN‟s loans & advances to \nthe DMBs. \n \nTotal specified liquid assets of the DMBs stood at \n=N=2,646.0 billion, representing 26.4 per cent of their \ntotal current liabilities. At that level, the liquidity ratio \nrose by 0.9 and 1.4 percentage points over the preced-\ning quarter‟s level and the stipulated minimum ratio of \n25.0 per cent. The loans-to-deposit ratio fell by 4.2 \npercentage points from the level in the preceding quar-\nter to 84.3 per cent, and exceeded the prescribed mini-\nmum target of 80.0 per cent by 4.3 percentage points. \n \n2.5 \nDiscount Houses’ Activities \n \n Total assets/liabilities of the discount houses stood at \n=N=346.0 billion in the fourth quarter of 2009, indicat-\ning an increase of 6.4 per cent over the level in the \npreceding quarter but a decline of 10.1 per cent from \nthe corresponding period of 2008. The increase in as-\nsets was accounted for by the 71.1 per cent rise in \nclaims on others, reinforced by the 9.4 per cent in-\ncrease in claims on the Federal Government during the \nquarter. Correspondingly, the rise in total liabilities \nwas attributed largely to the 29.7 per cent increase in \n“money at call” during the period. \n \nDiscount houses‟ investments in Federal Government \nsecurities of less than 91 days maturity rose to \n=N=52.4 billion, representing 19.0 per cent of their \ntotal deposit liabilities. At this level, discount houses‟ \ninvestments rose by 9.5 per cent over the level in the \npreceding quarter. This level of investment was 41.0 \npercentage points below the prescribed minimum level \nof 60.0 per cent for fiscal 2009. \n \n \n \n \n \n \n \n \n 5 \n \n \n Total borrowing by the discount houses was =N=0.02 \nbillion, while their capital and reserves amounted to \n=N=42.0 billion. Thus, resulting in a gearing ratio of \n1.7:1, compared with the stipulated maximum target \nof 50:1 for fiscal 2009. \n \n2.6 \nCapital Market Developments \n \n2.6.1 \nSecondary Market \n \nAvailable data indicated that the volume and value of \ntraded securities declined by 4.5 and 14.5 per cent to \n27.6 billion shares and =N=177.0 billion, respectively, \ncompared with 28.9 billion shares and =N=207.1 bil-\nlion in the third quarter. Total turnover volume and \nvalue between January and December 2009 was 102.9 \nbillion shares and =N=685.7 billion, respectively. The \nbanking sub-sector was the most active on the Ex-\nchange with traded volume of 15.5 billion shares val-\nued at =N=115.7 billion exchanged in 201,284 deals. \n \n2.6.2 Over-the-Counter (OTC) Bonds Mar-\nket \n \n \nTransactions on the over-the-counter (OTC) bond \nsegment of the market indicated that a turnover of 3.8 \nbillion units worth =N=4.5 trillion in 42,241 deals was \nrecorded in the review quarter, compared with a total \nof 4.7 billion units valued at =N=5.3 trillion in 38,418 \ndeals during the preceding quarter. The most active \nbond measured by turnover volume was the 5th FGN \nBond 2028 Series 5 with traded volume of 275.4 mil-\nlion units valued at =N=477.7 billion in 4,541 deals. \nCumulatively, total transactions on FGN Bonds \nthrough the OTC were 17.1 billion valued at =N=18.5 \ntrillion in 134,120 deals, compared with 10.35 billion \nshares worth =N=10.44 trillion in 78,248 deals in \n2008. \n \n2.6.3 New Issues Market \n \nIn the new issues market, 3.7 billion shares of \n=N=0.50 each in favor of Beco Petroleum Products \nPlc were admitted at a price of =N=2.50 per share. \nThe company was listed in the Petroleum Marketing \nSub-sector. \nAlso, 7,930 shares of =N=0.50 each in favor of Hon-\neywell Flour Mills Plc were admitted at a price of \n=N=8.50 per share after the conclusion of the offer for \nsale and initial public offering. The company was \nlisted in the Food, Beverages & Tobacco Sub-sector. A \ntotal of 3.2 million units of Crusader (Nig) Plc Unse-\ncured Convertible Debenture Stock 2013 was also ad-\nmitted on the daily official list at =N=1,000 par value, \nbringing the number of industrial loans to 44. This \nrepresented 80.6 per cent subscription level of the \n=N=4.0 billion 12.0 per cent Unsecured Convertible \nDebenture Stock 2013. A total of 10.0 billion shares of \n=N=0.50 each in favor of Guaranty Trust Assurance \nPlc were admitted at a price of N3.00 per share. Also, \nthe 12,350,000,000 shares of =N=0.50 each in favour \nof Unity Capital Assurance Plc were admitted at a \nprice of =N=2.50 per share. The companies were listed \nin the Insurance Sub-sector. In addition, the 13.2 bil-\nlion shares of =N=50 each in favor of Resort Savings \nand Loans Plc were admitted at a price of =N=1.25 per \nshare by way of Introduction. The company was listed \nin \nthe \nMortgage \nCompanies‟ \nSub-sector. \nThe \n201,885,335 shares of =N=0.50 each in favour of \nMcNichols Consolidated Plc were admitted at a price \nof =N=0.98 per share. During the review quarter, there \nwas one (1) supplementary listing, compared with \ntwenty-one (21) in the preceding quarter. \n \nIn another development, forty-nine securities were \ndelisted from the Daily Official list on maturity during \nthe review period. These included the Nigerian Inter-\nnational Debt Fund delisted from the equity section to \nmemorandum listing, four State Government Bonds, \nforty-one industrial loans and three preference stocks. \n \n2.6.4 Market Capitalization \n \nThe total market capitalization of the 266 listed securi-\nties declined by 10.3 per cent to =N=7.0 trillion from \nthe preceding quarter‟s level. The fall in market capi-\ntalization was attributed to the price losses recorded by \nthe highly capitalized stocks and the delisting of forty-\nnine securities. The 216 listed equities accounted for \n=N=5.0 trillion or 71.0 per cent of the total market \ncapitalization. \n \n2.6.5 NSE All-Share Index \n \nThe NSE All-Share Index declined by 5.6 per cent to \nclose at 20,827.17 (1984=100) at end-December 2009. \nRelative to the closing value of 31,450.78 on Decem-\nber 31, 2008, the year-to-date decline in the NSE All-\nShare-Index stood at 33.8 per cent. However, the NSE \nFood/Beverage Index rose by 16.7 per cent to close at \n526.71, while the NSE Oil/Gas Index increased by 0.1 \nper cent to close at 288.06. The NSE Insurance Index \nfell by 20.2 per cent to close at 249.01, while the NSE \nBanking Index declined by 5.3 per cent to close at \n339.32. \n \n \n \n \n \n \n \n \n 6 \nFigure 4: Volume and value of traded securities\n0\n20\n40\n60\n80\n4th\nQtr\n'07\n1st\nQtr\n08\n2nd\nQtr\n'08\n3rd\nQtr\n'08\n4th\nQtr\n'08\n1st\nQtr\n09\n2nd\nQtr\n09\n3rd\nQtr\n09\n4th\nQtr\n09\nNo.\n0\n200\n400\n600\n800\n1000\n1200\nN'billion\nVolume of traded securities\nValue of securities\n \n \n \n \n3.0 \nFISCAL OPERATIONS \n \n3.1 \nFederation Account Operations \n \nAvailable data showed that total federally-collected \nrevenue during the fourth quarter of 2009 stood at \n=N=1,371.51 billion, representing an increase of 3.4 \nand 13.9 per cent over the proportionate budget esti-\nmate and the receipts in the preceding quarter, respec-\ntively. At =N=936.27 billion, oil receipts, which consti-\ntuted 68.3 per cent of the total, exceeded the proportion-\nate budget estimate and the receipts in the preceding \nquarter by 20.2 and 39.0 per cent, respectively. The \nincrease in oil receipts relative to the preceding quarter \nwas due to the improvements in both the volume and \nprice of crude oil in the international oil market. \n \nNon-oil receipts, at =N=435.24 billion or 31.7 per cent \nof the total, was lower than the budget estimate and the \nreceipts in the preceding quarter by 20.5 and 17.9 per \ncent, respectively. The development reflected largely \nthe fall in customs and excise duties, Value-Added Tax \n(VAT) and Independent Revenue of the Federal Gov-\nernment (fig 7). \n \nAs a percentage of GDP, oil revenue was 15.2 per cent, \nwhile non-oil revenue stood at 6.7 per cent in the fourth \nquarter of 2009. \n \nOf the total federally-collected revenue during the re-\nview quarter, the sum of =N=687.67 billion was trans-\nferred to the Federation Account for distribution among \nthe three tiers of government and the 13.0 per cent deri-\nvation fund. The Federal Government received \n=N=332.09 billion, while the States and Local Govern-\nments received =N=168.44 billion and =N=129.86 bil-\nlion, respectively. The balance of =N=57.28 billion \nwent to the 13.0 per cent derivation fund for distribu-\ntion by the oil producing states. To bridge the shortfall \nin revenue for the period, the sum of =N=1,078.60 bil-\nlion was drawn from the excess crude account and \nshared as follows: Federal Government (=N=476.01 \nbillion), State Governments (=N=289.90 billion), Local \nGovernments (=N=219.45 billion) and oil producing \nstates (=N=93.24 billion). \nAlso, the Federal Government received =N=17.15 bil-\nlion, while the State and Local Governments received \n=N=57.16 and =N=40.01 billion, respectively, from the \nVAT Pool Account. \n \n3.2 \nThe Fiscal Operations of the Three \nTiers of Government \n \n3.2.1 \nThe Federal Government \n \nAt =N=765.44 billion, Federal Government retained \nrevenue for the fourth quarter 2009, was higher than the \nproportionate budget estimate and the receipts in the \npreceding quarter by 27.5 and 18.8 per cent, respec-\ntively. \n \nAt =N=1,041.28 billion, total estimated expenditure for \nthe review quarter rose by 28.6 and 10.6 per cent over \nthe proportionate budget estimate and the level in the \npreceding quarter, respectively. The rise in total expen-\nditure relative to the budget estimate and the preceding \nquarter was attributed largely to the increase in pension \npayments, overhead costs and statutory transfers during \nthe quarter. A breakdown of total expenditure showed \nthat the recurrent component accounted for 53.8 per \ncent, capital component 31.1 per cent, while statutory \ntransfers accounted for the balance of 15.1 per cent. As a \npercentage of GDP, recurrent expenditure was 8.6 per \ncent, while capital expenditure and transfers stood at 5.0 \nand 2.4 per cent, respectively. \n \nThe fiscal operations of the Federal Government in the \nfourth quarter, 2009, resulted in an estimated deficit of \n=N=275.83 billion, compared with the budgeted deficit \nof =N=209.15 billion and a surplus of =N=55.86 billion \nin the corresponding period. \n \nAs a percentage of GDP, the fiscal deficit was 4.2 per \ncent in the review quarter. The fiscal deficit was largely \nfinanced from domestic sources through the issuance of \nFGN Bonds and Treasury bills. \n \n \n \n \n \n \n 7 \nFigur e 6 : Compone nt s of Fe de r a lly Colle c t e d \nRe v e nue ( =N= Billion)\n936.27\n435.24\n0 .0 0\n10 0 .0 0\n2 0 0 .0 0\n3 0 0 .0 0\n4 0 0 .0 0\n5 0 0 .0 0\n6 0 0 .0 0\n7 0 0 .0 0\n8 0 0 .0 0\n9 0 0 .0 0\n1,0 0 0 .0 0\nOIL \nNON OIL \n \n \n \n 3.2.2 Statutory Allocations to State Govern-\nments \n \nDuring the review quarter, total receipts, including the \n13.0 per cent Derivation Fund and share of VAT by the \nState Governments from the Federation Account stood \nat =N=488.84 billion. This represented an increase of \n32.8 and 7.2 per cent over the levels in the preceding \nquarter and the corresponding period of 2008, respec-\ntively. \n \nFurther breakdown showed that at =N=56.76 billion, \nreceipts from the VAT Pool Account declined by 6.3 \nper cent from the level in the preceding quarter, while \nreceipts from the Federation Account stood at \n=N=432.08 billion. On monthly basis, the sum of \n=N=229.68 billion, =N=125.83 billion and =N=133.33 \nbillion were allocated to the 36 state governments in \nOctober, November and December 2009, respectively. \n \n3.2.3 Statutory Allocations to Local Govern-\nment Councils \n \n \nTotal receipts by the Local Governments from the Fed-\neration and VAT Pool Accounts during the fourth quar-\nter of 2009, stood at =N=210.73 billion. This was lower \nthan the level in the preceding quarter and the corre-\nsponding quarter of 2008 by 1.3 and 17.6 per cent, re-\nspectively. Of this amount, allocation from the Federa-\ntion Account was =N=170.72 billion or 81.0 per cent of \nthe total, while VAT Pool Account accounted for \n=N=40.01 billion or 19.0 per cent. On monthly basis, \nthe sums of =N=71.45 billion, =N=72.50 billion and \n=N=66.78 billion were allocated to the 774 local gov-\nernments in October, November and December 2009, \nrespectively. \n \n3.3 \nConsolidated Federal Government Debt \n \nAt =N=3,812.62 billion or 16.8 per cent of GDP, the \ntotal Federal Government debt as at end-December \n2009, rose by 4.8 per cent over the level at end-\nSeptember 2009. The breakdown comprised of domes-\ntic debt of =N=3,228.03 billion and external debt of \n=N=584.60 billion (US$3.95 billion). \n \n3.3.1 \nDomestic Debt \n \nThe domestic debt stock of the Federal Government \noutstanding at the end of the fourth quarter, 2009 was \n=N=3,228.03 billion, representing an increase of 5.6 \nper cent over the level at the end of the preceding quar-\nter. As a percentage of GDP, total domestic debt was \n14.2 per cent. The rise in domestic debt was accounted \nfor by the issuance of additional FGN Bonds and \nTreasury bills outstanding during the quarter. \n \n \n \n4.0 \nDOMESTIC ECONOMIC CONDITIONS \n4.1 \nAgricultural Sector \n \nAgricultural activities during the review quarter cen-\ntered on harvesting of tubers, fruit, vegetables and late \nmaturing grains as well as pre-planting operations in \npreparation for dry season planting. In the livestock sub\n-sector, farmers were engaged in fattening and other \nactivities in anticipation of the end of year sales. \n \nDuring the review period, a total of =N=3.34 billion \nwas guaranteed to 20,827 farmers under the Agricul-\ntural Credit Guarantee Scheme (ACGS). This amount \nrepresented a decline of 1.1 per cent from the preceding \nquarter but 15.2 per cent over the level in the corre-\nsponding period of 2008. \n \n \n \n \n \n \n \n \n 8 \nA ggregate output growth in the economy \nmeasured by the gross domestic product (GDP) was \nestimated at 9.0 per cent in the fourth quarter of 2009, \ncompared with 7.1 per cent in the preceding quarter. \nAgricultural activities centered on harvesting of tubers, \nfruits, vegetables, late maturing grains as well as pre-\nplanting operations in preparation for dry season \nplanting. In the livestock sub-sector, farmers were en-\ngaged in fattening and other activities in anticipation \nof the end of year sales. Crude oil production was esti-\nmated at 1.96 million barrels per day (mbd) or 180.32 \nmillion barrels for the quarter. The end-period infla-\ntion rate for the fourth quarter of 2009, on a year-on-\nyear basis, was 12.0 per cent, compared with 10.4 per \ncent in the preceding quarter. The inflation rate on a \n12-month moving average basis was 12.4 per cent, \ncompared with the preceding quarter’s level of 13.1 \nper cent. \n \n \n A sub-sectoral analysis of the loans guaranteed indi-\ncated that the food crops sub-sector had the largest \nshare of =N=2.26 billion or 67.9 per cent to 16,047 \nbeneficiaries, while the livestock sub-sector received \n=N=607.34 million or 18.2 per cent to 1,691 benefici-\naries. Also, 2,314 beneficiaries in the fisheries sub-\nsector obtained =N=339.65 million or 10.2 per cent, \nwhile =N=9.59 or 0.2 per cent went to 38 beneficiar-\nies in the mixed cropping sub-sector. In the cash \ncrops sub-sector, 585 beneficiaries got =N=103.46 \nmillion or 3.1 per cent, while 152 beneficiaries in \n„others‟ had =N=11.76 million or 0.4 per cent. Fur-\nther analysis showed that 31 states benefited from the \nscheme during the quarter, the highest and lowest \nsums of =N=777.82 million (23.3 per cent) and \n=N=11.23 million (0.3 per cent) went to Delta and \nOndo States, respectively. \n \nThe retail prices of most staples recorded decline in \nthe fourth quarter of 2009. Twelve of the fourteen \ncommodities monitored recorded price decline from \ntheir levels in the preceding quarter. These ranged \nfrom 1.5 per cent for vegetable oil to 15.1 per cent for \nwhite beans, while groundnut oil and yam flour re-\ncorded price increase of 1.8 and 12.3 per cent, respec-\ntively. The fall in the price of most commodities was \nattributed to the dampening effect of good harvest. \n \n4.2 \nIndustrial Production \n \nIndustrial activities during the fourth quarter of 2009, \nindicated improvement relative to the preceding quar-\nter. At 118.56 (1990=100), the estimated index of \nindustrial production rose by 2.6 and 1.1 per cent over \nthe levels attained in the preceding quarter and the \ncorresponding period of 2008, respectively. The de-\nvelopment reflected the improvement in activities in \nall the sectors. \n \nThe estimated index of manufacturing production, at \n88.56 (1990=100), increased by 0.2 per cent over the \nlevel in the preceding quarter but declined by 3.4 per \ncent from the level in the corresponding period of \n2008. The estimated capacity utilization also rose \nmarginally by 0.1 percentage points to 53.1 per cent \nduring the review quarter. The increase was attributed \nto the rise in demand due to the festive period, cou-\npled with the marginal improvement in electricity \nsupply. \n \nAt 129.89 (1990=100), the index of mining produc-\ntion increased by 2.4 and 0.7 per cent over the lev-\nels attained in the preceding quarter and the corre-\nsponding period of 2008, respectively. The develop-\nment was attributed to the rise in crude oil and gas \nproduction, resulting from the amnesty programme \nof the Federal Government, which reduced the ac-\ntivities of militants in the Niger Delta region. \n \nAt 2,230.0 MW/h, estimated average electricity gen-\neration increased by 6.5 per cent over the level at-\ntained in the preceding quarter. The rise reflected \nthe increase in gas supply to the thermal stations. \n \nAt 2,090.0 MW/h, estimated average electricity con-\nsumption rose by 9.5 per cent over the level in the \npreceding quarter. The increase in electricity con-\nsumption was attributed to the improvement in power \nsupply experienced during the review quarter (fig. \n8). \n \n4.3 Petroleum Sector \n \nNigeria‟s crude oil production, including condensates \nand natural gas liquids, was estimated at 1.96 million \nbarrels per day (mbd) or 180.32 million barrels (mbd) \nduring the fourth quarter of 2009, compared with \n1.73 mbd or 159.16 mbd in the preceding quarter. \nThis represented an increase of 13.3 per cent. The \ndevelopment was attributed to the relative peace be-\ning experienced in the Niger Delta region as a result \nof the Federal Government‟s amnesty programme. \nCrude oil export was estimated at 1.51 mbd or 138.92 \nmillion barrels in the review period, compared with \n1.28 mbd or 117.76 million barrels in the preceding \nquarter. Deliveries to the refineries for domestic con-\nsumption remained at 0.445 mbd or 40.94 million \nbarrels in the review quarter. \n \nAt an estimated average of US$78.25 per barrel, the \nprice of Nigeria‟s reference crude, the Bonny Light \n(37º API), rose by 11.7 per cent over the level in the \npreceding quarter. The average prices of other com-\npeting crudes namely, the West Texas Intermediate, \nthe U.K Brent and the Forcados also rose by 13.7, \n12.3 and 12.0 per cent to US$77.36, US$77.22 and \nUS$78.11 per barrel, respectively. The average price \nof OPEC‟s basket of eleven crude streams also, rose \nby 12.0 per cent to US$75.89 over the level in the \npreceding quarter. The increase in price was attrib-\nuted to the rising expectations from the emerging \nglobal economic recovery (fig. 9). \n \n \n \n \n \n \n \n \n 9 \nQt4. \n07\nQt1. \n08\nQt2. \n08\nQt3. \n08\nQt4. \n08\nQt1. \n09\nQt2. \n09\nQt3. \n09\nQt4. \n09\nManuf.\n90.1\n90.0\n88.0\n89.3\n86.4\n89.9\n88.6\n88.4\n88.6\nMining\n133.6\n132.9\n132.8\n132.5\n127.2\n127.6\n125.9\n125.9\n129.9\nElectricity\n191.3\n185.6\n185.6\n185.6\n185.6\n160.4\n160.4\n160.4\n160.4\nAll Sectors\n118.84 118.75 119.2\n120.9\n119.8\n115.9\n114.6\n115.6\n118.6\n100.0\n110.0\n120.0\n130.0\n140.0\n150.0\n160.0\n170.0\n180.0\n190.0\n200.0\nIndices\nFigure 8: Index of Industrial Production (1990=100)\n \n \n \n4.4 \nConsumer Prices \n \nAvailable data showed that the all-items composite \nConsumer Price Index (CPI) at the end of the fourth \nquarter of 2009, was 215.6 (May 2003=100), repre-\nsenting an increase of 1.5 and 11.9 per cent over the \nlevels in the preceding quarter and the corresponding \nperiod of 2008, respectively. The development was \nattributed largely to the increase in the prices of food \nand non-alcoholic beverages. \nThe urban all-items CPI at the end of the fourth quarter \nof 2009, was 230.1 (May 2003=100), indicating an \nincrease of 0.3 and 7.9 per cent over the levels in the \npreceding quarter and the corresponding quarter of \n2008, respectively. Similarly, the rural all-items CPI at \nthe end of the quarter, at 209.4 (May 2003=100), repre-\nsented an increase of 2.1 and 14.0 per cent over the \nlevels in the preceding quarter and the corresponding \nperiod of 2008, respectively. The end-period inflation \nrate for the fourth quarter of 2009, on a year-on-year \nbasis, was 12.0 per cent, compared with 10.4 and 15.1 \nper cent in the preceding quarter and the corresponding \nquarter of 2008, respectively (fig. 10). \nThe inflation rate on a twelve-month moving average \nbasis for the fourth quarter of 2009, was 12.4 per cent, \ncompared with 13.1 and 11.6 per cent recorded in the \npreceding quarter, 2009 and the corresponding period \nof 2008, respectively (fig. 11). \n \n \n \n5.0 \nEXTERNAL SECTOR DEVELOPMENTS \n \n5.1 \nForeign Exchange Flows \n \nForeign exchange inflow and outflow through the CBN \nin the fourth quarter of 2009 amounted to US$5.84 \nbillion and US$6.40 billion, respectively, representing \na net outflow of US$0.56 billion. Relative to the re-\nspective levels of US$8.08 billion and US$9.01 billion \nin the preceding quarter, inflow and outflow declined \nby 27.7 and 29.0 per cent, respectively. The fall in in-\nflow was attributed to the 85.5 per cent decline in non-\noil receipts, while the fall in outflow was due largely to \nthe 35.4 per cent decline in Wholesale Dutch Auction \nSystem (WDAS) utilization during the review quarter \n(fig. 12). \n \nAvailable data on aggregate foreign exchange flows \nthrough the economy indicated that total inflow \namounted to US$20.04 billion, representing an increase \nof 18.8 per cent over the level in the preceding quarter \nbut a decline of 16.0 per cent from the level in the cor-\nresponding period of 2008. Oil sector receipts, which \naccounted for 26.6 per cent of the total, stood at \nUS$5.33 billion, compared with the respective levels of \nUS$4.57 billion and US$9.87 billion in the preceding \nquarter and corresponding period of 2008. Non-oil pub-\nlic sector inflows, which accounted for 2.5 per cent of \nthe total, declined by 35.4 per cent, while autonomous \ninflow, which accounted for 70.9 per cent increased by \n61.2 per cent. \n \n \n \n \n \n \n 10 \nDec. 07 Mar. 08 Jun. 08 Sep. 08 Dec. 08 Mar. 09 Jun. 09\nSept. \n09\nDec. 09\nComposite\n167.4\n171.6\n184.1\n192.4\n192.6\n196.2\n204.7\n212.4\n215.6\nUrban\n191.4\n196.3\n204.7\n212.1\n213.1\n215.8\n223.5\n229.3\n230.1\n120\n130\n140\n150\n160\n170\n180\n190\n200\n210\n220\n230\n240\nNumber\nFig. 10: Quarterly Consumer Price Indices in \nNigeria (2003=100)\nDec.07Mar.08 Jun.08 Sep.08Dec.08Mar.09 Jun.09Sept.09Dec.09\nInflation 12MMA\n5.4\n5.8\n7.0\n9.2\n11.6\n13.1\n13.7\n13.1\n12.4\nInflation Yr-on-Yr\n6.6\n7.8\n12.0\n13.0\n15.1\n14.4\n11.2\n10.4\n12.0\n2\n4\n6\n8\n10\n12\n14\n16\n18\n20\nPer Cent\nFigure 11: Inflation Rate in Nigeria (Per Cent)\nP rovisional data indicated that foreign \nexchange inflow and outflow through the CBN in the \nfourth quarter of 2009 fell by 27.7 and 29.0 per cent, \nrespectively. Similarly, total non-oil export earnings \nreceipts by banks increased by 189.2 per cent from the \nlevel in the preceding quarter. The weighted average \nexchange rate of the Naira vis-à-vis the US dollar, \nappreciated by 0.6 per cent to =N=150.05 per dollar \nat the Wholesale Dutch Auction System (WDAS). \n \n \n \nAt US$6.48 billion, aggregate foreign exchange outflow \nfrom the economy declined by 29.9 and 66.1 per cent \nfrom the levels in the preceding quarter and the corre-\nsponding period of 2008, respectively. The fall in out-\nflow relative to the preceding quarter was accounted for \nlargely by the decline in funding of the WDAS segment \nof the foreign exchange market during the quarter under \nreview \n \n5.2 Non-Oil Export Proceeds by Exporters \n \nTotal non-oil export earnings by Nigeria‟s exporters \nrose by 189.2 per cent to US$971.17 million over the \nlevel in the preceding quarter. The development was \nattributed largely to the increase in the prices of the \ngoods traded at the international market. A breakdown \nof the proceeds in the review quarter showed that the \nproceeds of industrial, food products, manufactured \nproducts, transport, agricultural, and minerals stood at \nUS$212.08 million, US$6.96 million, US$430.47 mil-\nlion, \nUS$0.54 \nmillion, \nUS$282.94 \nmillion \nand \nUS$38.18 million, respectively. \n \nThe shares of industrial, food products, manufactured \nproducts, transport, agricultural, and minerals sub-\nsectors in non-oil export proceeds were 21.8, 0.7, 44.4, \n0.1, 29.1 and 3.9 per cent, respectively, in the review \nquarter. \n \n5.3 Sectoral Utilisation of Foreign Exchange \n \n \nThe invisibles sector accounted for the bulk (26.2 per \ncent) of total foreign exchange disbursed in the fourth \nquarter of 2009, followed by the industrial sector (20.8 \nper cent). Other beneficiary sectors, in a descending \norder of importance, included: minerals & oil (19.4 per \ncent), manufactured products (16.4 per cent), food (12.4 \nper cent), transport (4.3 per cent) and agricultural prod-\nucts (0.5 per cent) (Fig.13). \n \n5.4 Foreign Exchange Market Developments \n \nForeign exchange demand by the authorized dealers \nstood at US$5.97 billion, indicating a decline of 42.0 \nper cent from the level in the preceding quarter. Rela-\ntive to the level in the corresponding period of 2008, \ndemand fell by 63.6 per cent. The total amount of \nUS$4.74 billion was sold by the CBN during the pe-\nriod, indicating a decline of 35.7 per cent from the level \nin the preceding quarter (fig. 14). \n \nUnder the WDAS, the weighted average exchange rate \nof the Naira vis-à-vis the US dollar appreciated by 0.6 \nper cent to =N=150.05 per dollar from =N=150.89 in \nthe preceding quarter. It however depreciated by 18.7 \nper cent relative to the level in the corresponding period \nof 2008. In the bureaux-de-change segment of the mar-\nket, the naira traded at an average of =N=153.16 per \ndollar, compared with =N=157.36 and =N=125.25 per \ndollar in the preceding quarter and the corresponding \nquarter of 2008, respectively (fig. 15). Consequently, \nthe premium between the official and the bureaux-de-\nchange rates narrowed from 4.3 per cent in the preced-\ning quarter to 2.1 per cent (fig. 16). \n \n \n \n \n \n \n \n \n \n \n 11 \nFig. 13 : Sect oral U t ilisat ion of Foreign Exchange \n( Percent age of Tot al)\n0\n5\n10\n15\n20\n25\n30\n35\n40\nper cent\n3r d Qtr 2009\n19\n0.6\n10.4\n16.5\n4.3\n34.5\n14.7\n4th Qtr 2009\n20.8\n0.5\n12.4\n16.5\n4.3\n26.2\n19.3\n4th Qtr 2008\n18.0\n0.8\n10.0\n13.7\n3.4\n37.1\n17.0\nIndustr i a\nl\nAgr i cul tu\nr al\nFood\nM anuf act\nur es\nT r anspor\nt\nInvi si bl e\ns\nM i n. & Oi l\n3rd \nQtr \n07\n4th \nQtr \n07\n1st \nQtr \n08\n2nd \nQtr \n08\n3rd \nQtr \n08\n4th \nQtr \n08\n1st \nQtr \n09\n2nd \nQtr \n09\n3rd \nQtr \n09\n4th \nQtr \n09\nForex Sales at WDAS\n2.11 \n1.60 \n0.24 \n1.08 \n2.19\n6.58\n6.26 \n6.90 \n6.23 \n3.41 \nForex Demand at WDAS\n2.72 \n1.05 \n1.06 \n2.57 \n3.47\n13.25\n9.83 \n8.74 \n9.19 \n4.64 \nSupply of Forex to BDC\n1.93 \n1.77 \n1.40 \n1.67 \n2.44\n3.14\n1.32 \n0.93 \n1.12 \n1.33 \nTotal Forex Supply\n4.04 \n3.37 \n1.64 \n2.75 \n4.63\n9.77\n7.58 \n7.84 \n7.34 \n4.74 \n-2.00 \n-\n2.00 \n4.00 \n6.00 \n8.00 \n10.00 \n12.00 \n14.00 \nAmount in \n(US$Bn)\nFigure 14: Demand for and Supply of Foreign Exchange\n \n \n \n6.0 GLOBAL ECONOMIC CONDI-\nTIONS \nThe global output growth was projected to decline by \n1.1 per cent in 2009, as against the increase in output \ngrowth of 3.0 per cent in 2008. This significant decline \nwas due to the global financial and economic crisis. \nNevertheless, the unprecedented monetary, financial \nand fiscal policy interventions such as, large interest \nrate cuts, injection of liquidity and fiscal stimulus pro-\ngrams helped to reduce uncertainty and increased con-\nfidence and improvement in the financial conditions of \nthe global economy. With these interventions, the \nglobal output growth in many countries showed sign of \npositive recovery in the fourth quarter of 2009. \n \nIn the advanced economies, output was projected to \nrise by about 1.75 per cent in the fourth quarter of \n2009. The United States economy grew at 2.2 per cent \nin the third quarter of 2009, compared with the increase \nof 2.5 per cent in 2008. This was as a result of re-\nstrained investment and slightly more aggressive liqui-\ndation of inventories. GDP was expected to rise by 4.8 \nper cent in the fourth quarter of 2009 because of a \nsharp moderation in inventory de-stocking and the re-\nsult of the Supervisory Capital Assessment Program \n(SCAP) which boosted investors confidence in major \nfinancial institutions. \nThe Euro area economy grew by 0.4 per cent in the \nthird quarter of 2009 and this was expected to continue \nin the fourth quarter. The United Kingdom edged out of \nrecession in the fourth quarter of 2009. The 0.1 per cent \nincrease in the economy between October and Decem-\nber ended six straight quarters of shrinking output. \nGermany‟s economy shrank by 5.0 per cent in 2009 as \na result of the fall in the demand for its exports. The \ndecline contrasted sharply with the growth of 1.3 and \n2.5 per cent in 2008 and 2007, respectively. The fourth \nquarter GDP projection ranged between a decline of 0.2 \nand a rise of 0.2 per cent. The turnaround in 2009 was \nexpected to be driven mainly by rising exports and a \nturn in the inventory cycle, with continued support \nfrom stimulus. \n \nThe Western Hemisphere region showed signs of stabi-\nlization and recovery in the fourth quarter of 2009. \nThese economies were assisted by the improving con-\nditions in the global financial and commodity markets \nand stronger policy frameworks that promoted resil-\nience and allowed timely policy responses to support \neconomic activity. The real GDP in the region was pro-\njected to decline by 2.5 per cent in 2009, as against the \nincrease of 4.2 per cent in 2008. Consumption, invest-\nment, and exports fell sharply as a result of tighter ex-\nternal financing conditions, a deterioration in the re-\ngion‟s external demand, and lower worker remittances. \n \nAsia‟s export oriented economies were badly hit by the \nglobal downturn as a result of the drop in external de-\nmand. China, Indonesia, and India escaped a severe \nrecession as a result of the massive policy stimulus and, \nin the case of India, less dependence on exports. \nChina‟s GDP grew at 10.7 per cent in the fourth quarter \nof 2009 and there was the likelihood that the country \nwould achieve its targeted growth of 8.0 per cent in \n2009. China‟s growth in 2009 was largely as a result of \nthe 4 trillion yuan stimulus package. India‟s GDP in-\ncreased by 7.9 per cent in the fourth quarter of 2009. \nIn Japan, GDP growth which delined to 0.7 per cent in \n2008 was projected to grow at 0.3 per cent in the \nfourth quarter of 2009 due to the upward trend in ex-\nports and production, and with the release of the stimu-\nlus package of 7.2 trillion yen ($81 billion). \n \nThe rebound in Asia was linked to three factors: expan-\nsionary fiscal and monetary policy; a rebound in finan-\ncial markets and capital flows, which eased financial \nconstraints for smaller export enterprises and improved \nconsumer and business confidence. \n \n \n \n \n \n \n 12 \nFigure 16: WDAS-BDC Exchange Rate Premium \n(Quarterly)\n0\n2\n4\n6\n8\n10\n12\n14\n16\n18\n20\n'4th Qtr-06\n2nd Qtr-'07\n4th Qtr-07\n2nd Qtr 08\n4th Qtr 08\n2nd Qtr 09\n4th Qtr 09\nPremium\n \n \n The Real GDP growth for the Middle East was pro-\njected to rise by 2 per cent in 2009, compared with the \nincrease of 5.4 per cent in 2008. The drop in oil prices, \nthe sharp reduction in workers‟ remittances and foreign \ndirect investments had impact on the economies in the \nregion. But, the recent improvement in global financial \nconditions and rise in commodity prices helped to re-\nstore the pace of economic activity. Real GDP growth \nof oil was projected at about 4.5 per cent in 2009, more \nthan three times the growth rate of the oil exporters. \nThe sharp slowdown in activity of oil exporters re-\nflected cutbacks in oil production as a result of the ef-\nforts of OPEC to stabilize oil prices. \n \nThe global economic crisis badly affected the economy \nof the Commonwealth of Independent States (CIS). \nThe CIS Real GDP growth declined by 6.7 per cent in \n2009, as against the increase of 5.5 per cent in 2008. \nThe sharp decline in Russia Real GDP growth pro-\njected at 7.5 per cent led to painful adjustments in \nlower-income net energy importers in the region. Since \nmany of these economies depended on Russia for re-\nmittances and export earnings, the crisis depressed do-\nmestic demand, credit booms, and in some cases shut \ndown access to foreign capital markets. \n \nReal GDP growth in Africa was projected to decline \nfrom 5.2 per cent in 2008 to 1.7 per cent in 2009. This \ngrowth performance was encouraging given the sever-\nity of the external shocks. This outcome has been at-\ntributed to the governments in the region who have \nbeen able to use fiscal balances as shock absorbers, \nsustaining domestic demand and helping to contain \nemployment losses. \n \nRelative to their 2004-08 performance, oil exporters \n(Angola, Equatorial Guinea, Nigeria) were expected to \nexperience the sharpest growth slowdowns in 2009, as \noil revenues have fallen sharply. The GDP growth in \noil importers was projected to decelerate as well, from \nabout 5.0 per cent in 2004-08 to 1.5 per cent in 2009, as \ntheir exports declined. Real GDP in South Africa, the \nlargest economy of the region and an oil importer, was \nprojected to decline by 2.10 per cent in the fourth quar-\nter of 2009. In Nigeria, provisional data from the Na-\ntional Bureau of Statistics showed that real GDP grew \nby 9.0 per cent in the fourth quarter of 2009, up from \n4.50, 7.22 and 7.07 per cent in the first, second, and \nthird quarters of 2009, respectively. \n \n6.1 \nGlobal Inflation \n \nIn the advanced economies, inflation was projected to \nbe close to zero in 2009. With inflation rates remaining \nlow at 1.0 per cent, central banks in the advanced \neconomies reduced interest rates aggressively. The U.S. \nFederal Reserve and the Bank of Canada are explicitly \ncommitted to maintaining low policy rates. \nIt is projected that in the advanced economies, the rise \nin economic activities should keep core inflation at 1.0 \nper cent in 2009, compared with 3.4 per cent in 2008. \nIn the United States, consumer prices rose by 0.4 per \ncent in the third quarter of 2009. Japan‟s consumer \nprices fell to 1.7 percent in the fourth quarter of 2009 \nadding to signs of deflation in the economy. The out-\nlook for inflation is also negative at 0.1 per cent for \nnewly industrialised economies. As a result of the se-\nvere downturn in activities and sharp declines in com-\nmodity prices from their pre-crisis peaks, headline in-\nflation was low throughout the region. \n \nInflation pressures in the Western Hemisphere econo-\nmies eased, reflecting the continued weakness in eco-\nnomic activities and large output gaps. Inflation was \nprojected to fall from about 8.0 per cent in 2008 to 6.1 \nper cent in 2009. \n \nFollowing the significant slack in the economy of most \nAsian countries especially Japan, inflation was pro-\njected to remain in single digit and sometimes negative \nin the fourth quarter of 2009. In Emerging Asia, infla-\ntion was 7.0 per cent in 2008 and declined to 2.7 per \ncent in 2009. In the newly industrialized Asian econo-\nmies inflation rate was 4.5 per cent in 2008 and 1.0 per \ncent in 2009. In China, consumer prices climbed to 1.9 \nper cent year-on-year in the fourth quarter of 2009. \n \nFor the entire Middle East region, inflation was pro-\njected to decline from 15.0 per cent in 2008 to 8.3 per \ncent in 2009. \n \nIt was projected that most countries in the CIS region \nwould experience double digit inflation, especially \nRussia and Ukraine with 12.3 and 16.3 per cent infla-\ntion rates, respectively. This was as a result of signifi-\ncant fall in activity especially in construction sectors \naccompanied by currency devaluations. \n \nInflation in the Africa region was projected at a single \ndigit of 9 per cent. \n \n6.2 \nGlobal Commodity Prices \n \nThe rise in global demand and price of commodities \ncontinued in the fourth quarter. World crude oil output \nin the fourth quarter 2009, was estimated at 85.57 mil-\nlion barrels per day (mbd), while demand was esti-\nmated at 85.46 mbd, compared with 84.46 and 84.67 \nmbd supplied and demanded in the preceding quarter, \nrespectively. The increase in demand was due to opti-\nmism of a global economic recovery. Price develop-\nments would partly depend on how strongly supply \nresponds to recovering demand. \n \n \n \n \n \n \n \n 13 \n \n \n6.3 \nInternational Financial Markets \n \nDuring the fourth quarter of 2009, a number of events \ncaused price volatility in the major financial markets. \nThese included, the request by Dubai World on No-\nvember 25, 2009 for a debt repayment standstill and \nannouncements by credit rating agencies in relation to \nthe sovereign ratings of a number of European coun-\ntries. These developments made the market to focus on \nsovereign creditworthiness and some sovereign Credit \nDefault Swap (CDS). Equity prices rose by 1.0 per cent \nin the United Kingdom and the rest of Europe and by \nnearly 5.0 per cent in the United States in the fourth \nquarter of 2009. But the U.K equity prices remained \nover 20.0 per cent below pre-crisis peak. \n \nThe European Central Bank (ECB) left its main interest \nrate unchanged at 1.0 per cent, although this was still \nhigher than the Federal Reserve‟s and the Bank of Eng-\nland‟s rates in the fourth quarter of 2009. The ECB also \nannounced that it would begin to withdraw some of its \nprograms that were supporting markets with liquidity. \n \n6.4 \nOther International Economic Develop-\nments and Meetings \n \nOther major international economic developments and \nmeetings of relevance to the domestic economy during \nthe review quarter included: the 2009 Annual Meetings \nof the Inter-Governmental Group of Twenty-Four (G-\n24) on International Monetary Affairs and Develop-\nments, the Board of Governors of the World Bank \nGroup and the International Monetary Fund (IMF) held \nin Istanbul, Turkey from October 1 – 7, 2009. (see Oc-\ntober 2009 Report). \n \nAlso, the Joint Ministerial Committee of the Board of \nGovernors of the Bank and the Fund on the transfer of \nreal resources to developing countries (Development \nCommittee) met on October 5, 2009 in Istanbul. The \nCommittee noted that the global economy was showing \nsigns of recovery, but risks remained. They noted that \nin many developing countries, the impact of poverty on \nthe most vulnerable people was rising, while hard-\nearned progress towards the Millennium Development \nGoals was in danger of being reversed. To protect the \npoor, they urged members to follow through on com-\nmitments to increase aid and its effectiveness. They \nwelcomed continued progress by developing countries \nto improve their policy frameworks, and recognized \nthat addressing financing constraints and investing in \ndeveloping countries is critical for sustainable growth. \nThey also acknowledged that the revival of world trade \nand investment will drive growth and urged members \nto avoid protectionist measures (see October 2009 Re-\nport). \n \nAlso, the government of Canada tripled its share at the \nAfrican Development Bank with a callable capital of \nUS$2.6 billion. The action of the Canadian government \nwas to demonstrate its commitment to strengthen sup-\nport for international financial institutions in line with \nthe G-20 countries commitment. (see October 2009 \nReport). \n \nThe 12th Meeting of the Legal and Institutional Com-\nmittee of the West African Monetary Zone (WAMZ) \nwas held in Accra, Ghana from October 13 – 16, 2009. \nThe meeting was attended by representatives of WAMZ \nmember central banks, Ministries of Finance and that of \nJustice as well as staff of the West African Monetary \nInstitute (WAMI). The meeting discussed, among other \nissues, the draft Memorandum of Understanding (MoU) \nbetween the WAMZ national central banks in the areas \nof Licensing, Supervision and Regulation of Financial \nInstitutions and the Draft Fiscal Responsibility Act \n(FRA) (see October 2009 Report). \n \nIn another development, the meeting of the 26 current \nparticipants in the International Monetary Fund‟s New \nArrangements to Borrow (NAB) with representatives of \n13 potential new participants was held in Washington \nD.C. on November 24, 2009. At the meeting, partici-\npants agreed to expand the NAB and increase credit \narrangements to US$600 billion. They also agreed to \nintroduce more flexibility to the NAB (see November \n2009 Report). \n \nThe International Monetary Fund‟s African Department \nselected Ghana as the site of its second Regional Tech-\nnical Assistance Centre in West Africa (AFRITAC \nWest 2) in November 2009. Since inception in 1993, the \nIMF has established a total of seven regional technical \nassistance centres that are located in Africa (Tanzania, \nMali, and Gabon), the Pacific (Fiji), the Caribbean \n(Barbados), the Middle East (Lebanon), and Central \nAmerica (Guatemala). (see November 2009 Report). \n \nAlso, the Board of Directors of the African Develop-\nment Bank (AfDB) approved an equity investment of \nUS$30 million to the African Infrastructure Investment \nFund 2 on November 25, 2009. This is a successor Fund \nof the African Infrastructure Investment Fund 1 and it \nwould be a closed-end fund with a term of 13 years. \nThe Fund would be used to invest in infrastructure pro-\njects such as airport, road, power, telecommunications, \nrail, port, water and social infrastructure, primarily in \nSub-Saharan Africa (see November 2009 Report). \n \n \n \n \n \n \n \n 14 \n \n \nIn a related development, the Board of Directors of the \nAfDB approved a Line of Credit of US$30 million to \nthe African Banking Corporation Holdings Ltd (ABCH) \nunder AfDB‟s Liquidity Facility window. The proposed \nLine of Credit would feature a 5 year tenor and a 2-year \ngrace period and will benefit ABCH‟s banking subsidi-\naries in Botswana, Mozambique, Tanzania and Zim-\nbabwe and contribute towards financing the ABCH‟s \npipeline projects totaling US$96 million (see Novem-\nber 2009 Report). \n \nIn another development, the 37th Ordinary Meeting of \nthe Committee of Governors of Central Banks of \nECOWAS member States was held on December 16, \n2009 in Accra, Ghana. The meeting was presided over \nby Mr. Sanusi Lamido Sanusi, Governor of the Central \nBank of Nigeria and Chairman of the Committee of \nGovernors. \nThe major highlights of the meeting were: \n \nThe Director of Research and Operations presented \nthe Progress Report on behalf of the Director Gen-\neral. He indicated that the most important develop-\nment was the approval of the roadmap by the \nECOWAS Convergence Council for the creation of \nthe ECOWAS single currency. The report high-\nlighted activities during the year, including multi-\nlateral surveillance, special studies and a regional \nseminar on the theme “Payments Systems Develop-\nment and Interconnectivity in ECOWAS”. Finally, \nhe indicated that the 2010 WAMA Work Pro-\ngramme focuses on the single currency roadmap. \n \n \nThe Chairman of the Technical Committee pre-\nsented the Convergence Report for 2008 and first \nhalf of 2009. The report indicated that in 2008 and \nthe first half of 2009, economic performance of \nmember States was adversely affected by external \nshocks, specifically food and oil price increases and \nthe global financial crisis. Consequently, none of \nthe member countries met all of the primary and \nsecondary convergence criteria. \n \nAlso, the 25th Meeting of the Convergence Council of \nMinisters and Governors of the West African Monetary \nZone (WAMZ) was held in Accra, Ghana. All the mem-\nber States, the ECOWAS Commission and the West \nAfrican Monetary Institute (WAMI) were represented at \nthe meeting. The Republic of Liberia participated as \nobserver. The meeting was presided over by Honour-\nable Dr. Kwabena Duffuor, Minister of Finance and \nEconomic Planning, Republic of Ghana, as Chairman of \nthe Convergence Council. Council took the following \ndecisions: \n \n \nUrged member States to sustain the progress made, \nnotwithstanding the impact of the global financial \ncrisis; \n \nConsidered and approved that member States‟ me-\ndium-term frameworks be incorporated in the \nWAMI‟s assessment of member States‟ macroeco-\nnomic developments and prospects for meeting the \nconvergence criteria; \n \nDirected WAMI to undertake a review of the con-\nvergence criteria and advise Council accordingly; \n \nDirected WAMI to organize a meeting of experts \nfrom ministries of finance, central banks, and re-\ngional institutions with a view to shedding light on \nthe rationale for the choice and levels of conver-\ngence indicators; \n \nConsidered and approved the proposal to explore \nthe possibility of organizing the WAMZ Heads of \nState Summit on the sidelines of the ECOWAS \nHeads of State Summit; \n \nUrged the ministers of trade and integration as well \nas ministers of finance to participate in meetings \nand activities of the WAMZ; \n \nApproved and adopted the draft terms of reference \nfor the proposed ECOWAS Standing Committee on \nRules of Origin for onward transmission to \nECOWAS; \n \nApproved and adopted the draft Fiscal Responsibil-\nity Act as a model Act for the incorporation into \nnational laws by member States; \n \nEndorsed the application of the Republic of Liberia \nfor membership into the WAMZ and authorised the \nChairman of the Convergence Council to forward \nthe request to the Chairman of the Authority of \nHeads of State for decision; \n \nDirected WAMI to collaborate with WAIFEM in \ndeveloping training programmes for capacity build-\ning in the area of cross-border banking supervision; \n \nUrged all member States to expedite action on the \nratification of the WAMZ legal instruments; \n \nUrged all member States to meet all outstanding \nfinancial obligations to the WAMZ programme; \n \nNoted the efforts of WAMI, under its strategic part-\nnership plan to source external funding for the \ncomponents of the WAMZ work programme; \n \nDirected that WAMI organize before the next con-\nvergence council meetings, a forum including min-\nisters of trade, finance, integration and governors of \ncentral banks to deliberate on the trade integration \nimperatives sufficient for establishing the WAMZ \nmonetary union; \n \nNoted the progress made in the implementation of \nthe WAMZ payments system project; and \n \nNoted the Memorandum of Understanding exe-\ncuted between the national central banks in the ar-\neas of cross-border licensing, supervision and regu-\nlation of financial institutions. \n \n \n \n \n \n \n \n \n 15 \n \n \nLastly, the African Development Bank (AfDB) and the \nUnited Bank for Africa Plc (UBA) signed two loan \nagreements for a total of US$150 million on December \n16, 2009. The loan agreements were signed under the \nAfDB Emergency Liquidity Facility (ELF) and Trade \nFinance Initiative (TFI) designed for the rapid injection \nof liquidity into African markets via strong private sec-\ntor partner institutions. \n \nThe TFI loan totaling US$100 million will be used by \nUBA to advance trade credits to corporate customers \nacross its pan-African network, enabling it fill the gap \nleft by the retreat of non-African institutions from the \nmarket. \nThis loan will also permit UBA to significantly increase \nits intra-African corporate banking operations and spe-\ncifically promote regional trade. The ELF of US$50 \nmillion also approved by the AfDB will enable UBA to \nplay a catalytic role in supporting corporate projects, \ninfrastructure and SME financing across Africa. \n \nThese transactions are consistent with the AfDB‟s initia-\ntives formulated in response to the global financial cri-\nsis, its Country Strategy Paper for Nigeria as well as the \nNigerian \nGovernment‟s \nmillennium \ndevelopment \nagenda. This financial assistance to UBA also fits with \nthe AfDB's Private Sector strategy to support sound and \ncapable financial institutions during the financial crisis. \n \n \n \n \n \n \n \n 16", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/Quarterly_Economic_Reports/economic report for the fourth  quarter of 2009.pdf"}

clean/cb_requests/239840d2067935b65d33d9bbd240ad69.json

@@ -0,0 +1 @@
+{"doc_id": "239840d2067935b65d33d9bbd240ad69", "text": "CENTRAL BANK OF KENYA\nRemarks by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\nAT THE\nLAUNCH OF THE MOBILE PAY TANGAZA E-COMMERCE AND\nMONEY TRANSFER SERVICE\nSSAANNKKAARRAA HHOOTTEELL,, NNAAIIRROOBBII\nMonday, January 24, 2011\n\nThe Chairman and Board of Directors of Mobile Pay Ltd;\nThe Trustees of Tangaza Trust;\nThe Management of Mobile Pay Ltd;\nDistinguished Guests;\nLadies and Gentlemen:\nIt gives me great pleasure to join Mobile Pay Ltd and other members of the\nfinancial sector fraternity this morning and to preside over this auspicious\noccasion of the launch of another innovation in the Mobile Money Transfer\nbusiness.\nMay I commend the Board, Management and staff of Mobile Pay Ltd, and in\nparticular, the board of directors of Mobile Pay Ltd for their effort in developing\nthis innovative mobile money transfer service which indeed will go a long way\ntowards enhancing financial deepening and inclusion within our financial sector.\nLadies and Gentlemen: Mobile phone technology has in a few years of its\nexistence demonstrated how financial inclusion can be leapfrogged on a major\nscale and in a short time span using appropriate technological platforms. In only\nfour years of the existence of mobile phone money transfer services; four mobile\nphone operators have launched the services and have enrolled over 15.4 million\ncustomers and recruited over 39,449 agents. Total transactions have now reached\nKsh.2.45 billion a day and Ksh.76 billion a month. This reflects the fact that when\ncost of transactions decline, transactions increase in volume.\nMobile money transfer services have been a phenomenal success and have put\nKenya at the global centre stage of financial inclusion and innovation. In this\nregard, I am confident that the launch of Mobile Pay will ensure continued growth\nof the mobile money transfer services sector.\nLadies and Gentlemen: Central Bank will continue to play its role in promoting\na stable and conducive environment for financial innovation to thrive. At the\nmicro level, the Bank will continue to work with the Ministry of Finance and the\nfinancial sector regulators to promote a sound, safe, efficient and inclusive\n2\n\nfinancial system and with no room for regulatory arbitrage. In this regard, CBK\nwill continue to encourage more competitors in the provision of these services\nwhich results in further lower transaction costs for the Mwananchi.\nIn conclusion, Ladies and Gentlemen, I wish to take this opportunity to\ncongratulate and commend the Board and Management of Mobile Pay Ltd for\nintroducing this important mobile money transfer service, which is expected\nimprove service delivery to all members of the society. Going by its successful\npilot testing, I am sure it will be a successful mobile phone money transfer service.\nWith these few remarks, it is now my humble duty to declare TANGAZA MOBILE\nMONEY TRANSFER officially launched.\nThank you very much.\n3", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2011/Tanganza%20E-Commerce%20Jan%2024.pdf"}

clean/cb_requests/24f8b446f8f72ef965eb2ae249da2e83.json

@@ -0,0 +1 @@
+{"doc_id": "24f8b446f8f72ef965eb2ae249da2e83", "text": "CENTRAL BANK OF KENYA\nREMARKS\nBY\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCENTRAL BANK OF KENYA\nAT THE\nPRESS BRIEFING ON THE ROLL OUT OF CREDIT INFORMATION\nSHARING\nCentral Bank of Kenya, Nairobi\n13th July 2010\n\nMr. Richard Etemesi, Chairman, Kenya Bankers Association;\nMr. John Wanyela, Executive Director, Kenya Bankers Association;\nMr. Wachira Ndege, Chief Executive, Credit Reference Bureau Africa\nLtd;\nMembers of the Media Fraternity;\nColleagues;\nLadies and Gentlemen:\n1. Let me at the onset thank members of the media fraternity who have\naccepted our invitation to attend this press briefing. The Central Bank of\nKenya (CBK) is pleased to announce the roll out of credit information\nsharing for the banking sector. The CBK has accordingly this morning\nissued a circular to all institutions licensed under the Banking Act notifying\nthem that the effective rollout date for the credit information sharing\nmechanism shall be 31st July 2010. This implies that:-\n• The first reporting date for non-performing loans and other information\nsets to be submitted by banks shall be 31st July 2010.\n• The information as at 31st July 2010 should be submitted to the licensed\nCredit Reference Bureau by 10th August 2010.\n• Thereafter the information will be provided and updated at the end of\neach month.\n2. As you will recall, the Banking (Credit Reference Bureau) Regulations, 2008\nbecame operational on 2nd February 2009. CBK has since then licensed one\nCredit Reference Bureau, CRB Africa, granted approval in principal to\nMetropole CRB and is processing two other applications.\n3. The rollout of the credit information sharing mechanism follows four pilot\nruns conducted between banks and CRB Africa. The principal objectives of\nthe pilot runs conducted between February and June 2010 were to:-\n2\n\n• Confirm commercial banks capability to extract and submit data in the\nspecified format;\n• Evaluate the suitability of the data specifications document jointly\ndeveloped by CBK, Kenya Bankers Association and CRB Africa.\n4. The pilot runs have provided useful learning experiences for banks and the\nCredit Reference Bureau that will facilitate the roll out. Banks and mortgage\nfinance companies will therefore be expected to submit the mandatory non\nperforming loan data as at 31st July 2010 to licensed CRBs by 10th August\n2010. Institutions will thereafter be expected to submit to all licensed CRBs\nupdates on non performing loans and other information sets on a monthly\nbasis.\n5. It should be noted that whereas the CRB regulations mandate the sharing of\nnon-performing loans information, they also provide for positive\ninformation sharing. The full benefits of credit information sharing can only\nbe realized with the sharing of both positive and negative information. I am\ntherefore pleased to note that the Kenya Bankers Association is already\nliaising with its member banks on modalities of sharing and building\ninformation capital that includes both positive and negative information.\n6. The roll out of credit information sharing marks a watershed in the\ndevelopment of Kenya’s financial sector. Information asymmetry between\nbanks and borrowers has for long constrained innovation and financial\nintermediation. This state of affairs has led to the front-loading of search\ncosts and a risk premium in the cost of credit. Undoubtedly this has led to\nthe high cost of credit that has constrained the expansion of businesses and\ndeterred access to credit by a significant proportion of Kenyans.\n3\n\n7. Credit information sharing will facilitate the building of information capital\nthat will guide the pricing of loans by financial institutions. Banks will at the\nappraisal stage be able to price loans with a vastly enhanced information set\nas compared to the current situation. Customers, armed with their credit\nhistories, will also be empowered to negotiate better terms for credit with\nbanks. This is definitely a win-win situation that will catalyse growth of credit\nfor investment and wealth creation pushing Kenya faster towards Vision\n2030 aspirations of being a middle income country.\n8. Credit information sharing will reduce the search costs incurred by banks in\npricing loans. This will in turn not only enhance access to credit but also\nreduce the cost of doing business and boost Kenya’s competitiveness as the\nEastern Africa Financial Services Hub.\n9. We anticipate that the benefits of credit information sharing will start\naccruing from the middle of next month after the initial submissions. Banks\nwill be able to start accessing credit reports from mid August 2010 for loan\nappraisals. Customers should also be able to start accessing their credit\nreports at the same time. I therefore urge bank customers to liaise with their\nbanks and ensure that their account details are up to date. I also urge them\nto contact their banks to explore modalities of sharing positive credit\ninformation.\n10. CBK will, in this roll out period, partner with KBA to sensitize the public on\nthe modalities and benefits of credit information sharing. The media will\nplay a key role in this campaign and let me take this opportunity to seek\nyour support as we roll out the sensitization campaign from today.\n11. The roll out of credit information sharing for the banking sector is just the\nfirst step. As you are aware, Kenyans also access credit from a whole host of\nnon-banks including, microfinance institutions, SACCOs, other financial\n4\n\nsector regulators and utility companies. It is therefore imperative that the\nmechanism be extended to other non-bank credit providers.\n12. Accordingly CBK in partnership with KBA and with the support of the\nFinancial Sector Deepening Trust Kenya set up the Kenya Credit\nInformation Sharing Initiative (KCISI) in August 2009. KCISI will work with\nbanks as credit information sharing is implemented and explore modalities\nof extending credit information sharing beyond the banking sector.\n13. It is important to underscore that Credit Reference Bureaus licensed by CBK\nshall be subject to onsite and offsite surveillance by the Central Bank. The\nBanking (Credit Reference Bureau), 2008 regulations stipulate activities the\nbureaus can undertake, restrictions on use of customer information and\nsecurity and control measures. The CBK is empowered to take remedial\nmeasures including revocation of license for violations of the regulations by\nCRBs.\n14. With regard to customer information protection, the Regulations place\nemphasis on confidentiality of information handled by CRBs and also\nplaces stringent restrictions on the use and application of such information.\nBanks and CRBs cannot share information with unauthorised third parties.\nThe regulations provide for stringent penalties of up to Shs.500,000 for\nsuch breaches by CRBs. Banks on the other hand will be subject to\npenalties of up to Kshs.1 million and other remedial measures available\nunder the Banking Act for such breaches.\n15. In closing, let me underscore CBK’s commitment to working with the\ngovernment and other players to promote a stable, inclusive and efficient\nfinancial system.\nWe will now take your questions.\nThank You\n5", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Governors%20Remarks%20at%20Press%20Briefing%20on%20Roll%20Out%20of%20Credit%20Information%20Sharing.pdf"}

clean/cb_requests/255b72d06bac7f87484724e33c69518c.json

@@ -0,0 +1 @@
+{"doc_id": "255b72d06bac7f87484724e33c69518c", "text": "Monetary Policy Committee forecast report\n March 2024 MPC meeting\n 27 March 2024 \nSummary of assumptions March 2024 MPC\n* Figures below the assumption in parentheses represents the previous MPC \nassumption\n1. Foreign sector assumptions\nPercentage changes\n(unless otherwise indicated)\nActual\nForecast\n2020\n2021\n2022\n2023\n2024\n2025\n2026\n1.\nReal GDP growth in South Africa's major trading partner countries\n-2.5%\n7.4%\n3.8%\n2.9%\n2.6%\n3.0%\n3.1%\n(-2.5%)\n(7.3%)\n(3.8%)\n(2.7%)\n(2.6%)\n(3.1%)\n(3.1%)\n2.\nOutput gap in South Africa's major trading partner countries\n-2.8%\n-1.0%\n0.1%\n0.1%\n-0.1%\n-0.1%\n0.1%\n(-2.8%)\n(-0.9%)\n(0.2%)\n(0.1%)\n(-0.2%)\n(0.0%)\n(0.2%)\n3.\nInternational commodity prices in US$\n22.7%\n46.0%\n-0.9%\n-27.3%\n-10.7%\n-4.7%\n-1.5%\n(22.7%)\n(46.0%)\n(-0.9%)\n(-27.3%)\n(-11.9%)\n(-4.9%)\n(-1.6%)\n4.\nBrent crude (US$/barrel)\n$41.8\n$70.7\n$100.4\n$82.6\n$82.0\n$81.0\n$80.0\n($41.8)\n($70.7)\n($100.4)\n($82.6)\n($82.0)\n($81.0)\n($80.0)\n5.\nWorld food prices (US$ )\n3.2%\n28.1%\n14.2%\n-13.7%\n-1.3%\n3.1%\n1.5%\n(3.2%)\n(28.1%)\n(14.2%)\n(-13.7%)\n(-0.3%)\n(3.1%)\n(1.5%)\n6.\nInternational consumer prices (G3)\n0.7%\n3.3%\n7.4%\n4.5%\n2.5%\n2.1%\n2.0%\n(0.7%)\n(3.3%)\n(7.4%)\n(4.5%)\n(2.5%)\n(2.1%)\n(2.0%)\n7.\nInternational policy interest rate (G3)\n0.2%\n0.1%\n1.1%\n3.9%\n4.3%\n3.4%\n2.2%\n(0.2%)\n(0.1%)\n(1.1%)\n(3.9%)\n(4.3%)\n(3.4%)\n(2.2%)\n2. Domestic sector assumptions\nPercentage changes\n(unless otherwise indicated)\nActual\nForecast\n2020\n2021\n2022\n2023\n2024\n2025\n2026\n1.\nFuel taxes, levies and margins\n5.7%\n6.1%\n2.9%\n3.1%\n5.4%\n3.8%\n4.0%\n(5.7%)\n(6.1%)\n(2.9%)\n(3.1%)\n(6.4%)\n(4.1%)\n(3.9%)\n2.\nPotential growth\n-3.2%\n3.2%\n0.5%\n0.1%\n1.0%\n1.2%\n1.6%\n(-3.2%)\n(3.2%)\n(0.5%)\n(0.1%)\n(1.0%)\n(1.2%)\n(1.6%)\n3.\nInflation target midpoint\n4.5%\n4.5%\n4.5%\n4.5%\n4.5%\n4.5%\n4.5%\n(4.5%)\n(4.5%)\n(4.5%)\n(4.5%)\n(4.5%)\n(4.5%)\n(4.5%)\nForeign Sector Assumptions\n1. Trading partner GDP growth: is broadly determined via the Global Projection Model “GPM” which is adjusted to aggregate the GDP growth rates of South Africa’s major trading partners on a trade weighted basis. Individual projections are done for the six largest trading partners (Eurozone, China, United States, \nJapan, Great Britain and India). Other countries considered, although with small weights, are Mexico, Brazil and Russia. The remaining trading partners are grouped into the Rest of Countries bloc. Since Sub-Saharan Africa (SSA) is also a major trading region for South Africa (but does not have a bloc in the GPM), \nit is modelled separately then combined with the aggregate of all countries in the GPM to make up total trading partner GDP growth. The assumption takes account of country specific “consensus” forecasts as well as regional growth prospects.\n2. Commodity price index (excludes oil but includes petroleum products): is a weighted aggregate price index (2015 = 100) of the major South African export commodities based on 2019 export basket weights.\n3. International consumer prices: are also broadly determined via the GPM, the index is an aggregate of the consumer price indices of the G3 countries (euro area, United States and Japan) weighted by their global trade-export weights. Consumer prices are determined for each region discussed above by \naccounting for expected future price inflation, demand pressures, and pass-through from changes in the relevant exchange rate. Other institutional forecasts for international consumer prices are also considered.\n4. International policy interest rate: is again broadly determined via the GPM. Interest rates are an aggregate of the policy rates of the G3 countries (euro area, United States and Japan). They are individually determined by a “Taylor-type” monetary policy rule. The communications of the relevant central banks and\nother institutional forecasts are also considered.\n1\nSummary of selected QPM forecast results March 2024 MPC\n* Figures below the forecast in parentheses represents the previous MPC forecast\n1. Selected forecast results (quarterly)\nPercentage change\n(year-on-year)\nActual\nForecast\n22Q1\n22Q2\n22Q3\n22Q4\n2022\n23Q1\n23Q2\n23Q3\n23Q4\n2023\n24Q1\n24Q2\n24Q3\n24Q4\n2024\n25Q1\n25Q2\n25Q3\n25Q4\n2025\n26Q1\n26Q2\n26Q3\n26Q4\n2026\nSteady state\n1.\nHeadline CPI\n5.8\n6.6\n7.7\n7.4\n6.9\n7.0\n6.2\n5.0\n5.5\n6.0\n5.4\n5.1\n5.3\n4.7\n5.1\n4.7\n4.7\n4.6\n4.5\n4.6\n4.5\n4.5\n4.5\n4.5\n4.5\n4.5\n(5.8)\n(6.6)\n(7.7)\n(7.4)\n(6.9)\n(7.0)\n(6.2)\n(5.0)\n(5.6)\n(5.9)\n(5.3)\n(5.1)\n(5.1)\n(4.4)\n(5.0)\n(4.7)\n(4.7)\n(4.5)\n(4.5)\n(4.6)\n(4.5)\n(4.6)\n(4.5)\n(4.5)\n(4.5)\n2.\nCore CPI\n3.6\n4.1\n4.6\n5.0\n4.3\n5.1\n5.2\n4.7\n4.5\n4.8\n4.8\n4.7\n4.9\n4.9\n4.8\n4.8\n4.6\n4.6\n4.5\n4.6\n4.5\n4.5\n4.5\n4.5\n4.5\n4.5\n(3.6)\n(4.1)\n(4.6)\n(5.0)\n(4.3)\n(5.1)\n(5.2)\n(4.7)\n(4.5)\n(4.9)\n(4.7)\n(4.5)\n(4.7)\n(4.7)\n(4.6)\n(4.6)\n(4.6)\n(4.5)\n(4.5)\n(4.6)\n(4.5)\n(4.6)\n(4.5)\n(4.5)\n(4.5)\n3.\nFood CPI\n6.1\n7.4\n11.0\n12.3\n9.2\n13.6\n12.2\n8.6\n8.7\n10.7\n6.2\n5.3\n5.6\n4.8\n5.5\n4.5\n4.3\n4.2\n4.3\n4.3\n4.5\n4.4\n4.5\n4.5\n4.5\n4.5\n(6.1)\n(7.4)\n(11.0)\n(12.3)\n(9.2)\n(13.6)\n(12.2)\n(8.6)\n(8.9)\n(10.7)\n(6.9)\n(6.1)\n(5.4)\n(4.3)\n(5.7)\n(4.3)\n(4.2)\n(4.2)\n(4.3)\n(4.2)\n(4.4)\n(4.4)\n(4.5)\n(4.5)\n(4.5)\n4.\nFuel CPI\n31.7\n35.6\n44.3\n26.0\n34.3\n10.6\n-0.2\n-9.3\n3.4\n0.6\n4.8\n3.7\n3.2\n-5.5\n1.4\n-0.8\n1.3\n1.1\n1.1\n0.7\n1.0\n1.0\n1.3\n1.5\n1.2\n4.5\n(31.7)\n(35.6)\n(44.3)\n(26.0)\n(34.3)\n(10.6)\n(-0.2)\n(-9.3)\n(2.9)\n(0.4)\n(1.7)\n(3.1)\n(3.4)\n(-5.1)\n(0.6)\n(2.0)\n(1.7)\n(1.4)\n(1.4)\n(1.6)\n(1.3)\n(1.3)\n(1.5)\n(1.6)\n(1.4)\n5.\nElectricity CPI\n14.0\n14.0\n7.8\n7.9\n10.7\n7.9\n7.9\n15.2\n15.3\n11.7\n15.3\n15.3\n12.0\n12.0\n13.5\n12.0\n12.0\n10.0\n10.0\n10.9\n10.0\n10.0\n8.0\n8.0\n8.9\n4.5\n(14.0)\n(14.0)\n(7.8)\n(7.9)\n(10.7)\n(7.9)\n(7.9)\n(15.2)\n(15.3)\n(11.7)\n(15.3)\n(15.3)\n(12.0)\n(12.0)\n(13.5)\n(12.0)\n(12.0)\n(10.0)\n(10.0)\n(10.9)\n(10.0)\n(10.0)\n(8.0)\n(8.0)\n(8.9)\n2. Selected forecast results (annual)\nPercentage changes\n(unless otherwise indicated)\nActual\nForecast\n2020\n2021\n2022\n2023\n2024\n2025\n2026\nSteady state\n1.\nGDP growth\n-6.0%\n4.7%\n1.9%\n0.6%\n1.2%\n1.4%\n1.6%\n2.5%\n(-6.0%)\n(4.7%)\n(1.9%)\n(0.6%)\n(1.2%)\n(1.3%)\n(1.6%)\n2.\nOutput gap\n-3.5%\n-1.9%\n-0.5%\n-0.1%\n0.0%\n0.1%\n0.0%\n0.0%\n(-3.5%)\n(-1.9%)\n(-0.5%)\n(-0.1%)\n(0.0%)\n(0.0%)\n(0.0%)\n3.\nNominal effective exchange rate\n-12.8%\n9.9%\n-2.4%\n-11.5%\n-1.6%\n0.7%\n0.9%\n2.5%\n(-12.8%)\n(9.9%)\n(-2.4%)\n(-11.7%)\n(-0.2%)\n(0.1%)\n(0.4%)\n4.\nReal effective exchange rate\n-10.6%\n11.2%\n-3.0%\n-10.3%\n0.9%\n3.2%\n3.4%\n0.0%\n(-10.6%)\n(11.2%)\n(-3.0%)\n(-10.5%)\n(2.2%)\n(2.5%)\n(2.9%)\n5.\nRepurchase rate\n3.50%\n3.61%\n6.54%\n8.25%\n7.72%\n7.37%\n7.33%\n7.00%\n(end of period i.e. fourth quarter)\n(3.50%)\n(3.61%)\n(6.54%)\n(8.25%)\n(7.54%)\n(7.29%)\n(7.30%)\n6.\nNeutral real interest rate\n1.9%\n2.2%\n2.3%\n2.5%\n2.6%\n2.7%\n2.8%\n2.5%\n(1.9%)\n(2.1%)\n(2.3%)\n(2.5%)\n(2.7%)\n(2.8%)\n(2.8%)\n7.\nCurrent account balance\n1.9%\n3.7%\n-0.5%\n-1.6%\n-2.1%\n-2.7%\n-3.3%\n(ratio to GDP)\n(1.9%)\n(3.7%)\n(-0.5%)\n(-1.4%)\n(-2.8%)\n(-3.6%)\n(-4.0%)\nNotes \nA. Nominal effective exchange rate: This is based on the bilateral exchange rates of our three largest trading partners (euro area, United States and Japan). The bilateral exchange rates are weighted by export trade weights.\nA. Nominal effective exchange rate: This is based on the bilateral exchange rates of our three largest trading partners (euro area, United States and Japan). The bilateral exchange rates are weighted by export trade weights.\nB. Nominal exchange rate steady state: This is estimated using the Purchasing Power Parity (PPP) condition, which links the depreciation of the nominal exchange rate to the inflation differential between SA and abroad. Given that the REER depreciation is zero at steady state, the nominal exchange rate will therefore depreciate\nby 2.5% per year in steady state, reflecting the inflation (target) differential between domestic (4.5%) and foreign (2.0%) inflation.\nB. Nominal exchange rate steady state: This is estimated using the Purchasing Power Parity (PPP) condition, which links the depreciation of the nominal exchange rate to the inflation differential between SA and abroad. Given that the REER depreciation is zero at steady state, the nominal exchange rate will therefore depreciate\nC. Real effective exchange rate: This is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the trade weighted CPI of euro area, United States and Japan).\nC. Real effective exchange rate: This is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the trade weighted CPI of euro area, United States and Japan).\nD. Repurchase rate: End of period refers to the average repo rate for the last quarter of the year. The nominal repo rate steady state is calculated as the sum of SA inflation target (4.5%) and the steady state neutral real interest rate (2.5%).\nD. Repurchase rate: End of period refers to the average repo rate for the last quarter of the year. The nominal repo rate steady state is calculated as the sum of SA inflation target (4.5%) and the steady state neutral real interest rate (2.5%).\nE. Neutral real interest rate (NRIR): The NRIR is the policy rate, minus inflation, which prevails when the economy is fully in balance, with inflation at target and output at potential. The policy stance is measured as either tight or loose based on whether actual rates are above or below this neutral rate, respectively. The steady state\nNRIR is calculated as the sum of the respective steady states for the G3 neutral real interest rate (0.5%), South Africa’s risk premium (2.0%), and the change in the real effective exchange rate REER (0.0%). Before the steady state is reached it is possible for the REER equilibrium to appreciate or depreciate, so this value can have\na non-zero value over the medium term. It is nonetheless always zero in the long run.\nE. Neutral real interest rate (NRIR): The NRIR is the policy rate, minus inflation, which prevails when the economy is fully in balance, with inflation at target and output at potential. The policy stance is measured as either tight or loose based on whether actual rates are above or below this neutral rate, respectively. The steady state\nF. Steady state: This is the long run value in the model. While model equilibriums can have different values over the medium term, as conditions change, all equilibriums eventually reach a steady state, where they stabilise. For more details on the estimation of steady states, see Botha, De Jager, Ruch and Steinbarg (2017) - South \nAfrican Reserve Bank Working Paper Series No. WP/17/01.\nF. Steady state: This is the long run value in the model. While model equilibriums can have different values over the medium term, as conditions change, all equilibriums eventually reach a steady state, where they stabilise. For more details on the estimation of steady states, see Botha, De Jager, Ruch and Steinbarg (2017) - South \nG. Current account balance as a percentage of GDP:\n Forecast is obtained from the SARB's Core macroeconometric model.\nG. Current account balance as a percentage of GDP:\n Forecast is obtained from the SARB's Core macroeconometric model.\n2\n3\n2\n3\n4\n5\n6\n7\n8\n9\n10\n2017\n2018\n2019\n2020\n2021\n2022\n2023\n2024\n2025\n2026\nRepurchase rate*\nPer cent\n90%\n60%\n30%\nRepo rate\n*The uncertainty bands for the repo rate are based on historical forecasting experience and stochastic\nsimulations in the Quarterly Projection Model (QPM). The bands are symmetric, and therefore do not reflect any\nassessment of upside or downside risk. For details on the QPM see 'Enhancing the Quarterly Projection Model',\nSouth African Reserve Bank Working Paper Series No. WP/23/05, June 2023.\nInterest rate forecast\n4", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Forecast/March MPC Forecast report.pdf"}

clean/cb_requests/277e96862e50a500d1022751be4f777b.json

@@ -0,0 +1 @@
+{"doc_id": "277e96862e50a500d1022751be4f777b", "text": "1\nCBN Half Year Economic Report for 2007\nCENTRAL BANK OF NIGERIA\nREPORT FOR THE FIRST HALF OF 2007\nTable 1: Monetary Policy Targets (Growth in % except otherwise stated)\n \n*Targets for half year\n \n1.0\nINTRODUCTION\nMonetary targeting remained the main strategy for monetary policy implementation in the first half of \n2007. The CBN adopted various policy measures aimed at containing the growth of monetary aggregates in \norder to achieve monetary and price stability, including reserve money target under the Policy Support \nInstrument (PSI). Open Market Operations (OMO) remained the major tool of liquidity management. Other \npolicy measures included increased issuance of treasury securities in the primary market to mop-up excess \nliquidity; use of deposit and lending facilities to encourage inter-bank transactions as well as sales of foreign \nexchange, including swaps. \n \n \nKey Policy \nTarget \n2003 \n2004 \n2005 \n2006 \n2007 \n(i) \nBroad Money \nGrowth (M2) \n15.00 \n15.00 \n15.04 \n15-17 \n10.00 \n(ii) \nNarrow Money \n(M1) \n13.80 \n10.80 \n11.38 \n13.30 \n \n(iii) \nBase Money \n(under PSI) \n- \n- \n- \nN800 \nbillion* \nN860 \nbillion* \n(iv) \nAggregate credit \nto the domestic \neconomy \n25.70 \n24.50 \n22.54 \n22.50 \n-29.96 \n(v) \nCredit to \nGovernment \n150.30 \n29.90 \n14.01 \n-57.2 \n-54.94 \n(vi) \nCredit to the \nprivate sector \n32.30 \n30.00 \n25.24 \n30.00 \n30.00 \n(vii) \nInflation rate \n9.00 \n10.00 \n10.00 \n9.00 \n9.00 \n(viii) \nGDP \n5.00 \n5.00 \n6.00 \n7-10 \n10.00 \n \n2.0 \nOPERATIONS OF THE CENTRAL BANK OF NIGERIA\n2.1 \nLiquidity Management\nLiquidity management efforts of the Central Bank of Nigeria (CBN) yielded the expected results as the \nreserve money target for the first half of the year was met. Analysis of OMO transactions showed that total bids \nand sales of intervention securities amounted to N411.80 billion and N1,051.00 billion, respectively, compared \nwith N1,207.00 billion and N895.60 billion in the corresponding period of 2006. Nigerian Treasury Bills \n(NTBs) of various tenors (91-, 182- and 364-days) amounting to N765.50 billion were issued during the period. \nWith the introduction of the new Monetary Policy Rate (MPR) and the adoption of the CBN standing \nfacilities, the volatility in the inter-bank rates was contained with rates hovering within the standing facility's \ninterest rate corridor. The sums of N101.54 billion and N145.68 billion Cash Reserve Requirement (CRR) \ninvested on behalf of the banks following the reduction in required reserves from 5.0 to 3.0 per cent in December \n2006 were released at maturity on March 29 and April 13, 2007, respectively. \n2\nCBN Half Year Economic Report for 2007\n2.2\nPayments and Clearing System\nThe reform in the payments system was sustained. The effectiveness of Cheque Clearing and \nSettlement arrangement was further enhanced with the full implementation of the cheque standardization \npolicy as well as the approval of Oceanic Bank as a settlement bank, bringing the number of settlement banks to \neleven. Also, arrangements were concluded towards the reduction in the up-country cheque clearing cycle form \n5 3 days, while electronic bulk payments of salaries of 7 Ministries, Departments and Agencies (MDAs) of the \nFederal Government commenced. The CBN also finalised actions to commence the payment of staff and \npensioners emoluments through electronic bulk payment system. The National Payments System Vision 2020 \nwas presented to stakeholders at a National Payments System Stakeholders' Forum in order to harvest ideas to \nimprove the strategy. The development would further aid the implementation of the initiatives outlined in the \nPayments System Vision 2020. The new CBN Act empowers the Central Bank of Nigeria to regulate electronic \npayments and settlement. As part of the effort to transform Nigeria into an international financial the Financial \nSystem Strategy (FSS-2020) which was initiated by the CBN in 2006 was given further impetus during the \nperiod. An international conference was held from June 18 to 20, 2007 with the objective of sensitizing \nstakeholders and harvesting of ideas that would facilitate the realization of the strategy. \nThe aggregate volume and value of cheques cleared increased by 5.58 and 33.26 per cent, respectively. \nA total of 7.12 million instruments worth N10,128.87 billion were cleared, compared with 6.74 million worth \nN7,601.12 billion in the corresponding period of 2006. The development indicated the increasing use of cheque \nfor large value transactions in the country.\n2.2.1\nRetail Payments System\n2.2.1.1 Cheque\n3\nCBN Half Year Economic Report for 2007\n \n-\n200,000.00\n400,000.00\n600,000.00\n800,000.00\n1,000,000.00\n1,200,000.00\n1,400,000.00\nVolume\nFig. 2 \nVolume of Cheques Cleared (First Half 2007)\n2006 1,151,813.00 \n 1,196,266.00 \n 1,097,038.0 989,264.00 1,171,396.00 \n 1,138,300.00 \n2007 1,244,819.00 \n 1,327,881.00 \n 1,237,956.0 1,005,623.0 1,152,709.00 \n 1,051,547.00 \nJanuary\nFebruary\nMarch\nApril\nMay\nJune\n \n-\n200,000.00\n400,000.00\n600,000.00\n800,000.00\n1,000,000.00\n1,200,000.00\n1,400,000.00\n1,600,000.00\n1,800,000.00\n2,000,000.00\nNaira Million\nFig. 3\nValue of Cheques Cleared (First Half 2007)\n2006 1,110,681.0 1,258,225.0 1,294,447.0 1,210,702.0 1,421,775.0 1,305,287.0\n2007 1,441,810.0 1,651,724.0 1,849,271.0 1,596,257.0 1,820,297.0 1,607,595.0\nJanuary\nFebruary\nMarch\nApril\nMay\nJune\nIn terms of the volume of the cheques cleared, the Lagos Clearing Zone maintained its lead with 54.87 per cent, \nfollowed by Abuja, Port Harcourt and Benin with 9.98, 6.09 and 4.56 per cent, respectively.\nThe increase in the use of electronic payments continued during the period was attributed to the \naggressive marketing strategy of the banks and increased public awareness. Available data on various e-\npayment channels indicated that Automated Teller Machine (ATM) was the most patronized, accounting for \nover 93 per cent of the total, while mobile phone payments was the least with about 0.20 per cent.\n2.2.1.1 Electronic Payments\n4\nCBN Half Year Economic Report for 2007\nTable 2 \nChannel of Transaction \nPer cent \nVolume Terms \nATM \n93.66 \n \nWeb (Internet) \n 4.36 \n \nPOS \n 1.79 \n \nMobile \n 0.19 \nValue Terms \nATM \n94.51 \n \nWeb (Internet) \n 3.31 \n \nPOS \n 2.17 \n \nMobile Phone\n \n 0.02 \n \nATM's patronage was fuelled by the dominance of cash in settling transactions within the country.\nThe upward trend in ATM transactions was sustained. At 4,765,467 and N41.28 billion as at end -June \n2007, the volume and value of ATM transactions increased by 32.08 and 118.32 per cent, respectively, over the \nfigures in the corresponding period of 2006. The increased usage of ATMs could be attributed to a number of \nfactors, including increased number of ATMs in the country, enhanced public awareness and the ease of service \ndelivery.\n2.2.1.1.1 ATM Transactions\n5\nCBN Half Year Economic Report for 2007\n \n18.91\n41.28\n0\n5\n10\n15\n20\n25\n30\n35\n40\n45\nN'billion\n2006\n2007\nFig. 5 \nValue of ATM transactions (Jan - June) 2006-2007\n2.2.1.1.1\nWeb Transactions\n2.2.1.1.2\nPoint of Sale (POS) Transactions\nTransactions involving the use of Internet increased significantly. In terms of volume and value, the use \nof Internet for payment for goods and services increased by 119.8 and 50.9 per cent to 221,537 and N1.55 \nbillion, respectively. The development was attributable to the growing number of merchants that accept the use \nof payment cards on such sites and the issuance of international prepaid cards by some banks.\nThe volume and value of online POS transactions increased significantly from 19,769 and N90.19 \nmillion to 91,211 and N946.22 million, respectively. The development was attributable to the increasing \nconnectivity of POS terminals via General Packet Radio Service (GPRS) and the widespread use of debit \ncards.\n \n6\nCBN Half Year Economic Report for 2007\n \n90.19\n946.22\n0\n100\n200\n300\n400\n500\n600\n700\n800\n900\n1000\nN'billion\n2006\n2007\nFig. 7\n Value of POS transactions (Jan - June) 2006-2007\n7\nCBN Half Year Economic Report for 2007\n \n-\n2,000.00\n4,000.00\n6,000.00\n8,000.00\n10,000.00\n12,000.00\nVolume\nFig. 8\nVolume of Large Value Transfers (First Half 2007)\n2006 8,186.00 \n 7,720.00 \n 6,504.00 \n 6,637.00 \n 7,856.00 \n 7,955.00 \n2007 6,235.00 \n 8,290.00 10,391.00 9,905.00 11,801.00 11,150.00 \nJanuary\nFebruary\nMarch\nApril\nMay\nJune\n2.2.1.1.1\nDollar Denominated Card Transactions\n2.2.2\nWholesale Payments System\nThe use of Dollar denominated Cards grew significantly during the review period. The volume and \nvalue of transactions increased by 73.94 and 70.51 per cent to 88,891 and US$22.46 million, respectively, over \nthe levels in the corresponding period of 2006. The development was due to the growing public awareness of the \nscheme and the ease of transactions.\nThe volume and value of transactions through inter-bank transfers rose by 28.79 and 96.14 per cent to \n57,772 and N27,372.29 billion, respectively. The rise was buoyed by the Real Time Gross Settlement (RTGS) \nsystem. The guidelines for the intra-day facility as well as additional modules were introduced during the period \nto ensure the efficiency of the RTGS system\n8\nCBN Half Year Economic Report for 2007\n0\n1000\n2000\n3000\n4000\n5000\n6000\nNaira billion\nFig. 9\nValue of Inter-bank Transfers (First Half 2007)\n2006\n1939.35\n2347.91\n2338.32\n2181.55\n2566.71\n2581.9\n2007\n2743.76\n4437.75\n4857.87\n4854.4\n5205.29\n5276.22\nJanuary\nFebruary\nMarch\nApril\nMay\nJune\nS/N \nFAILED BANK\n \nASSUMED BY\n \n1 \nAllstates Trust Bank\n \nEcobank Plc\n \n2 \nAssurance Bank\n \nAfribank Plc\n \n3 \nLead Bank\n \nAfribank Plc\n \n4\n \nTrade Bank\n \nUBA Plc\n \n5\n \nMetropolitan Bank\n \nUBA Plc\n \n6\n \nCity Express Bank\n \nUBA Plc\n \n7\n \nHallmark Bank\n \nEcobank Plc\n \n2.3 \nFinancial Sector Surveillance\n2.3.1 \nBanking Supervision\n The CBN intensified its supervisory and surveillance activities on the financial institutions through \nregular appraisal and review of banks' periodic returns, spot checks, monitoring and special investigations, \namong others. Post-consolidation on-site verification of the deposit money banks' integration processes, as \ncontained in their strategic business plans were also conducted. The exercise revealed that eighteen (18) banks, \nexcluding the six (6) banks that were not involved in mergers and acquisitions during the consolidation exercise \nhad attained 80 per cent compliance level as at end-June 2007. \nIn line with the decision of the CBN that no private sector deposits in the fourteen banks that failed to \nmeet the recapitalization requirement would be lost, the NDIC invited the healthy banks to assume the private \nsector liabilities of ten (10) banks for which final court order for their liquidation had been obtained and to \ncherry-pick their assets under the Purchase and Assumption (P&A) model of bank liquidation. Thus far, the \nprivate sector liabilities of seven banks had been assumed by three healthy banks as indicated below: \n9\nCBN Half Year Economic Report for 2007\nOf the four (4) outstanding banks that could not recapitalize, the NDIC had obtained provisional court \norder to liquidate one (1), while the remaining three (3) banks are still undergoing court processes.\nThe implementation of the electronic Financial Analysis and Surveillance System (e-FASS) was \nfurther boosted with the deployment of the Data Security System (DSS) in all the banks. With this development, \nall the banks now render returns in absolute figures through the e-FASS. All the bureaux-de-change (BDCs) \nhave effectively connected to the DSS and were expected to commence the rendition of their returns through the \nsystem, while the finance companies, primary mortgage institutions (PMIs) and the development finance \ninstitutions (DFIs) would be similarly connected within the year.\nAs part of the efforts to promote safe and sound financial system, the CBN issued a number of circulars \nto the banks which included:\nWaiver of tax on interest earnings from agricultural lending by banks\nReporting of suspicious or unusual transactions involving terrorism to the Nigerian Financial \nIntelligence Unit (NFIU); and\nSubmission of returns through the e-FASS\nA total of 741 cases of attempted fraud and forgery, involving 5.4 billion, US$35,406.1, €150.00 and \n₤60.0 were reported, up from 597 cases in the corresponding period of 2006. The 438 cases that were \nsuccessfully executed resulted in the loss of 1.4 billion, US$13,938, €150.0 and ₤60.0 to the banks, compared \nwith 295 cases and the loss of 1.2 billion, US$455,549.0, and ₤10,000.0 during the corresponding period in \n2006. The development was attributable to the weaknesses in the internal control systems of the banks and the \ndelay to \n\n\n\nN\nN\nN\nfully integrate their systems and processes.\nIncome audits, verification of capital and special investigations were conducted on some banks to \ncheck the authenticity of reports/returns to the CBN. The examination focused on the level of income and \nprofits reported in the audited accounts, the liquid assets, and the legitimacy of funds used for recapitalisation. \nFurther examination revealed that 88.0 per cent of the banks in the system met the specified minimum capital \nadequacy ratio (CAR) of 10.0 per cent, compared with 96.0 per cent in the corresponding period of 2006. With \nrespect to the liquidity ratio (LR), 72.0 per cent of the banks met the stipulated minimum of 40.0 per cent, \ncompared with 92.0 per cent in the corresponding period of 2006. The defaulting banks were penalized \naccordingly.\nAn assessment of the banking sector soundness using the CAMEL parameters revealed that as at end-\nJune 2007, six (6) banks were rated sound, sixteen (16) satisfactory, and three (3) banks were rated marginal. No \nbank was rated unsound, reflecting the positive results of the consolidation exercise. The non-performing loans \nof the banks rose from N209.0 billion at end-June 2006 to N254 0 billion, reflecting a deterioration in the \nquality of loan facilities. The ratio of non-performing credit to industry total credit was 7.7 per cent as at end-\nJune, 2007 as against 9.7 per cent recorded at end-June, 2006. The ratios were below the acceptable \ncontingency threshold of 20.0 per cent for the industry. \nRoutine examinations were also conducted on some of the deposit money banks and the discount \nhouses. The examinations covered prudential regulations, foreign exchange operations, anti-money laundering \n2.3.2 \nPrudential Examination\n2.3.3\n Banking Sector Soundnes\n2.3.4 Routine Examinations\n10\nCBN Half Year Economic Report for 2007\ncontrols and know-your-customer (KYC) directives. The examination on foreign exchange operations of the \nbanks revealed various infractions, including poor record keeping, incomplete documentation, non-compliance \nwith the foreign exchange rules and regulations, among others. The errant banks were appropriately sanctioned \nfor each of the offences.\nAn examination of the extent of compliance with the anti-money laundering controls and the Know-\nYour-Customer (KYC) principle in banks and other financial institutions revealed the following: non-\nuniformity with regard to the documentation of customers' identity; difficulty in obtaining information on \npolitically exposed persons; difficulty in obtaining uniform means of identification of customers; lack of \ncontinuous training for staff; and low adoption of self regulation by the institutions, among others.\nThe CBN embarked on a number of measures on Anti-Money Laundering/Combating Financing \nTerrorism (AM/CFT) in compliance with the Financial Action Task Force (FATF) requirements. In this regard, \nthe CBN organized various public enlightenment and training programmes on money laundering in \ncollaboration with other stakeholders. It also placed advertisements in newspapers and magazines as well as co-\noperated with and shared information with local and foreign law enforcement agencies in the arrest and \nprosecution of persons involved in financial crimes.\n Verification exercise on compliance with the provisions of the code of corporate governance for banks \nissued in April 2006 was conducted. Appraisal of the banks' monthly reports as well as periodic on-site \nverification by examiners to confirm the claims in their reports revealed that four (4) banks had government \nequity holdings above 10 per cent, while no bank had complied with the appointment of independent directors.\nOn-site examinations on 1,351 Other Financial Institutions (OFIs), comprising 757 community banks \n(CBs), 16 microfinance banks (MFBs), 113 finance companies (FCs), 91 primary mortgage institutions (PMIs), \n368 bureaux de change (BDCs), and 6 development finance institutions (DFIs) were conducted. The major \nregulatory issues that emerged from the examinations included deep erosion of shareholders' funds through poor \nquality of risk assets, poor loan recovery effort and weak discharge of oversight functions by the Boards of \nDirectors. \n Off-site review of the activities of the OFIs revealed improvement in their operations. The total assets of \nthe community banks, primary mortgage institutions and finance companies grew by 1.9, 5.7 and 6.0 per cent, \nrespectively, over the levels at end-December 2006. \nThe development finance institutions defaulted in the timely rendition of their statutory returns which \nconstituted a major impediment to effective supervisory process. In order to address the recent resurgence of \nillegal finance houses that were involved in questionable activities, the CBN embarked on a verification exercise \nas a prelude to publishing the names of licensed active FCs. The exercise revealed that seventy-six (76) FCs were \nin operation, while thirty-seven (37) had ceased operations. The names of the seventy-six licensed active FCs \nwere subsequently published in the national dailies to guide members of the general public. \nOne hundred and ten (110) fresh applications for BDC licences were received in the first half of the \nyear, out of which sixteen (16) operating licences were approved and sixty-six (66) Approvals-In-Principle \ngranted, while twenty-eight (28) others were at various stages of processing. Inspite of the publication of the \nnames of eighty (80) BDCs that could not be located during the on-site examination in the first quarter of 2006, \nonly 23 of the BDCs were located by the CBN, with 57 outstanding as at end of June 2007.\n2.3.5 \nFinancial Crime Surveillance\n2.3.6 \nCompliance with the Code of Corporate Governance for Banks in Nigeria\n2.3.7 \nExamination of Other Financial Institutions\n11\nCBN Half Year Economic Report for 2007\nFig. 11\nExchange Rate Movements (Naira per US$)\n115\n120\n125\n130\n135\n140\n145\n150\n155\nJan-06\nFeb-06\nMar-06\nApr-06\nMay-06\nJun-06\nJul-06\nAug-06\nSep-06\nOct-06\nNov-06\nDec-06\nJan-07\nFeb-07\nMar-07\nApr-07\nMay-07\nJun-07\nWDAS\nBDC\nInter-Bank\n2.4\nForeign Exchange Management\nThe official segment of the foreign exchange market under the Wholesale Dutch Auction System \n(WDAS) held 47 auctions as against 44 in the corresponding period of 2006. In aggregate, the market witnessed \na surge in demand amounting to US$6.59 billion, up from US$3.78 billion in the first half of 2006. This \ndevelopment was occasioned by the bid to pay for new oil blocks, importation of petroleum products and the \nrise in the repatriation of dividend at the end of the first quarter. Consequently, the value of foreign exchange \nsold by the CBN to the authorized dealers increased by 137.6 per cent to US$8,73 billion.\nAt N127.94, the exchange rate of the naira vis-à-vis the US dollar appreciated by 0.8 per cent over the \nlevel in the corresponding period of 2006. In the bureaux de change (BDC) segment of the market, the naira also \nappreciated, by 11.5 per cent, and traded at an average of N129.32 per US dollar. Consequently, the wide \nparallel market premium of 11.8 per cent in the first half of 2006 crashed to a remarkable low of 1.1 per cent.\n12\nCBN Half Year Economic Report for 2007\nJun-06\n11.8\nDec-06\n1.71\nJun-07\n1.1\n0\n5\n10\n15\n20\n25\nFig. 12\nBureaux de Change Premium\nJan-06\nFeb-06\nMar-06\nApr-06\nMay-06\nJun-06\nJul-06\nAug-06\nSep-06\nOct-06\nNov-06\nDec-06\nJan-07\nFeb-07\nMar-07\nApr-07\nMay-07\nJun-07\n \nFig. 13\nForeign Exchange Disbursements (2007 Half Year)\nWDAS Utilisation\n64.01%\nExternal Debt Service\n5.82%\nDrawing on L/C\n2.35%\nNational Priority \nProjects\n0.00%\nOther Official Payments\n25.22%\nAutonomous Source\n2.60%\n2.4.2 \nForeign Exchange Flows \nForeign exchange flows into the economy increased by 1.0 per cent over the level in the corresponding \nperiod of 2006 to US$29.49 billion. Total receipts from the oil sector (US$12.53 billion) accounted for 42.5 per \ncent, while the autonomous sources (US$14.94 billion) and non-oil public sector inflows (US$2.02 billion) \naccounted for 50.7 and 6.9 per cent, respectively. The huge autonomous inflows which surpassed the oil receipts \nwere driven by the increase in receipts from invisibles and non-oil exports. Total foreign exchange outflow \nincreased by 20.2 per cent to US$13.50 billion during the period. This development was attributed to the \nincrease in the frequency and sales at the WDAS, drawings on letters of credit, as well as other official and \nautonomous payments. \n13\nCBN Half Year Economic Report for 2007\nFig. 15 \nSectoral Utilization of Foreign Exchange\nAgricultural\n0.8%\nTransport\n4.5%\nInvisibles\n30.7%\nOthers\n28.9%\nIndustrial\n35.1%\nTransactions through the CBN resulted in a net inflow of US$1.30 billion, compared with US$7.32 \nbillion in the corresponding period of 2006. The inflows and outflows were US$14.55 billion and US$13.24 \nbillion, respectively, compared with US$18.37 billion and US$11.06 billion in the corresponding period of \n2006.\n2.4.3 \nSectoral Utilization of Foreign Exchange\nUtilization of official foreign exchange was estimated at US$12,647.1 million, representing an increase \nof 59.0 per cent over the level in the first half of 2006. An analysis of the foreign exchange utilization showed \nthat industrial and agricultural sectors accounted for 35.1 and 0.8 per cent, respectively, compared with 45.6 and \n1.0 per cent in the corresponding period of 2006. The share of finished goods, transport and invisibles were 28.9, \n4.5 and 30.7 per cent, respectively, compared with 30.6, 4.9 and 17.9 per cent in the corresponding period of \n2006. \n14\nCBN Half Year Economic Report for 2007\nFig. 16\n Sectoral Distribution of ACGSF Loans (Nmillion)\nFood Crop\n69.0%\nOthers\n21.1%\nLivestock\n9.9%\n2.5\nDevelopment Finance Operations\n2.5.1\nAgricultural Credit Guarantee Scheme Fund (ACGSF)\nThe authorized and called-up share capital of the ACGSF as at end-June 2007 was N3.0 billion, while \nthe paid-up capital remained N2.25 billion. Total resources available under the scheme as at end-June 2007 was \nN4.790 billion. A total of 11,374 loans valued at N1.002 billion were guaranteed under the scheme, compared \nwith 12,188 loans, valued at N801.1 million in the corresponding period of 2006. This represented a decline of \n6.6 per cent in volume and an increase of 25.1 per cent in value of loans guaranteed, compared with the levels \nattained in the corresponding period of 2006. The total number of loans repaid stood at 15,993 valued at N1.252 \nbillion. The cumulative volume and value of ACGSF loans from inception in 1978 to end-June 2007 stood at \n509,066 and N15.92 billion. The number and value of applications for claims settled under the scheme rose by \n124.8 and 108.5 per cent over the levels in the corresponding period of 2006 to 517 and N31.79 million, \nrespectively.\n2.5.2\nInterest Drawback Programme (IDP)\n2.5.3\nThe Trust Fund Model (TFM)\n2.5.4\nSmall and Medium Enterprises Equity Investment Scheme (SMEEIS)\nThe number and value of settled IDP claims rose by 38.8 and 152.6 per cent over the levels in the \ncorresponding period of 2006 to 8,214 and N44.17 million, respectively. The increase was attributed to the \nincentive offered under the IDP which encouraged farmers to payback their loans more promptly.\nThe total number of MOU signed under the TFM remained at 16 as at end-June 2007, as no new MOU \nwas signed during the first half of 2007.\nThe cumulative sum set aside by banks under the SMEEIS as at end June, 2007 was N37.42 billion, \nwhich represented a decrease of 2.1 and 8.2 per cent relative to the levels in the preceding half year and the \n15\nCBN Half Year Economic Report for 2007\n \nFig. 17\nSectoral Distribution of Investments by Banks as at June 2007\nAgro-Allied\n6.03%\nManufacturing\n38.37%\nConstruction\n6.14%\nSolid Minerals\n0.33%\nICT & Telecom.\n11.74%\nEducational Estab.\n0.74%\nServices\n17.10%\nTourism\n21.63%\nMicro Enterprises\n0.00%\ncorresponding period of 2006, respectively. The sum of N18.13 billion was invested by banks in 258 projects, \nrepresenting an increase of 6.4 and 21.6 per cent over the levels in the preceding half year and the corresponding \nperiod of 2006, respectively.\nA sectoral breakdown of the investments as at end-June, 2007, showed that the real sector received \nN9.2 billion (50.79 per cent) for 163 projects, while the services sub-sector accounted for the balance valued at \nN8.9 billion (49.21 per cent) invested in 95 projects. Further analysis revealed that the manufacturing sub sector \ndominated, accounting for 46.9 and 38.3 per cent of the total number and value of projects, respectively. \nServices followed with 21.3 and 17.1 per cent of the total number and value of projects, respectively. Tourism & \nLeisure, and Information and Communication Technology (ICT) & Telecommunications accounted for 21.6 \nand 9.8 per cent of the total amount invested, respectively, while construction, agro-allied, educational \nestablishment and solid minerals sub sectors accounted for 6.1, 6.0, 0.7 and 0.3 per cent, respectively. \n2.5.4\nMicrofinance\nForty (40) additional applications for microfinance bank (MFB) licenses from new investors were \nreceived, while eleven (11) final licenses, and thirty-two (32) approvals-in- principle (AIPs) were granted. Also, \nfive (5) final licences and one hundred and forty (140) provisional approvals were granted to existing CBs to \nconvert to MFBs. Twenty-three (23) other new applications for MFB licences were at various stages of \nprocessing. However, the implementation of the conversion plans submitted by the community banks that were \nyet to meet the minimum shareholders' funds of N20 million was hampered by their failure to adhere to the \nprogrammes and timelines contained in their conversion plans. \nEfforts to build the skills and competencies of the executives of microfinance banks were given a boost \nwith the CBN's approval of the certification programme for directors and management staff of microfinance \n16\nCBN Half Year Economic Report for 2007\nbanks as well as other regulators. Following the approval, steps are being taken to finalize the Terms of \nReference for the Technical Service Providers, establish a Supervisory Board, and set up an Administrative \nSecretariat. \nProvisional data showed that the total assets of the CBN as at end-June 2007 increased by 23.68 per \ncent to N6,492.8 billion when compared with the level in the corresponding period of 2006. This reflected the \nincrease of 31.14, 29.31, 23.89 and 10.56 per cent in total external reserves, rediscount and advances, fixed \nassets and other securities, which more than offset the decrease of 49.33 and 22.21 per cent in Federal \nGovernment securities and other assets.\nThe corresponding increase of 23.55 per cent in total liabilities relative to the first half of 2006 was \naccounted for by deposits (29.0 per cent), currency in circulation (19.43 per cent), and other liabilities (14.0 per \ncent). The increase of 47.36 and 21.67 per cent in other deposits and the federal and state governments' deposits \nmore than offset the decline in banks' deposits.\n2.6\nCBN Assets and Liabilities", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/Quarterly_Economic_Reports/main report-2.pdf"}

clean/cb_requests/289d8b2e41c2662150388c22d61bebf6.json

@@ -0,0 +1 @@
+{"doc_id": "289d8b2e41c2662150388c22d61bebf6", "text": "Monetary Policy\nReview\n \n \n May 2006\nMonetary Policy\nReview\nMay 2006\nSouth African Reserve Bank\nMonetary Policy Review May 2006\n© South African Reserve Bank\nAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in\nany form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior\npermission of the publisher. The contents of this publication are intended for general information only and are\nnot intended to serve as financial or other advice. While every precaution is taken to ensure the accuracy of\ninformation, the South African Reserve Bank shall not be liable to any person for inaccurate information or\nopinions contained in this publication.\nEnquiries relating to this Review should be addressed to:\nExecutive General Manager and Chief Economist\nResearch Department\nS A Reserve Bank\nP O Box 427\nPretoria 0001\nTel. 27-12-3133668/3944\nhttp://www.reservebank.co.za/mpr\nISSN: 1609-3194\nSouth African Reserve Bank\nMonetary Policy Review May 2006\nContents\nMonetary Policy Review\nIntroduction...........................................................................................................................\n1\nRecent developments in inflation...........................................................................................\n1\nThe evolution of indicators of inflation..............................................................................\n1\nFactors affecting inflation.................................................................................................\n7\nMonetary policy.....................................................................................................................\n20\nThe outlook for inflation.........................................................................................................\n26\nInternational outlook........................................................................................................\n26\nOutlook for domestic demand and supply ......................................................................\n29\nIndicators of inflation expectations ..................................................................................\n30\nThe Reserve Bank inflation forecast ................................................................................\n32\nAssessment and conclusion..................................................................................................\n33\nMonetary Policy Review\nIntroduction\nForecasts suggest that the inflation outlook has improved significantly, and there is\nevidence that inflation expectations and wage settlements are increasingly in line with\nthe inflation target. At the same time, however, there are aspects of the inflation\nenvironment that increasingly demand caution. Continued strong consumer demand,\nwhich shows few signs of moderating, and resurgent international oil prices are\nparticularly significant concerns.\nAgainst a backdrop of lower domestic inflation and interest rates, consumer and\nbusiness confidence remain high. The strong growth in household consumption\nexpenditure is reflected in rising household debt levels, vigorous credit extension, and\nthe widening deficit on the current account of the balance of payments. All carry\npotential risks for the inflation and interest rate outlook. Furthermore, in an international\nenvironment characterised by robust global demand and persistent global imbalances,\nrising oil and commodity prices feature prominently. Geopolitical factors and tight market\nconditions suggest that the risks of oil price spikes are significant.\nThis Monetary Policy Review provides an analysis of recent price developments, the\nfactors that affect inflation as well as the outlook for inflation. In addition, three focus\ntopics are presented in boxes. The first box considers international trends in household\ndebt, and discusses the factors underlying these trends and their implications. The\nsecond box reports on research into the growth rate of potential output in South Africa,\nand the third discusses recent proposals regarding how best to tackle global imbalances\nin order to ensure longer-term sustainable global economic growth. \nRecent developments in inflation\nThis section reviews recent trends in the main inflation indices, and provides an analysis\nof developments in the main factors impacting on inflation in South Africa.\nThe evolution of indicators of inflation\nFigure 1 shows that the measure of inflation targeted by the Bank, the year-on-year\nincrease in the consumer price index excluding mortgage interest cost for metropolitan\nand other urban areas (CPIX), has remained within the inflation target range of 3 to 6 per\ncent for 31 consecutive months up to March 2006. When the previous Monetary Policy\nReview was published, the latest available rate (for September 2005) was 4,7 per cent.\nInflation then declined to 3,7 per cent in November 2005 before increasing to 4,5 per\ncent in February 2006 and then decelerated once more to 3,8 per cent in March. The\nanalysis presented in this section shows that fluctuations in petrol and food prices have\nbeen the major contributors to movements in CPIX inflation in this period.\nWith the repurchase or repo rate having remained unchanged from mid-April 2005,\ninflation measured in terms of the headline consumer price index for metropolitan areas\n(CPI) has tracked that of CPIX closely in the past year (Figure 1). The CPI inflation rate\ndeclined from 4,4 to 3,4 per cent between September and November 2005, and then\nincreased to 4,0 per cent in January 2006 before slowing to 3,4 per cent in March.\nSouth African Reserve Bank\n1\nMonetary Policy Review May 2006\n2\nThe weighted contributions of the main components of the CPIX to the overall year-\non-year inflation rate, presented in Table 1, confirm that developments in the\ntransport and food components of the index have had a significant influence on CPIX\ninflation. Food prices, which have a weight of 23,7 per cent in the index, contributed\n0,5 percentage points to CPIX inflation in November 2005 when the overall inflation\nrate was 3,7 per cent. This contribution increased to 1,1 percentage points in\nDecember 2005 and January 2006, and further to 1,2 percentage points in February\nand March 2006. The contribution of the transport component to CPIX inflation, driven\nmainly by petrol prices, declined from 1,3 percentage points in September 2005 to \n0,8 percentage points in December 2005, before increasing to 1,2 and 1,3 percentage\npoints in January and February 2006, respectively. The contribution of this component\nthen declined to 0,7 percentage points in March, when the overall CPIX inflation rate\nslowed to 3,8 per cent.\nTable 1\nContributions to CPIX inflation\nPercentage change over twelve months* and percentage points\n2005\n2006\nSep\nOct\nNov\nDec\nJan\nFeb\nMar\nTotal*..................................................\n4,7\n4,4\n3,7\n4,0\n4,3\n4,5\n3,8\nOf which:\nFood...................................................\n0,7\n0,6\n0,5\n1,1\n1,1\n1,2\n1,2\nHousing..............................................\n0,6\n0,6\n0,5\n0,5\n0,5\n0,5\n0,5\nMedical care and health expenses......\n0,6\n0,6\n0,6\n0,6\n0,6\n0,6\n0,6\nTransport ............................................\n1,3\n1,3\n0,9\n0,8\n1,2\n1,3\n0,7\nEducation ...........................................\n0,4\n0,4\n0,4\n0,4\n0,4\n0,4\n0,4\nOther..................................................\n1,1\n0,9\n0,8\n0,6\n0,5\n0,5\n0,4\nSource: Statistics South Africa\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nPercentage change over twelve months\n0\n3\n6\n9\n12\n15\n2000\n2001\n2002\n2003\n2004\n2005\n2006\n \nCPI\n \nCPIX\nFigure 1 \nConsumer price inflation: CPIX and CPI\nSource: Statistics South Africa\nThe contributions of the other main components of the CPIX remained relatively constant\nover the period under review. The housing component, which contributed \n0,6 percentage points in September and October 2005, contributed 0,5 percentage\npoints between November 2005 and March 2006. The medical care and health expenses\ncomponent and the education component remained subdued, contributing 0,6 and \n0,4 percentage points, respectively, to the year-on-year inflation rates in Table 1.\nAlthough inflation pressures from grain prices in the food component of the CPIX have\nbeen muted, maize prices have gravitated towards their import parity prices in 2006\n(Figure 2). The price of yellow maize increased from a low of R554/ton late in February\n2005 to R1 000/ton on 25 April 2006, while that of white maize rose from R471/ton to\nR1 084/ton over the same period.\nThe effect of excluding energy and food prices from the year-on-year CPIX inflation\nmeasure is shown in Figure 3. The moderating effect of food prices on the overall CPIX\ninflation rate, which was evident throughout 2005, has disappeared in recent months.\nExcluding food, CPIX inflation declined from 5,3 per cent in September 2005 to 4,1 per\ncent in December 2005, before increasing to 4,5 per cent in February 2006 and then\nslowing to 3,5 per cent in March. Energy prices, by contrast, continue to deviate\nsignificantly from the overall CPIX inflation rate. Excluding energy prices, CPIX inflation\nSouth African Reserve Bank\n3\nMonetary Policy Review May 2006\nWhite maize, rand per ton\nYellow maize, rand per ton\nFigure 2 \nMaize prices\n2005\n2004\n2003\n2006\n \nExport parity price\n \nImport parity price\n \nSAFEX spot price\nSource: Grain South Africa\n0\n500\n1000\n1500\n2000\n0\n500\n1000\n1500\n2000\n4\ndeclined from 3,5 per cent to 3,0 per cent between September and November 2005,\nthen increased once more to 3,4 per cent in December 2005 before receding to 3,2 per\ncent in March 2006.\nFigure 4 presents the inflation rates for the goods and services categories of the CPIX, and\nreveals that since January 2006 goods prices have increased at a faster rate than those\nof services for the first time since April 2003. The year-on-year inflation rate for goods\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nPercentage change over twelve months\n2001\n2000\n2002\n2003\n2004\n2005\n2006\n2\n4\n6\n8\n10\n12\nCPIX\nCPIX excluding energy prices\nCPIX excluding food prices\nSources: Statistics South Africa and SARB calculations\n \n \nFigure 3 \nThe effect of food and energy prices on CPIX\n \ninflation\nPercentage change over twelve months\n2002\n2001\n2003\n2004\n2005\n2006\n0\n3\n6\n9\n12\n15\n \nGoods\nServices\nCPIX\n \nFigure 4 \nCPIX: Goods and services inflation \nSource: Statistics South Africa\nprices declined from 4,4 per cent in September 2005 to 3,1 per cent in November 2005\nbefore increasing to 4,8 per cent in February 2006 and then decelerating once more to \n4,1 per cent in March.\nServices price inflation declined continuously from 5,5 per cent in September 2005 to\n3,5 per cent in March 2006. The deceleration in services inflation can be attributed to\nsignificant declines in a number of components of the index. The inflation rate for the\nhousing services component (which has a weight of 40 per cent in the services index)\nslowed from 7,0 per cent in August 2005 to 3,6 per cent in March 2006. Communication\nservices inflation declined from 2,5 per cent in August 2005 to a negative 2,4 per cent\nin January-March 2006, while medical services inflation slowed from 9,9 per cent in\nAugust 2005 to 7,0 per cent in March. Education services inflation declined from \n8,0 per cent in the preceding twelve months to 7,1 per cent in March 2006.\nFigure 5 presents the year-on-year inflation rate for the administered price index (API). In\nthe period under review, the API inflation rate declined from 10,3 per cent in September\n2005 to 7,0 per cent in December 2005, before increasing to 9,3 per cent in February\n2006 and then slowing to 6,2 per cent in March. As noted above, fluctuations in petrol\nprices continue to have a significant impact on inflation in South Africa, and this is\nparticularly the case with API inflation since petrol has a weight of 25,4 per cent in the\nAPI basket. Excluding the petrol component, the inflation rate for the remaining\nadministered prices declined from 4,5 per cent in September 2005 to 3,2 per cent in\nMarch 2006.\nTable 2 presents the contributions of various components of the API to the overall API\ninflation rate. The dominant influence of the contribution of the petrol component is\nclearly evident from the table, both in terms of size and in terms of the impact of\nfluctuations on the overall API inflation rate. Its contribution declined from 7,0 percentage\nSouth African Reserve Bank\n5\nMonetary Policy Review May 2006\nPercentage change over twelve months\n2003\n2004\n2006\n2005\n0\n3\n6\n9\n12\n15\n \nAdministered price index (API)\n \nAPI excluding petrol\n \nCPIX\nSources: Statistics South Africa and SARB calculations\nFigure 5 \nCPIX and administered prices\n6\npoints in September 2005, when the API inflation rate was 10,3 per cent, to \n3,8 percentage points in December 2005, when API inflation was 7,0 per cent. It then\nincreased to 7,1 percentage points in February 2006 when the corresponding API\ninflation rate was 9,3 per cent. In March, the contribution of the petrol component\ndeclined to 3,8 percentage points when the API inflation rate slowed to 6,2 per cent.\nTable 2\nContributions to administered price inflation \nPercentage change over twelve months* and percentage points\n2005\n2006\nSep\nOct\nNov\nDec\nJan\nFeb\nMar\nTotal*..................................................\n10,3\n10,0\n7,5\n7,0\n8,6\n9,3\n6,2\nOf which:\nPetrol..................................................\n7,0\n6,7\n4,2\n3,8\n6,2\n7,1\n3,8\nElectricity............................................\n0,5\n0,3\n0,3\n0,3\n0,2\n0,1\n0,0\nAssessment rates ..............................\n0,5\n0,5\n0,5\n0,5\n0,5\n0,5\n0,5\nEducation services..............................\n1,2\n1,2\n1,2\n1,2\n1,2\n1,2\n1,1\nMedical services.................................\n0,1\n0,1\n0,1\n0,0\n-0,0\n-0,1\n-0,1\nCommunication ..................................\n0,0\n0,0\n-0,0\n-0,0\n-0,4\n-0,4\n-0,4\nOther..................................................\n1,0\n1,2\n1,2\n1,2\n0,9\n0,9\n1,3\nSource: Statistics South Africa\nThe inflation rate measured in terms of the production price index (PPI) is presented in\nFigure 6. After declining from 4,6 per cent in September 2005 to 4,2 per cent in October\n2005, the overall PPI inflation rate rose to 5,5 per cent in January and February 2006\nbefore slowing marginally to 5,4 per cent in March. The imported component of the\nindex continued to exert upward pressure on the overall PPI inflation rate. After declining\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nPercentage change over twelve months\n2001\n2002\n2003\n2004\n2005\n2006\n-10\n-5\n0\n5\n10\n15\n20\n \nImported component\n \nDomestically produced component\n \nProduction price index (PPI)\nSource: Statistics South Africa \nFigure 6 \nProduction price inflation\nfrom 6,8 per cent in September 2005 to 5,7 per cent in November 2005, the inflation\nrate for this component increased to 6,9 per cent in February 2006 and then slowed to\n6,7 per cent in March. Inflation measured in terms of the domestic component of the PPI\nalso increased from 3,8 per cent in September 2005 to 5,2 per cent in January 2006,\nbefore receding slightly to 5,0 per cent in March.\nThe weighted contribution of the imported component declined from 1,7 percentage\npoints in September 2005 to 1,4 percentage points in November 2005 before increasing\nto 1,6 percentage points in the four months thereafter. The domestic component’s\ncontribution to PPI inflation increased from 2,9 percentage points in September 2005 to\n3,8 percentage points in March 2006.\nFactors affecting inflation\nRecent developments in some of the main drivers of inflation in South Africa are\nreviewed in this section. The outlook for these variables, and therefore for inflation, is\ndiscussed in a later section.\nInternational economic developments\nThe International Monetary Fund (IMF) estimates that the world economy grew by \n4,8 per cent in 2005 (Table 3), above an earlier estimate of 4,3 per cent but below the\n5,1 per cent recorded in 2004. While growth in some of the advanced economies\nslowed in 2005, emerging-market economies continued to grow strongly. The impact on\nglobal growth of higher oil prices, which has been a recurring theme in recent editions\nof this Review, has however been relatively moderate, and the global inflation rate rose\nonly marginally from 3,7 per cent in 2004 to 3,8 per cent in 2005. \nTable 3\nAnnual percentage change in real gross domestic product and\nconsumer prices \nPer cent\nReal GDP\nConsumer \nprices\nShare of global\nreal GDP*\n2005\n2005\nWorld ......................................................................\n100,0\n4,8\n3,8\nAdvanced economies ............................................\n52,3\n2,7\n2,3\nUnited States ....................................................\n20,1\n3,5\n3,4\nJapan ................................................................\n6,4\n2,7\n-0,3\nEuro area ..........................................................\n14,8\n1,3\n2,2\nUnited Kingdom ................................................\n3,0\n1,8\n2,1\nOther advanced economies ..............................\n6,2\n3,7\n2,1\nOther emerging-market and developing countries ..\n47,7\n7,2\n5,4\nAfrica ................................................................\n3,3\n5,2\n8,5\nCentral and eastern Europe ..............................\n3,3\n5,3\n4,8\nCommonwealth of Independent States ............\n3,8\n6,5\n12,3\nDeveloping Asia ................................................\n27,1\n8,6\n3,6\nChina ..............................................................\n15,4\n9,9\n1,8\nIndia ................................................................\n5,9\n8,3\n4,2\nMiddle East ....................................................\n2,8\n5,9\n8,4\nWestern hemisphere ..........................................\n7,4\n4,3\n6,3\n*\nGDP shares based on the IMF’s purchasing-power-parity valuation of country GDPs for 2005 \nSource: IMF World Economic Outlook, April 2006.\nSouth African Reserve Bank\n7\nMonetary Policy Review May 2006\n8\nThe economy of the United States of America (US) proved resilient in 2005, despite\nprogressive monetary tightening, waning fiscal stimulus, natural disasters and a sharp\nincrease in energy prices. Real gross domestic product (GDP) growth of 3,5 per cent was\nrecorded, the fastest growth rate in the G7. As has been the case in many economies,\nhowever, consumer prices in the US continue to be buffeted by oil prices, averaging 3,4\nper cent in 2005. Core CPI inflation – which excludes food as well as energy prices –\nmoved higher in the first quarter of last year and then slowed slightly to stabilise at just\nover 2 per cent.\nGrowth in Japan was faster than expected at 2,7 per cent in 2005, with business\ninvestment and personal consumption expenditure acting as the main locomotives of\ngrowth. CPI inflation averaged -0,3 per cent in 2005. However with stronger growth\nresuming, the year-on-year headline CPI and core inflation rates became positive as of\nJanuary 2006 and November 2005, respectively. \nThe widely anticipated improvement in euro area growth finally materialised in the third\nquarter of last year, with GDP advancing by 2,7 per cent, the fastest pace since the first\nquarter of 2004. Growth subsequently slowed to 1,0 per cent over the final three months\nof the year, resulting in overall growth of 1,3 per cent for 2005. The higher oil prices\nimpacted on headline CPI inflation throughout 2005, briefly pushing the year-on-year\nrate as high as 2,6 per cent in September, well above the European Central Bank’s\n(ECB’s) “close to but below 2,0 per cent” target ceiling.\nThe United Kingdom (UK), after posting an expansion of 3,2 per cent in real GDP in 2004\nslowed significantly in 2005 to record growth of 1,8 per cent, largely as a result of a\ndeceleration in consumer spending associated with a cooling in the housing market. The\nCPI inflation rate accelerated to 2,1 per cent in 2005, after averaging 1,3 per cent in 2004.\nGrowth in India in 2005 advanced impressively at 8,3 per cent, only slightly less\nspectacular than the 9,9 per cent posted by China. In the Middle East, rising oil\nproduction and prices have continued to support GDP growth, accompanied by dramatic\nimprovements in external current-account and fiscal positions. GDP growth of 5,9 per\ncent was registered in 2005. Growth in oil-importing countries in the sub-Saharan Africa\nregion, while slowing, has so far held up surprisingly well. African economies grew by \n5,2 per cent in 2005, with inflation rising from 8,1 per cent in 2004 to 8,5 per cent in 2005.\nOil prices\nInternational oil prices have fluctuated sharply in the period under review, as geopolitical\nfactors and related concerns about supply disruptions as well as downstream\nbottlenecks have impacted on the markets. As Figure 7 shows, the Brent crude oil spot\nprice declined from a peak of just below US$70 per barrel towards the end of August\n2005 to around US$53 at the end of November, before increasing to over US$66 per\nbarrel late in January 2006 and then falling once more to around US$56 in mid-February.\nBy late April, the price had risen to new record-high levels above US$74 per barrel. \nFrom the highs recorded in August 2005, prices fell immediately as emergency oil\nreserves were released to the markets and Saudi Arabia promised to increase its output.\nHowever, throughout December futures prices were supported by cold weather in the\nUS. Attention also began to focus on concerns regarding Iran’s nuclear programme as\nwell as Nigerian supply disruptions, and international crude oil prices began to rise early\nin 2006 as a result of these concerns. \nMonetary Policy Review May 2006\nSouth African Reserve Bank\nFebruary 2006 was dominated by robust US inventories data, with the US Energy\nDepartment reporting a jump in inventories around the middle of the month. At the end\nof the month, crude inventories in the US reached their highest level since 1999. Prices\nwere lower in February despite an attack on a Saudi Arabian oil facility at month-end,\nnews that Nigerian oil production had been cut by 20 per cent as a result of attacks by\nmilitants, as well as lingering concerns about Iran, as the International Atomic Energy\nAgency reconvened to consider the country’s nuclear programme. \nIn March, despite the International Energy Agency (IEA) lowering its forecast of global oil\ndemand growth by 300 000 barrels per day to 1,5 million barrels per day, an unexpected\ndecline in US inventories at the end of the month pushed oil prices back up to a two-\nmonth high. Prices then continued to rise amid increasing concerns that the dispute over\nIran’s nuclear programme could result in military conflict disrupting crude oil supplies,\nreaching levels above US$74 per barrel by late April 2006.\nCentral bank interest rate developments\nTable 4 depicts the most recent interest rate changes made by a selection of central\nbanks. Of those banks that made changes in the period since November 2005, when\nthe previous Monetary Policy Review was published, a significant majority have opted to\nraise official interest rates. \nThe US Federal Open Market Committee (FOMC) raised its target for the federal funds\nrate to 4,75 per cent in March 2006, the fifteenth consecutive 25-basis-point increase\nsince mid-2004. The FOMC indicated that while longer-term inflation expectations\nremain well contained in the US, inflationary concerns centre around the increased\nresource utilisation rates, and higher energy and commodity prices. In the short-to-\nmedium term, monetary policy in the US is likely to have a bias towards tightening.\nCanada’s central bank resumed interest rate increases in March and April 2006, raising\nthe target for the overnight rate to 4,00 per cent.\nSouth African Reserve Bank\n9\nMonetary Policy Review May 2006\nUS dollars per barrel\n30\n40\n50\n60\n70\n80\nO\nN\nD\nJ\nJ\nJ\nF\nM\nA\nO\nN\nD\nJ\nF\nM\nA\nM\nA\nS\nM\n2004\n2005\n2006\n \nFigure 7 \nPrice of Brent crude oil\nSource: Bloomberg\n10\nTable 4\nSelected central bank interest rates\nPer cent\nCountries\n1 Jan 2005 \n3 May 2006 \nLatest change\n(percentage points)\nUnited States ....................................\n2,25\n4,75\n28 Mar 2006\n(+0,25)\nJapan................................................\n0,00\n0,00\n19 Mar 2001 \n(-0,15)\nEuro area ..........................................\n2,00\n2,50\n8 Mar 2006 \n(+0,25)\nUnited Kingdom ................................\n4,75\n4,50\n4 Aug 2005 \n(-0,25)\nCanada ............................................\n2,50\n4,00\n25 Apr 2006 \n(+0,25)\nDenmark ..........................................\n2,00\n2,50\n3 Mar 2006 \n(+0,25)\nSweden ............................................\n2,00\n2,00\n1 Mar 2006 \n(+0,25)\nSwitzerland........................................\n0,25 – 1,25\n0,75 – 1,75\n16 Mar 2006 \n(+0,25)\nAustralia ............................................\n5,25\n5,75\n3 May 2006 \n(+0,25)\nNew Zealand ....................................\n6,50\n7,25\n8 Dec 2005 \n(+0,25)\nIsrael ................................................\n3,70\n5,25\n1 May 2006 \n(+0,25)\nChina ................................................\n5,58\n5,85\n28 Apr 2006 \n(+0,27)\nHong Kong........................................\n3,75\n6,25\n29 Mar 2006 \n(+0,25)\nIndonesia ..........................................\n7,43\n12,75\n6 Dec 2005 \n(+0,50)\nMalaysia ............................................\n2,70\n3,50\n26 Apr 2006 \n(+0,25)\nSouth Korea ......................................\n3,25\n4,00\n9 Feb 2006 \n(+0,25)\nTaiwan ..............................................\n1,75\n2,375\n30 Mar 2006 (+0,125)\nThailand ............................................\n2,00\n4,75\n10 Apr 2006 \n(+0,25)\nIndia ..................................................\n4,75\n5,50\n24 Jan 2006 \n(+0,25)\nBrazil ................................................\n17,75\n15,75\n19 Apr 2006 \n(-0,75)\nChile..................................................\n2,25\n5,00\n13 Apr 2006 \n(+0,25)\nMexico ..............................................\n8,81\n7,00\n21 Apr 2006 \n(-0,25)\nCzech Republic ................................\n2,50\n2,00\n31 Oct 2005 \n(+0,25)\nHungary ............................................\n9,50\n6,00\n20 Sep 2005 \n(-0,25)\nPoland ..............................................\n6,50\n4,00\n1 Mar 2006 \n(-0,25)\nRussia ..............................................\n13,00\n12,00\n26 Dec 2005 \n(-1,00)\nSource: National central banks\nAfter maintaining an unchanged monetary policy stance since mid-2003, the ECB\nraised interest rates by 25 basis points in December 2005 and again in March 2006.\nThe latter decision was due to perceived upside risks to price stability as a result of\nstrong monetary and credit growth, and changes in administered prices and indirect\ntaxes. After reducing interest rates by 25 basis points to 4,5 per cent in August 2005,\nthe Bank of England (BOE) has subsequently left interest rates unchanged. \nThe Bank of Japan (BOJ) announced an important shift in policy in March 2006 which\ninvolved ending the quantitative easing policy which had been in place since March 2001. In\nterms of the new policy, the operating target of money-market operations has been shifted\nfrom the outstanding balance of current accounts of commercial banks held at the BOJ to a\nshort-term interest rate, the uncollateralised overnight call rate. Australia raised its cash rate\nby 25 basis points to 5,75 per cent in May as a result of increased inflationary risks. \nTaiwan’s discount rate was increased for the seventh consecutive quarter to 2,375 per\ncent, the highest level in more than four years, in order to contain inflation pressures, while\nChina raised the benchmark lending rates of financial institutions to 5,85 per cent late in\nApril. The central banks of Thailand and South Korea also raised interest rates during the\nfirst quarter of 2006 as a result of the robust domestic demand underpinning growth in\nboth countries. Given the anticipated upward pressure on core inflation, interest rates have\nbeen increased to 4,75 per cent in Thailand and 4,0 per cent in South Korea.\nIn Latin America, the central banks of Brazil and Mexico reduced interest rates during\n2006 as inflationary pressures continued to be benign. The Bank of Brazil has cut the\nMonetary Policy Review May 2006\nSouth African Reserve Bank\novernight rate to 15,75 per cent, its lowest level since March 2001, although real rates\nremain among the highest in the world. After reducing interest rates by a further 25 basis\npoints in April, the Bank of Mexico gave some indication that it may be reaching the end\nof its loosening cycle. \nExchange rate developments\nFigure 8 shows that the nominal effective exchange rate of the rand measured against a\nbasket of thirteen currencies (NEER) strengthened to near its year-2000 average level in\nJanuary and mid-February 2006, before weakening in March and recovering once more\nin April. The NEER is currently trading at around the levels recorded at the end of 2005.\nMeasured on a bilateral basis, the rand has fluctuated between R5,97 and R6,77 against\nthe US dollar and between R7,19 and R7,95 against the euro since the publication of\nthe November 2005 Monetary Policy Review.\nAlongside movements in the US dollar-euro exchange rate and changes in investor\nsentiment regarding emerging markets in general, strong commodity prices and robust\ninvestment flows into the country have continued to support the domestic currency.\nFollowing a large foreign direct investment inflow of R32,2 billion during the third quarter\nof 2005, an inflow of R5,7 billion was recorded in the fourth quarter. Portfolio investment\nrose by 36,3 per cent in 2005, despite an outflow of R4,1 billion in the final quarter of\nthe year as non-residents reduced their holdings of South African bonds and a euro-\nSouth African Reserve Bank\n11\nMonetary Policy Review May 2006\nIndex: 2000=100 (foreign currency per rand)\nRand per euro\nRand per US dollar\nFigure 8 \nExchange rates of the rand\n2005\n2006\nMar\nFeb\nMay\nApr\nJul\nJun\nSep\nAug\nOct Nov Dec Jan Feb Mar Apr\nJan\n \nNominal effective exchange rate of the rand (NEER)\n \nRand per US dollar \n \nRand per euro (right-hand scale)\n85\n90\n95\n100\n7,0\n7,5\n8,0\n8,5\n9,0\n5,0\n5,5\n6,0\n6,5\n7,0\n7,5\n8,0\n12\ndenominated bond was redeemed by Eskom. In the first three months of 2006, net\npurchases of shares and bonds by non-residents totalled R32,8 billion and R3,5 billion,\nrespectively, although this may include some movements between asset classes\n(Figure 9).\nLabour markets\nThe December 2005 Quarterly Employment Statistics survey published by Statistics\nSouth Africa reveals that wage inflation, measured as the year-on-year growth rate in\nremuneration per worker in the formal non-agricultural sector of the economy, was \n4,6 per cent in the fourth quarter of 2005 (Figure 10). The average growth rate for\n2005 as a whole was 7,3 per cent, compared to 9,2 per cent for 2004. This\ndownward trend in wage inflation is consistent with wage settlement trends in South\nAfrica, as reported by Andrew Levy Employment Publications, which suggest that\naverage wage settlements were 6,3 per cent in 2006 compared to 6,8 per cent in\n2004. Settlements averaged 6,3 per cent in the first quarter of 2006.\nLabour productivity, measured as the ratio of value added to employment in the formal\nnon-agricultural sectors, rose at decelerating rates in 2005. In the final quarter,\nproductivity increased at an annual rate of 2,1 per cent compared to 5,5 per cent in\nthe first quarter of the year. The lower growth in labour productivity is largely\nattributable to faster growth in employment levels. However, for 2005 as a whole the\naverage level of labour productivity growth was 3,8 per cent, compared to 2,5 per\ncent in 2004.\nThese developments in wage inflation and labour productivity growth mean that the\ngrowth in unit labour cost has been well contained. The growth in unit labour cost\nslowed from 4,5 per cent in the third quarter to 2,5 per cent in the fourth quarter of 2005.\nThe average rate of increase for 2005 was 3,3 per cent, significantly down from the rate\nof 6,5 per cent recorded in 2004. \nMonetary Policy Review May 2006\nSouth African Reserve Bank\nR billions\n2003\n2004\n2005\n2006\n-10\n-5\n0\n5\n10\n15\n20\n \nNet purchases of shares\n \nNet purchases of bonds \nFigure 9 \nNet purchases of shares and bonds by \n \nnon-residents\nDemand and output \nAlthough growth in the South African economy slowed from an annualised rate of \n4,2 per cent in the third quarter of 2005 to 3,3 per cent in the fourth quarter, the real\ngrowth rate for the year at 4,9 per cent is the highest since 1984. The contributions to\ngrowth in the fourth quarter of 2005 were confined to sectors other than mining and\nmanufacturing, while expenditure growth in all the components of real domestic final\ndemand accelerated. Table 5 examines the recent growth in real GDP in more detail. \nTable 5\nGrowth in real gross domestic product and expenditure\ncomponents\nPer cent*\n2004\n2005\n3rd qr\n4th qr\nYear\n1st qr\n2nd qr 3rd qr\n4th qr\nYear\nFinal consumption expenditure\nby households ....................................\n7,4\n7,7\n6,5\n6,5\n6,7\n6,1\n6,8\n6,9\nFinal consumption expenditure \nby government....................................\n0,1\n12,6\n6,9\n0,8\n5,9\n5,5\n14,7\n5,6\nGross fixed capital formation ..............\n7,5\n9,7\n8,8\n9,9\n4,6\n7,0\n7,5\n8,0\nChanges in inventories (R billions)** ....\n17,8\n12,7\n14,5\n12,2\n6,1\n13,3\n2,9\n8,6\nGross domestic expenditure..............\n4,7\n3,8\n7,5\n7,0\n5,9\n7,4\n3,9\n5,9\nExports of goods and services ..........\n10,5\n25,0\n2,5\n-18,4\n23,5\n10,5\n-4,1\n6,7\nImports of goods and services ..........\n3,2\n20,8\n14,1\n9,1\n23,2\n21,6\n1,2\n10,1\nGross domestic product ..................\n6,6\n4,3\n4,5\n4,6\n5,4\n4,2\n3,3\n4,9\n*\nQuarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data \n**\nConstant 2000 prices\nSouth African Reserve Bank\n13\nMonetary Policy Review May 2006\nPercentage change over four quarters\n2001\n2002\n2003\n2004\n2005\nFigure 10 Remuneration per worker, labour productivity and unit\n \nlabour cost in the formal non-agricultural sector\n \nNominal unit labour cost\n \nRemuneration per worker\n \nLabour productivity\nSource: Statistics South Africa\n0\n3\n6\n9\n12\n15\n18\nNote: Data from the fourth quarter of 2004 are from the Quarterly Employment\nStatistics (QES) published by Statistics South Africa, which replaced the Survey\nof Employment and Earnings (SEE) in June 2005. Since these two surveys differ\nboth in terms of their sample sizes and content, data from the fourth quarter\n2004 onwards may not necessarily be fully comparable with previous periods. \n14\nThe slowdown in GDP growth in the fourth quarter of 2005 can be attributed mainly\nto temporary or special technical factors that adversely affected output in both the\nmanufacturing and mining sectors. The real value added in the mining sector fell\nsignificantly in the fourth quarter of 2005 as production of platinum group metals was\nadversely affected by scheduled maintenance of a smelter at one of the platinum\nmines, and manufacturing suffered the adverse effects of refinery plant conversions\nrelated to the change-over to unleaded and lead replacement fuel. However, growth\nin the real value added in other sectors remained buoyant in the fourth quarter of 2005\nwith certain secondary and tertiary subsectors recording impressive growth rates. \nContinued brisk expansion in final consumption expenditure by households was\nunderpinned by the steady increase in household disposable income, continued\nbuoyancy in the real-estate and securities markets and a favourable interest rate\nenvironment. The particularly rapid growth in household spending on durable and semi-\ndurable goods continued throughout 2005 (Figure 11). \nRobust domestic demand fuelled growth in expenditure on imports of goods and\nservices and although import growth slowed significantly in the fourth quarter of 2005,\nreal imports of goods and services grew by 10,1 per cent for the year as a whole. The\ndecelerating global expansion in the second half of 2005 and a strengthening currency\nconstrained growth in exports of goods and services, and a contraction of 4,1 per cent\nwas recorded in the fourth quarter of 2005. Although overall annual growth in exports\nwas 6,7 per cent in 2005, the stronger growth in imports served to widen the deficit on\nthe current account to 4,2 per cent of GDP, compared with 3,4 per cent in 2004. \nThe record R98,4 billion net capital inflow on the financial account of the balance of\npayments in 2005 more than comfortably financed the current-account deficit for the year.\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nYear-on-year percentage changes\n-5\n0\n5\n10\n15\n20\n25\n2000\n2001\n2002\n2003\n2004\n2005\n \nDurable goods\nSemi-durable goods\nNon-durable goods\nServices\nTotal\n \nFigure 11 Real final consumption expenditure by households \nThe resulting large surplus recorded on the country’s overall balance of payments enabled\nSouth Africa’s reserve position to strengthen in 2005 as the Bank continued to purchase\nforeign exchange with the objective of building up reserves prudently. On balance, the\ncountry’s official reserves rose by US$5,9 billion in 2005. By the end of March 2006, gross\nreserves measured in US dollars amounted to US$23 billion and the international liquidity\nposition stood at US$19,5 billion. This can be compared to the situation at the end of\nSeptember 2005, when gross reserves were US$19,5 billion and net reserves were\nUS$16,1 billion.\nSouth African Reserve Bank\n15\nMonetary Policy Review May 2006\nBox 1 Household debt: An international perspective\nThe escalation of household debt in recent years has become a source of concern in a number\nof countries. Higher levels of debt may make households more vulnerable to interest rate and\nhouse price shocks, with adverse implications for both economic growth and financial stability.\nThis box takes a closer look at international trends in household debt, the forces that drive these\ntrends and their implications.1\nInternationally, household debt ratios have been influenced by a common set of fundamental\nfactors, although the timing and extent of these influences have tended to differ from one\ncountry to another. Financial market deregulation for example, occurred in many countries,\nparticularly in the 1980s. The deregulation process, apart from removing many of the credit\nconstraints on household borrowing, generated competition among financial institutions with\nthe consequence that efficiency improved and costs were lowered. Together with high levels of\nfinancial innovation, deregulation resulted in improved risk assessment by lending institutions,\ndeclining transaction costs and the proliferation of credit and other financial products such as\nsecuritisation and home equity withdrawal schemes. Access to credit by households improved,\nand this increased debt levels. \nMortgages generally constitute a large proportion of household debt, therefore rising house\nprices and demographic changes that increase home ownership contribute to rising debt levels.\nRising household debt may also reflect a rational response by households to low levels of\ninterest rates and inflation expectations, and high levels of consumer confidence. Together with\nbuoyant asset prices, both financial and real estate, the low inflation environment has resulted\nin households being more comfortable with higher debt levels. \nFigure B1.1 shows household debt as a percentage of disposable income for a selected group\nof countries over the period 1990 – 2005.2 The generally increasing trend for this ratio is clearly\nevident from the figure, although there are notable differences in the timing of accelerations\nbetween the episodes. Although valid comparisons between countries cannot be made without\nanalyses of the underlying balance sheet positions of the various household sectors, it is\nnotable that a relatively wide range of ratios is reported by countries. Italy and Chile, for\nexample, have debt to disposable income ratios which are below 60 per cent while the UK and\nNew Zealand have ratios above 150 per cent. The household debt-to-income ratio of South\nAfrica rose from 49,1 per cent in the final quarter of 2002 to 65,5 per cent in the corresponding\nquarter of 2005.\nIt has been argued that household debt ratios provide little information about whether\nhousehold debt is excessive or sustainable. The right-hand axes of the individual country\ngraphs therefore depict the costs of servicing the debt.3 Although rising household debt has\nbeen offset somewhat by the global moderation in interest rates, servicing costs have risen\nto double-digit levels in Australia, the US and New Zealand in recent years. South Africa’s\ndebt service costs are currently around 7 per cent of disposable income, less than half the\nlevel that prevailed in 1998. \n1\nGiven differences in\ncountry characteristics and data\ncompilation, it must be stressed\nat the outset that unconditional\ncomparisons between countries\nshould be treated with caution.\n2\nCountries were selected\nlargely on the basis of data\navailability.\n3\nThere is no single\nuniversally accepted indicator of\nsustainability. Another common\nmeasure is the gearing ratio of\nhouseholds, i.e. debt levels\nrelative to the assets of\nhouseholds. A problem with this\nmeasure is that it is easily\naffected by changes in house\nprices.\nHigh levels of household debt have significant macroeconomic implications. The higher the level\nof household indebtedness, the more sensitive the economy is to unexpected fluctuations in\nthe levels of both incomes and interest rates. Furthermore, this sensitivity may be affected by\ncountry-specific factors that are not incorporated in ratios such as those presented in Figure\nB1.1. The form of debt contract would be an example here. In the US, the interest rate applying\nto the debt is predominantly fixed, whereas in Australia, the United Kingdom, and South Africa\nit tends to be variable over the life-span of the loan, and closely linked to the policy rate. In the\nlatter case, the implications of increased household indebtedness are potentially much greater.4\nOther factors that need to be considered when assessing the indebtedness of households\ninclude the composition and distribution of debt, the vulnerability of debtors and the health of\nthe financial system in general. \n16\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nUnited States\nFigure B1.1 \nHousehold debt and debt service costs in selected countries\nPer cent\nNew Zealand\nPer cent\nAustralia\nPer cent\nUnited Kingdom\nPer cent\n \nHousehold debt as percentage of disposable income\n \nHousehold debt service cost as percentage of disposable income (right-hand scale) \nSources: Bank of Australia; Federal Reserve Bank of St. Louis; FRB Flow of Funds; Reserve Bank of New Zealand; Office for \nNational Statistics (UK) and Bank of Canada.\nCanada\nPer cent\nSouth Africa\nPer cent\n0\n30\n60\n90\n120\n150\n180\n0\n2\n4\n6\n8\n10\n12\n14\n16\n0\n30\n60\n90\n120\n150\n180\n0\n2\n4\n6\n8\n10\n12\n14\n16\n0\n30\n60\n90\n120\n150\n180\n0\n2\n4\n6\n8\n10\n12\n14\n16\n0\n30\n60\n90\n120\n150\n180\n0\n2\n4\n6\n8\n10\n12\n14\n16\n0\n30\n60\n90\n120\n150\n180\n0\n2\n4\n6\n8\n10\n12\n14\n16\n0\n30\n60\n90\n120\n150\n180\n0\n2\n4\n6\n8\n10\n12\n14\n16\n1990\n1992\n1994\n1996\n1998\n2000\n2002\n2005\n1990\n1992\n1994\n1996\n1998\n2000\n2002\n2005\n1990\n1992\n1994\n1996\n1998\n2000\n2002\n2005\n1990\n1992\n1994\n1996\n1998\n2000\n2002\n2005\n1990\n1992\n1994\n1996\n1998\n2000\n2002\n2005\n1990\n1992\n1994\n1996\n1998\n2000\n2002\n2005\n4\nDebelle, G. 2004. Macro-\neconomic implications of rising\nhousehold debt. BIS Working\nPaper No. 153.\nReal-estate and equity prices \nDevelopments in the real-estate and equity markets may generate wealth effects which\nhave the potential to impact on aggregate demand and inflation. Figure 12 shows that\nthe year-on-year increases in house prices, measured in terms of the Absa House Price\nIndex, continued to slow from the record high levels experienced in September and\nOctober 2004. Since the publication of the previous Monetary Policy Review, growth in\nnominal house prices has declined from 18,0 per cent in September 2005 to 13,7 per\ncent in March 2006. In real terms, the rate of increase in house prices declined from \n13,1 per cent to 9,9 per cent over the same period.\nOn average, nominal house prices rose by 22,5 per cent in 2005 compared with \n32,0 per cent in 2004 while in real terms house prices grew by an average of 18,5 per\ncent in 2005 compared with 30,2 per cent in 2004.\nThe slowdown in the growth in house prices can be explained partly by the impact of\nsustained buoyant real-estate market conditions on the affordability of houses (an increase\ndenotes a decline in affordability in Figure 13). The price/disposable income (PDI) index,\nwhich is the ratio of the indices of Absa nominal house prices to per capita disposable\nincome, shows a stronger decline in the affordability of houses than the\nrepayments/disposable income (RDI) index. The latter index is calculated as the ratio of\nmortgage repayments on the average priced house to per capita disposable income, and\nreflects the moderating effect of the prevailing interest rate environment. \nNotwithstanding the slowdown in the rate of increase in house prices, building statistics\npublished by Statistics South Africa continue to suggest buoyant economic activity in\nSouth African Reserve Bank\n17\nMonetary Policy Review May 2006\nPercentage change over twelve months \n2002\n2003\n2004\n2005\n2006\n0\n5\n10\n15\n20\n25\n30\n35\n40\n \nAbsa House Price Index (nominal)\n \nAbsa House Price Index (deflated by CPI)\nSource: Absa \nFigure 12 House prices\nNote: The Absa House Price Index records the total purchase price of houses in the\n80 – 400 m2 size category, valued at R2,2 million or less and for which loan\napplications were approved by Absa.\n18\nthe real-estate market (Table 6). In 2005, the real value of buildings completed rose by\n32,2 per cent compared with 22,5 per cent in 2004. The corresponding real value of\nbuilding plans passed (an indicator of future construction activity) increased by 41,8 per\ncent in 2005 compared with 33,0 per cent in 2004.\nTable 6\nReal value of building plans passed and buildings completed by\nlarger municipalities\nAnnual percentage change\n2002\n2003\n2004\n2005\n2006*\nBuilding plans passed\nTotal ........................................................\n17,2\n11,3\n33,0\n41,8\n22,6\nResidential ..............................................\n18,8\n16,3\n39,6\n34,8\n23,0\nNon-residential ..................................\n13,4\n3,5\n18,1\n61,7\n40,3\nAdditions and alterations ....................\n16,3\n6,3\n27,6\n47,0\n11,4\nBuildings completed\nTotal ........................................................\n3,2\n6,8\n22,5\n32,2\n29,5\nResidential..........................................\n31,2\n8,1\n33,8\n40,0\n26,9\nNon-residential ..................................\n-35,7\n8,7\n6,2\n11,1\n42,7\nAdditions and alterations ....................\n-0,1\n1,4\n5,8\n23,7\n27,9\n*\nFigures for January – February 2006 compared with the corresponding months of 2005\nSource: Statistics South Africa\nEquity prices on the JSE Limited (JSE) continued to show a strong upward trend in the\nperiod since September 2005, as Figure 14 shows. The closing levels of the daily all-\nshare price index repeatedly set record highs, increasing by 8,5 per cent from 16 875 at\nthe end of September to 18 312 at the end of December 2005, before breaking the \n21 000-level in April 2006. The resources index also performed strongly, breaching the \n38 000-level at the end of April.\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nIndices: 2000=100\n50\n100\n150\n200\n250\n300\n1970\n \nRDI\n \nPDI\nFigure 13 Housing affordability indices\nSources: Absa and SARB calculations\nLess \nMore \n1975\n1980\n1985\n1990\n1995\n2000\n2005\nLess affordable\nMore affordable\nNote: A deposit of 20 per cent is assumed in the calculation of RDI. The mortgage rate\nis proxied by the predominant rate of banks for dwelling units, and the monthly\nrepayment is calculated over a period of 20 years.\nFiscal policy \nThe Budget presented by the Minister of Finance on 15 February 2006 revised the\nestimate of total revenue for the 2005/06 fiscal year to R411,1 billion, approximately \nR41 billion more than originally budgeted (Table 7). The corresponding estimate for total\nexpenditure was revised upward only marginally to R419,0 billion, resulting in an\nestimated budget deficit of R7,9 billion for 2005/06. This represents 0,5 per cent of GDP,\nbelow the 3,1 per cent originally expected in February 2005 and the revised 1,0 per cent\npresented in the Medium Term Budget Policy Statement (MTBPS) in October 2005. In\nthe medium term, the budget deficit as a proportion of GDP is expected to rise to \n1,5 per cent in 2006/07 and then contract to 1,2 per cent by 2008/09. \nTable 7\nPublic finance data\nR billions and per cent\n2003/04 2004/05 2005/06 2005/06\n2006/07\n2007/08 2008/09\nActual\nActual\nBudget\nRevised\nMedium-term\nestimates\nestimates\nNational government \nRevenue................................\n299,4\n347,9\n369,9\n411,1\n446,4\n492,0\n547,1\nExpenditure ..........................\n328,7\n368,5\n417,8\n419,0\n472,7\n519,2\n571,3\nDeficit (-) ..............................\n29,3\n20,7\n48,0\n7,9\n26,4\n27,2\n24,2\nAs percentage of GDP:\nDeficit (-) ..............................\n2,3\n1,5\n3,1\n0,5\n1,5\n1,4\n1,2\nTotal gross loan debt ..........\n35,5\n35,3\n30,6\n34,2\n32,3\n31,5\n30,5\nPSBR* ..................................\n2,3\n1,7\n3,9\n0,6\n2,4\n2,3\n2,4\n*\nPSBR: Public-sector borrowing requirement\nSource: National Treasury Budget Review 2006\nSouth African Reserve Bank\n19\nMonetary Policy Review May 2006\nIndex\nIndex\n2003\n2004\n2005\n2006\n13000\n18000\n23000\n28000\n33000\n38000\n43000\n5000\n7000\n9000\n11000\n13000\n15000\n17000\n19000\n21000\n23000\nFTSE/JSE all-share index\nFTSE/JSE resources index (right-hand scale)\nFigure 14 Share price indices\n20\nThe public-sector borrowing requirement (PSBR) for 2005/06 has also been revised\ndownward to 0,6 per cent of GDP in the Budget Review from the 3,9 per cent of GDP\nprojected in February 2005 and the 1,2 per cent of GDP presented in the 2005 MTBPS.\nThe PSBR is projected at 2,4 per cent of GDP in 2006/07, and at 2,3 and 2,4 per cent\nof GDP in 2007/08 and 2008/09, respectively. \nMonetary conditions\nGrowth in the monetary aggregates remained robust during 2005, reflecting strong\ndomestic expenditure levels. The growth rate measured over twelve-month periods for\nthe broad monetary aggregate (M3) increased from 15,9 per cent in October 2005 to\n21,1 per cent in February 2006 (Figure 15). The quarter-on-quarter annualised growth\nin seasonally adjusted M3 declined significantly from 29,3 per cent in the third quarter of\n2005 to 12,5 per cent in the fourth quarter of 2005. The growth in total loans and\nadvances to the private sector rose from 19,3 per cent in October 2005 to 21,9 per cent\nin February 2006. On average, total loans and advances to the private sector increased\nby 20,7 per cent in 2005 compared with 12,3 per cent in 2004.\nMonetary policy \nThe monetary policy stance has remained unchanged since mid-April 2005 when the\nrepo rate was reduced by 50 basis points to 7 per cent per annum (Figure 16). Since\nthe previous Monetary Policy Review there have been three meetings of the Monetary\nPolicy Committee (MPC) and at each of these meetings the issues facing the\ncommittee were similar. In brief, the MPC was faced with an improving inflation outlook\nas reflected in the central forecast generated by the Bank’s macroeconomic model. At\nthe same time there were significant risks, including emerging macroeconomic\nimbalances, that the committee had to take cognisance of. These risks related primarily\nto the continued strong domestic demand growth which was fuelled in part by high\ncredit extension and relatively low nominal interest rates; a burgeoning current-account\ndeficit which is also in part a manifestation of the high domestic demand; and resurgent\ninternational oil prices.\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nPer cent\n5\n10\n15\n20\n25\n2002\n2003\n2004\n2005\n2006\n \nTotal loans and advances to the domestic private sector\n \nM3\nFigure 15 Growth in M3 and in bank loans and advances\nAs noted earlier, CPIX inflation has remained within the target range for the 31 months\nto March 2006. The Monetary Policy Committee (MPC) has been particularly\nencouraged by the evolution of some of the components of CPIX. It has become clear\nthat there has been a steady convergence of the inflation rates of many of the\ncategories of goods and services which make up the index to within the target range\nof 3 – 6 per cent. In particular, the committee noted the fact that services price inflation\nhad fallen to within the inflation target range after an extended period of inertia around\nthe 8-per-cent level. In addition, the inflation rate for administered prices excluding\npetrol had fallen to a level significantly below the overall CPIX inflation. These\ndevelopments bode well for the sustainability of inflation within the target range.\nAlthough food price inflation had increased from very low levels in the first half of 2005,\nthe most recent rate of increase of 4,5 per cent was still well within the inflation target\nrange, despite the sharp increase in maize prices in the latter part of 2005.\nIn the previous Monetary Policy Review, the central forecast presented to the October\nMPC meeting was published. That forecast showed that CPIX inflation was expected to\nrise to about 5,8 per cent in the second quarter of 2006 before easing to 5,3 per cent\nin the final quarter of 2007. Since then the forecasts have shown successive\nimprovements. In December 2005, CPIX inflation was expected to rise gradually to reach\nan upper turning point around 5,5 per cent in the fourth quarter of 2006, whereafter it\nwas expected to decline to a level of around 5 per cent by the end of 2007. By February\n2006 there was a further improvement in the forecast. At that time the forecast was for\nthe inflation trajectory to follow a more moderately rising trend compared to that\ndiscussed at the previous meeting. According to the central forecast, CPIX inflation was\nexpected to peak at around 4,9 per cent in the first quarter of 2007 whereafter it was\nexpected to decline slowly to reach around 4,7 per cent at the end of the forecast\nperiod. The forecast at the April 2006 meeting was similar to this. By then the forecast\nperiod had been extended to the end of 2008 and a level of 4,6 per cent was expected\nby the end of that period. This was despite the fact that the oil price assumption in the\nforecast was increased significantly. The forecast presented to the MPC in April is\nreproduced later in this Review.\nSouth African Reserve Bank\n21\nMonetary Policy Review May 2006\nPer cent\n2002\n2003\n2004\n2005\n2006\nFigure 16 The repo and other short-term interest rates\n6\n8\n10\n12\n14\n16\n18\n \nPrime overdraft rate\n \nRepo rate\n \n3-month NCD rate\n22\nThese benign inflation forecasts were a result of a number of positive factors which were\nanchoring inflation within the target range. These factors are generally expected to\ncontinue to help keep inflation under control, and therefore are not considered to pose\na significant upside or downside risk to the forecast. Of particular significance is the\nevolution of inflation expectations over the past few months. At the time of the October\nmeeting, the MPC noted, with concern, the results of the inflation expectations survey\nconducted by the Bureau for Economic Research (BER) for the third quarter of 2005. At\nthat time it appeared that the rising trend in oil prices was impacting unfavourably on\ninflation expectations and expectations had moved higher. These fears were allayed\nsomewhat with the publication of the survey for the fourth quarter of 2005 which\nshowed that expectations had not deteriorated further and that there was a slight\nimprovement for 2007. The survey for the first quarter of 2006, which was presented to\nthe April meeting, showed a significant improvement in expectations. Not only was there\na decline in the expected inflation for 2006, but the expected inflation rate for the end of\nthe forecast period in 2008, although marginally higher than that expected in 2006 and\n2007, was a moderate 4,8 per cent. This reflects confidence that low and stable inflation\nwill prevail over the medium term. These trends were confirmed in the breakeven\ninflation rates, measured by the spreads between the yields on South African CPI\ninflation-linked bonds and conventional nominal bonds of the same maturity.\nEntrenched inflation expectations are also expected to feed into wage and price\nformation. Over the past two years there has been increasing evidence that nominal\nwage settlements are declining. These settlements were still above the inflation rate, and\ntherefore implied real wage increases. Nevertheless, the MPC was satisfied that these\nsettlements had become consistent with the inflation target range. Furthermore, the\ntrend in unit labour cost was extremely favourable, with unit labour cost increases\naveraging 3,3 per cent in 2005, which was half the average increase measured in the\nprevious year. If these trends persist they will make an important contribution to\nsustaining inflation within the target range.\nFiscal policy also remained supportive of monetary policy over this period. At the time of\nthe Medium Term Budget Policy Statement in October 2005, the National Treasury had\nrevised down its budget deficit forecast for 2005/06 from 3,9 per cent to 1,0 per cent\nof GDP. At the time of the February 2006 Budget, this forecast was revised down further\nto 0,5 per cent as a result of higher-than-expected tax revenues. At the same time the\nestimated budget deficit for 2006/07 was reduced from the October estimate of 2,2 per\ncent to 1,5 per cent of GDP.\nExpected movements in the exchange rate have a significant impact on expected inflation.\nAlthough the rand exchange rate has been subject to some volatility, it has remained within\na fairly limited trading range for some time and therefore has had a stabilising effect on\ninflation. Since the beginning of the year the nominal effective exchange rate has\nappreciated by around 2 per cent. The movements of the rand continued to be determined\nby factors such as movements in the US dollar against the euro; changes in investor\nsentiment towards emerging markets; strong capital inflows to South Africa; and\ncontinued strong commodity prices. The MPC is aware that there are potential risks in\nboth directions to the exchange rate outlook. However, given the underlying improvements\nin the foreign exchange market with the elimination of the net open forward position and\nthe build-up of reserves, the rand exchange rate is expected to be less vulnerable to\nexogenous shocks, and to react in a more orderly manner than was previously the case. \nThere was some change in the outlook for output growth in the economy. At the\nDecember 2005 and February 2006 MPC meetings, it was already apparent that growth\nin output was moderating. This was evident in the mining and manufacturing output data\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nand the Investec/BER Purchasing Managers Index (PMI) which indicated a possible\ncontraction in manufacturing in January and February. By April 2006 this weakening\ntrend had been confirmed. The annualised GDP growth rate in the fourth quarter of 2005\nwas 3,3 per cent, and the most recent output data continue to indicate that although\ngrowth is expected to remain robust in 2006, it is likely to be more in line with the\nestimated potential output in the economy. Box 2, on the next page, reports on the\nresults of research by the Bank to estimate potential output in the economy.\nWorld inflation is also expected to be well contained, despite the higher international oil\nprices and resilient world growth. The most recent World Economic Outlook of the IMF\nshows that world inflation is expected to average 3,8 per cent in 2006 and 3,5 per cent\nin 2007, while global growth is expected to average 4,8 per cent in these two years.\nThese developments have been accompanied by a general tightening of monetary\npolicy in most major industrial countries.\nDespite the promising inflation outlook, the MPC became increasingly concerned about\nthe growth rate of domestic consumption expenditure. This has been identified as one of\nthe main risk factors for some time. In 2005, household final consumption expenditure\ngrew by 6,9 per cent, and all indications are that this trend is going to continue. As noted\nin the April 2006 MPC statement, the FNB/BER consumer confidence index was at an\nall-time high, and had been at high levels for some time. It was noted that the reasons for\nthis high level of demand included low nominal interest rates, higher real incomes and\nwealth effects emanating from record high prices on the JSE, and a buoyant housing\nmarket. Despite the strong expenditure, there had been little impact on domestic inflation.\nThe MPC noted in February that if these trends continued unabated, some impact on\nprices would be inevitable. At issue then is how pre-emptive the MPC should be, given\nthe absence so far of significant price increases in the wake of this high demand.\nThe robust domestic demand has been reflected in the growth of money supply and\ncredit extension, both of which have accelerated significantly. By the time of the April\nmeeting, domestic credit extension to the private sector was growing at a year-on-year\nrate of over 20 per cent, and asset-backed credit was growing at around 27 per cent.\nThe MPC noted with some concern the pace at which household indebtedness was\nrising. The level of such indebtedness had, by the fourth quarter of 2005, risen to almost\n66 per cent of disposable income. The cost of servicing this debt, while still low,\nincreased moderately during the past year. By the end of 2005 debt servicing costs had\nrisen to around 7 per cent of disposable income.\nThe MPC also became increasingly concerned about the widening deficit on the current\naccount of the balance of payments, which is also in part a manifestation of the high\nconsumption expenditure. Although the current-account deficit of 4,2 per cent of GDP is\nhigh by historical standards for South Africa, it is recognised that it is also a consequence\nof the higher investment and growth in the economy. As noted in various MPC statements,\nthe widening current-account deficit is not in itself inflationary. The potential threat to inflation\ncomes through its possible impact on the exchange rate, should the deficit be regarded as\nunsustainable. At current levels the deficit has been comfortably financed by capital inflows,\nwhich have even allowed the Bank to continue with its accumulation of foreign exchange\nreserves. At these levels the deficit appears to be sustainable. However, the MPC would be\nconcerned about a continuous and rapid widening of the deficit.\nThe behaviour of international oil prices continued to be identified as a major risk factor.\nIn the past few months, there have been numerous occasions when it appeared that the\noil prices would stabilise at slightly lower levels. Brent crude oil prices had peaked at\naround US$70 per barrel in August 2005 in the wake of hurricane Katrina. Prices then\nSouth African Reserve Bank\n23\nMonetary Policy Review May 2006\n24\nmoderated, and in February of this year had fallen to around US$55 per barrel. Since\nthen, however, renewed geopolitical tensions and tight supply and demand conditions\nin the oil markets resulted in a surge in prices to US$70 per barrel. These developments\nresulted in the MPC raising its assumptions about future prices, but there is nevertheless\nthe risk that international oil prices could in fact increase even further than assumed. The\nMPC has stated on numerous occasions that it would not react to first-round effects of\nhigher oil prices. However, the higher and faster these prices rise, the more likely they\nare to feed through to generalised inflation.\nDuring the past few months, the MPC has been faced with contradictory signals. On the\none hand, the inflation outlook as reflected in the inflation forecast of the Bank has\nimproved at each successive meeting. On the other hand, the MPC has become\nincreasingly concerned about international oil price developments and the level of\ndomestic demand which are also contributing to higher consumer indebtedness and a\nwidening of the current-account deficit. The MPC has left the monetary stance\nunchanged but has indicated that, on balance, the risks to the outlook are on the upside.\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nBox 2 Measuring potential output in South Africa\nThe estimated level of potential output plays an important role in monetary policy making. If potential\noutput is interpreted as the maximum sustainable level of output consistent with stable inflation,\nthen its growth rate provides a useful guide for the assessment of sustainable growth in output and\nemployment in an economy. It follows that the gap between actual and potential GDP, often referred\nto as the GDP or output gap, is a key variable determining the evolution of prices and thus inflation.\nA level of real GDP above its potential suggests excess demand and is thus a source of inflationary\npressures, while the converse is true for a level below potential. However, because potential output\nis a non-observable variable, measuring it with any degree of accuracy is a difficult assignment, and\nestimates should not be employed in a mechanical fashion. This box provides a summary of the\nresults of recent research that has been undertaken at the Bank on the estimation of potential\noutput for South Africa (Du Toit et al, 2006).\nTwo broad categories of methods are employed in the literature to estimate potential output. The first\ncategory comprises statistical detrending methods, with examples including the well-known Hodrick-\nPrescott (HP) filter, Beveridge-Nelson decompositions and unobserved components methods. A\ncommon characteristic of these methods is that they are purely statistical and mechanical in nature\nand have no explicit economic foundation. Cerra and Saxen (2000) and Van Norden and St-Amant\n(1997) provide detailed discussions of these and other methods. The second category comprises\nstructural methods which are based on estimated structural models. Examples here include\nproduction function methods and structural vector autoregression (SVAR) models. It is important to\nrealise that the results obtained using different methodologies may differ substantially (Cerra and\nSaxen, 2000). It is also the case that estimates of potential output will change as the structure of the\neconomy changes, an issue which appears to have particular relevance in the South African case.\nThe work reported here falls into the second of the categories discussed above. A structural\nproduction-function method is employed to estimate potential output for South Africa, based on a\nCobb-Douglas production function with constant returns to scale. This production function may\nbe represented by the following expression:\nYt = At K αt Nßt\n(1)\nwhere Yt is actual gross domestic product at factor cost; At is unobservable total factor productivity\n(TFP); Kt is the actual capital stock, and Nt is actual employment. α and ß represent the capital and\nlabour share parameters, respectively. \nBy estimating the potential levels of all the variables on the right-hand side of Equation 1, the\npotential level of output can be determined. If one uses a * to denote potential levels of all variables,\nthen potential output Yt* is obtained from: \nY*t = A*t K* α\nt N* ß\nt\n(2)\nSouth African Reserve Bank\n25\nMonetary Policy Review May 2006\nEmploying a Solow-residual approach to estimate the potential level of total factor productivity A*,\na neoclassical (Jorgenson) approach to estimate the desired capital stock K*, and adjusting labour\ninput for the gap between actual unemployment and the non-accelerating wage rate of\nunemployment (NAWRU) to obtain potential employment1 N*, a 10-equation structural model was\nsimulated to determine the potential output for the South African economy. Four alternative\nscenarios were considered:\n(a)\nStatus quo: This scenario assumes the existence of structural unemployment given the current\nstructure and growth impediments of the South African economy, i.e. it assumes a positive\nNAWRU. \n(b) Utopia: This assumes full employment, i.e. potential output is equal to the economically active\npopulation and therefore NAWRU is set to zero. \n(c)\nGovernment targets: This assumes that the quantified targets of the government are achieved\n(halving unemployment in 10 years, attracting an additional US$ 804 million per annum resulting\nin an FDI to GDP ratio of 1,3 per cent, and increasing the savings to GDP ratio to 22 per cent).\n(d) International benchmark: This assumes that the South African economy becomes more\ncompetitive in terms of the average performances of emerging markets (the unemployment rate\nwas set to 12 per cent, the FDI to GDP ratio to 4 per cent, the savings to GDP ratio to 25 per\ncent, and openness to 0,55).\nThe results are reported in Table B2.1\nTable B2.1 Summary of the results\nPer cent\nScenario\nReal potential output \ngrowth rate\nStatus quo.......................................................................................\n4,1\nUtopia..............................................................................................\n6,9\nGovernment targets.........................................................................\n5,1\nInternational benchmark...................................................................\n6,5\nThese results suggest that South Africa’s current growth potential is a rate of 4,1 per cent. This can\nbe compared with the results of Arora and Bhundia (2003) who also use a production function\napproach and estimate an average potential output growth rate of 3 per cent for the period 1995 –\n2003. However it must be stressed these results should be viewed as indicative and a contribution\nto the literature, and not as immutable numbers to be applied in a mechanical fashion. At the\nextreme, adopting the utopia scenario, the simulations generate a potential output growth rate of\n6,9 per cent, while in the intermediate cases, a growth rate of 5,1 per cent results when government\nmeets its own targets and 6,5 per cent is possible if the South African economy’s competitiveness\nrises to around the average level of other emerging economies. \nReferences\nArora, V and Bhundia, A. 2003. Potential Output and Total Factor Productivity Growth in Post-\nApartheid South Africa. IMF Working Paper No. 03/178, Washington: International Monetary Fund.\nCerra, V and Saxen, S C. 2000. Alternative Methods of Estimating Potential Output and Output Gap:\nAn Application to Sweden. IMF Working Paper No. 00/59, Washington: International Monetary Fund.\nDu Toit, C B, Du Toit, A, Ehlers N, Kuhn, K and Mashiane, M M. 2006. South Africa’s growth\npotential: Prospects and challenges. South African Reserve Bank Discussion Paper DP/06/04.\nVan Norden, S and St-Amant, P. 1997. Measurement of Output Gap: A Discussion of Recent\nResearch at the Bank of Canada. Bank of Canada Technical Report No. 79. \n1\nThe potential level of\nemployment is defined in two\ndifferent but related ways in\nthe paper. First, potential\nemployment is defined as the\nlevel of labour resources that\nmight be employed without\nresulting in additional inflation.\nThis definition admits the\nexistence of some natural rate\nof unemployment, sometimes\nreferred to as the NAWRU.\nAccording to this definition\npotential employment (N*) is\nthe difference between the\neconomically active population\n(EAP) and the fraction of EAP\nthat is naturally unemployed,\ni.e. N* = EAP (1-NAWRU). The\nsecond definition assumes that\npotential employment is equal\nto the EAP, i.e. NAWRU is\nequal to zero.\n26\nThe outlook for inflation\nThe outlook, risk and uncertainties relating to some of the factors that determine the\noutlook for inflation and that are embodied in the forecast, are presented in this section. \nInternational outlook\nRecent data suggest that the global recovery that began in 2002 will remain on track,\nwith world GDP advancing at a robust pace (Table 8). The projection for global GDP\ngrowth in 2006 has been revised upward by the IMF from 4,3 to 4,9 per cent, followed\nby growth of 4,7 per cent in 2007. The buoyancy of activity in China, India, and Russia\ntogether accounted for two-thirds of the upward revision to global growth in 2006. In the\nfour-year period 2004 – 2007, the global economy is set to expand at close to 5,0 per\ncent annually, well above its 3,7 per cent long-term average. \nAlthough global headline inflation has risen slightly in response to higher oil prices,\nwith the latest forecast for 2006 revised upward by 0,1 percentage points to 3,8 per\ncent, core inflation has not been affected significantly and inflationary expectations\nremain well grounded. The current worldwide boom is also not expected to spark\nsignificant inflationary problems. While advanced country inflation is expected to be\nslightly higher than previously estimated, estimates for most developing countries\nhave been lowered. \nTable 8\nIMF projections of world growth and inflation for 2006* \nand 2007\nPer cent\nReal GDP\nInflation rates\n2006\n2007\n2006\n2007\nWorld ........................................................\n(4,3)\n4,9\n4,7\n(3,7)\n3,8\n3,5\nAdvanced economies ..............................\n(2,7)\n3,0\n2,8\n(2,0)\n2,3\n2,1\nUnited States ......................................\n(3,3)\n3,4\n3,3\n(2,8)\n3,2\n2,5\nJapan ..................................................\n(2,0)\n2,8\n2,1\n(-0,1)\n0,3\n0,6\nEuro area ............................................\n(1,8)\n2,0\n1,9\n(1,8)\n2,1\n2,2\nUnited Kingdom ..................................\n(2,2)\n2,5\n2,7\n(1,9)\n1,9\n1,9\nOther advanced economies ................\n(3,9)\n4,1\n3,7\n(2,3)\n2,2\n2,3\nOther emerging-market and \ndeveloping countries................................\n(6,1)\n6,9\n6,6\n(5,7)\n5,4\n4,8\nAfrica ..................................................\n(5,9)\n5,7\n5,5\n(7,0)\n9,1\n7,3\nCentral and eastern Europe ................\n(4,6)\n5,2\n4,8\n(4,3)\n4,1\n3,4\nCommonwealth of Independent \nStates ..................................................\n(5,7)\n6,0\n6,1\n(10,5) 10,4\n9,7\nDeveloping Asia ..................................\n(7,2)\n8,2\n8,0\n(4,7)\n3,9\n3,5\nChina................................................\n(8,2)\n9,5\n9,0\n(3,8)\n2,0\n2,2\nIndia ................................................\n(6,3)\n7,3\n7,0\n(5,1)\n4,8\n4,9\nMiddle East..........................................\n(5,0)\n5,7\n5,4\n(9,7)\n8,7\n8,5\nWestern hemisphere............................\n(3,8)\n4,3\n3,6\n(5,4)\n5,8\n5,6\n*\nIMF projections for 2006 as at September 2005 in parentheses\nSource: IMF World Economic Outlook, April 2006\nIn the G7 countries, growth is generally forecast to accelerate in 2006 and moderate\nsomewhat in 2007. The US and UK are clear exceptions. In the former, growth is\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nexpected to slow during 2006, while in the latter growth improves progressively over the\nforecast interval. After faltering in the fourth quarter of 2005, the US economy recently\nregained strong momentum in the first quarter of 2006. However, growth is expected to\nslow in the remaining quarters of 2006 to record 3,4 per cent for the year. US inflation\nhas been revised upward to 3,2 per cent in 2006. The UK’s economic growth, after\nslowing to 1,8 per cent in 2005, is projected to accelerate to 2,5 and 2,7 per cent in\n2006 and 2007, respectively. Inflation is expected to remain well contained in the\nneighbourhood of the Bank of England’s 2 per cent inflation target.\nGrowth is expected to accelerate in the euro area, averaging 2,0 per cent over the next\ntwo years. Although ECB officials have expressed concern about excess liquidity and\nrapid money growth, inflation forecasts remain relatively benign, with headline CPI\ninflation projected to slow from 2,2 per cent in 2005 to 2,1 per cent in 2006 before rising\nto 2,2 per cent in 2007. The Japanese recovery is also expected to stay on track, with\nGDP rising by 2,8 per cent in 2006 – the fastest rate since 1991 – before slowing to\naround 2,1 per cent in 2007. With the long road out of deflation seemingly finally ended,\nconsumer prices are projected to rise by 0,3 per cent in 2006 and 0,6 per cent in 2007. \nThe IMF raised its growth forecasts for the greater part of the Asia-Pacific region, although\nit warned that the projected favourable outlook could worsen existing global imbalances\n(Box 3 discusses the issue of global imbalances). Developing Asia is forecast to grow by \n8,2 per cent this year, above the September 2005 forecast of 7,2 per cent. Key areas of\nstrength are China and India. China’s economy is expected to grow at 9,5 per cent this year\nwhile India’s growth rate is expected to be a similarly impressive 7,3 per cent. Sustained in\ncertain cases by high prices for oil and other commodities, sub-Saharan African nations are\nprojected to grow 5,8 per cent this year, the fastest rate in more than 30 years. Growth\nforecasts for Southeast Asia, Australia and New Zealand have been trimmed, however. \nSouth African Reserve Bank\n27\nMonetary Policy Review May 2006\nBox 3 Tackling global imbalances \nGlobal imbalances have continued widening in recent years, raising fears regarding their\nsustainability over the long run (Figure B3.1 depicts global current-account balances as estimated\nfor 2005). Three aspects of global capital flows are deemed as being without precedent and are\nreferred to by Summers (2006)1 as the capital flows paradox in the current world financial system.\nFirstly, the net flow of capital is mainly from developing countries and emerging markets towards the\nindustrialised world and, principally, the United States. Secondly, escalating US foreign debt is\nmirrored in foreign reserve accumulation by emerging-market countries that in many instances is far\nin excess of any acknowledged criterion of reserve need for financial protection. Finally, expected\nreal returns on these foreign reserves are expected to be low and relatively risky. \nThe main risks for the global economy resulting from these imbalances are that exchange rates\nmight adjust abruptly and in a disorderly fashion, characterised by substantial overshooting, a large\nincrease in interest rates and a sharp contraction of global activity. Concern about such an outcome\nhas led to an increasing consensus worldwide that exchange rates should more appropriately reflect\neconomic fundamentals. The IMF has in this regard called for greater currency flexibility in emerging\nAsia, arguing that in the absence of significant movements in relative prices, Asian countries will\nhave few incentives to rebalance their economies towards domestic demand or the US towards\nexport industries.\nIn order to address current global imbalances, policy changes are required in almost all regions of\nthe world, unlike in the 1980s when large current-account imbalances were mainly confined to the\nUS, Japan and Europe. The G7 finance ministers and central bankers have repeatedly declared that\nvigorous action on various fronts is needed to unwind global imbalances and to ensure sustainable\ngrowth. They have stressed that these actions include fiscal consolidation in the US; further\nstructural reforms in Europe; and further structural reforms including fiscal consolidation in Japan.\nHowever, the policy changes required to address global imbalances are spread more widely and are\n1\nSummers, L H. 2006.\nReflections on Global Account\nImbalances and Emerging\nMarkets Reserve Accumulation.\nL K Jha Memorial Lecture.\nReserve Bank of India. Mumbai,\nIndia, March.\n28\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nof concern not only to the developed economies. The differences between desired savings and\ndesired investment rates in different regions of the world will have to be reduced if sustainable global\neconomic growth is to be achieved and the probability of a sudden unfavourable correction in the\nworld economy is to be reduced significantly. \nThe strong growth in the foreign exchange reserves of Asian central banks has been one of the\nmost visible features of growing global imbalances, along with the US current-account deficit. Large\nAsian trade surpluses and foreign direct investment inflows into East Asia have resulted in central\nbankers in the region buying US dollars to prevent their currencies appreciating. The accumulation\nof foreign exchange reserves is deemed by many to be artificially depressing Asian exchange rates,\nboosting trade surpluses, hindering natural adjustment mechanisms to rectify imbalances and\ncreating the risk of financial crisis. The IMF recommends that relative changes should be gradual to\nminimize the costs of adjustment and also recommends increased national savings with fiscal\nconsolidation in the US and more effective measures to strengthen domestic demand in Europe,\nJapan and emerging Asia. In oil-producing countries the IMF recommends spending on\ninfrastructure, health and education, and gradual currency appreciation. \nIt is becoming increasingly clear that an outcome characterised by a benign unwinding of global\nimbalances in the international monetary system will require an effective international institutional\nforum for debate and effective policy formulation. Although the IMF is still deemed by many to be\nthe most appropriate institution for this role, it has in the past few years concentrated more on being\nthe lender of last resort to middle income countries and on surveillance of economies without a\nspecific focus on systemic macroeconomic problems. Some countries have therefore, among other\nmeasures, called for more active surveillance by the IMF as well as a number of other measures to\nimprove the institution’s effectiveness although other countries are less enthusiastic in this regard.\nSome countries have called for effective forums to discuss global imbalances in small groups and\nhave suggested that there should be a group of at most three or four countries representing the big\ncurrency blocks – the euro area, the US, Japan and China. Regular discussions have also been\nproposed for a new group of 11 countries that would comprise the G7 plus the newly important\neconomies of Brazil, Russia, India and China. \nThe world economy has in recent years been characterised by rapid above-trend growth within a\nrelatively low inflation environment. Although there are a number of factors that could remain\nsupportive of continued beneficial global growth outcomes, tackling the problem of global\nimbalances effectively will be the most important prerequisite in ensuring that favourable conditions\ncontinue underpinning longer-term sustainable global economic growth. \nUS$ billions\nSource: Summers (2006)\nFigure B3.1: \nGlobal current-account balances for 2005\nOil exporters\nJapan\nChina\nRest of world and statistical \ndiscrepancy\nEmerging Asia\nEuro area\nUnited States\n-1000\n-800\n-600\n-400\n-200\n0\n200\n400\n600\n800\nDeficit\nSurplus\nThe forecasts of moderate expansion in the Organisation for Economic Cooperation and\nDevelopment (OECD) are confirmed by the latest composite leading indicators (CLIs)\ncompiled by the OECD. These CLIs are aggregate time series compiled for 23 member\ncountries that show a leading relationship with the growth cycles of key macro-\neconomic indicators (the average lead is 6 months). As shown in Figure 17, the six-\nmonth rate of increase of the CLI for the overall OECD area was 4,7 per cent in February\n2006, reflecting improved performance in the corresponding CLIs in most of the major\nOECD economies. Figure 17 also presents a trade-weighted OECD CLI, where the\nweights are based on South Africa’s exports to OECD member countries. The six-month\nrate of increase in the SA trade-weighted OECD CLI was 3,7 per cent in February 2006,\nreflecting an improved but slightly less resilient performance in South Africa’s OECD\ntrading partners than that recorded for the overall OECD. \nThe outlook for the international oil markets remains uncertain. While the underlying\ndynamics of the market will probably continue to change slowly, as investment by OPEC\nand non-OPEC producers eventually allows capacity to grow slightly faster than demand,\nthe market seems set to remain tight. Recent forecasts by the IEA put global oil demand\nat 84,7 million barrels per day, with non-OPEC production in February at approximately\n50,7 million barrels per day (close to the IEA projected average production of\napproximately 51,3 million barrels per day in 2006). If the status quo is maintained, then\nthe call on OPEC production (including natural gas liquids) will be around 34 million barrels\nper day in 2006, which is very close to OPEC’s output level in February 2006. Given the\nsupply concerns in some of the major oil-producing countries, the uncertainty surrounding\nthe hurricane season in the Gulf of Mexico, the limited spare production capacity and the\nanticipated strong demand as a result of robust global growth rates, tight conditions are\nexpected to characterise developments in the oil market for some time. Geopolitical\ndevelopments are expected to add further to volatility in the coming months.\nOutlook for domestic demand and supply\nThe economic growth momentum in the domestic economy is expected to continue in\n2006, although at a lower rate than in 2005. Among other factors, the government’s\nSouth African Reserve Bank\n29\nMonetary Policy Review May 2006\nPer cent, annualised 6-month rate of change\n1997\n1998\n1999\n2000\n2001\n2002\n2003\n2004\n2005\n2006\n-8\n-6\n-4\n-2\n0\n2\n4\n6\n8\n10\nOECD trend restored CLI\nSA trade-weighted OECD CLI\nSources: OECD and SARB calculations\nFigure 17 OECD composite leading indicators\n30\nstrong focus on improving the growth potential of the economy through the Accelerated\nand Shared Growth Initiative of South Africa (ASGISA), infrastructural investment\nassociated with the 2010 Soccer World Cup preparations and the improved global\noutlook will underpin this growth momentum. The tertiary sector, which contributed\nmost to growth in 2005, is expected to remain resilient in 2006. \nAccording to the April 2006 Reuters consensus forecasts, the South African economy\nis expected to grow at 4,5 per cent in 2006 and 2007, and by 5,0 per cent in 2008.\nThese forecasts represent the mean of 14 individual forecasts for both 2006 and 2007\nand the mean of 7 forecasts for 2008. They range from 4,1 to 4,8 per cent for 2006, \n4,0 to 5,7 per cent for 2007 and 4,7 to 5,8 per cent for 2008. In its Budget Review, the\nNational Treasury expects economic growth of 4,9 and 4,7 per cent for 2006 and 2007,\nrespectively.\nConsumer spending, which has been driving economic expansion, is expected to remain\nrobust. Factors that will underpin consumer spending include a steady increase in the real\ndisposable income of households, tax relief provided in the 2006/07 national Budget,\nespecially for the low income groups, substantial equity price increases on the JSE,\ncontinued lower levels of expected inflation, and buoyant levels of consumer confidence.\nConsumer confidence, measured by the FNB/BER consumer confidence index as the\npercentage of respondents expecting an improvement less the percentage expecting\ndeterioration, increased by one percentage point to +21 in the first quarter of 2006. On\nthe downside, increasing levels of household debt and a cooling down of house prices\nare factors that should moderate consumer spending going forward. \nBusiness confidence levels generally remain upbeat. The RMB/BER business confi-\ndence index, which reports the gross percentage of respondents who perceive business\nconditions as satisfactory, rose to 86 per cent in the first quarter of 2006. This is just\nbelow the 88 per cent recorded in late 2004, which was the highest level since 1980.\nThe SACOB/Absa Trade Activity Index also remained high in March 2006, with 66 per\ncent of respondents optimistic about trade conditions. Although this index declined for\nthe second consecutive month in March, having recorded values of 68 per cent in\nJanuary and 67 per cent in February, it nevertheless remains at a higher level than in\nMarch 2005. The Investec/BER Purchasing Manager’s Index (PMI), which is a barometer\nof manufacturing activity, rose to 54,3 index points in April 2006 from 51,5 in March,\nsuggesting some improvement in conditions for the manufacturing sector this year. \nOverall, the short-to-medium-term outlook for aggregate demand and supply remains\nfavourable and continues to be underpinned by domestic demand. However, sustained\nrobust domestic demand growth generates some upside risk for inflation, particularly\nsince recent growth in consumer demand has been strongest for durable and semi-\ndurable goods which are either imported or have high import content, and thus\ncontribute to a widening of the current-account deficit. \nIndicators of inflation expectations\nThe various measures reviewed here suggest that inflation expectations are currently\nanchored around the midpoint of the inflation target range. The results of the latest BER\nsurvey, undertaken in the first quarter of 2006 and reproduced in Figure 18, show that\nrespondents expect CPIX inflation to average 4,4 per cent in 2006, before increasing\nslightly to 4,6 and 4,8 per cent in 2007 and 2008, respectively. The results for 2006 and\n2007 are notably below those obtained in the previous three quarterly surveys. \nMonetary Policy Review May 2006\nSouth African Reserve Bank\nAccording to the April 2006 Reuters survey of long-term forecasts for the South African\neconomy (Table 9), CPIX inflation is expected to average 4,2 per cent in 2006, before\nrising to 4,7 per cent in 2007 and 2008. The median forecasts do not differ from these\naverages or from the median forecasts of the previous survey.\nTable 9\nReuters survey of CPIX forecasts: April 2006*\nPer cent\n2006\n2007\n2008\n1. Mean....................................................................\n(4,2) 4,2\n(4,6) 4,7\n(4,5) 4,7\n2. Median ................................................................\n(4,2) 4,2\n(4,7) 4,7\n(4,7) 4,7\n3. Highest ................................................................\n(4,6) 4,5\n(6,0) 6,0\n(5,6) 5,5\n4. Lowest ................................................................\n(3,4) 3,9\n(3,2) 4,0\n(3,5) 3,8\nNumber of forecasters..............................................\n(16)\n14\n(16) 14\n(9)\n7\n*\nMarch 2006 survey results in parentheses\nSource: Reuters\nAn indication of developments in inflation expectations may also be obtained from the\nbreakeven inflation rates in Figure 19, measured as the difference between the yields on\nSouth African CPI inflation-linked bonds and conventional nominal bonds of similar\nmaturity. Breakeven inflation rates obtained from the R197 (maturing 2023), \nR189 (maturing 2013) and R198 (maturing 2008) inflation-linked bonds are all currently\nclose to the midpoint of the inflation target range.\nSouth African Reserve Bank\n31\nMonetary Policy Review May 2006\nAnnual averages, per cent\n4\n5\n6\n7\n2006\n2007\n2008\nFigure 18 \nBER surveys of CPIX inflation expectations\n4,9\n5,5\n5,2\n4,4\n5,0\n5,4\n5,2\n4,6\n4,8\n05Q2\n05Q3\n05Q4\n06Q1\nSource: Bureau for Economic Research, University of Stellenbosch\n32\nThe Reserve Bank inflation forecast\nThe Reserve Bank’s latest quarterly forecast for CPIX inflation, which was presented to\nthe MPC meeting on 12 and 13 April 2006, is presented in Figure 20. The central\nprojection is for the CPIX inflation rate to accelerate to just below 5 per cent in the first\nquarter of 2007, and then remain slightly above the midpoint of the inflation target range\nuntil the end of the forecast period in the first quarter of 2008.\nMonetary Policy Review May 2006\nSouth African Reserve Bank\nPercentage points\n2001\n2002\n2003\n2004\n2005\n2006\nFigure 19 Breakeven inflation rates\n3\n4\n5\n6\n7\n8\n9\n \nSpread between R189 and R153 bonds\n \nSpread between R197 and R186 bonds\n \nSpread between R198 and R194 bonds\nPer cent\n2003\n2004\n2005\n2006\n2007\n2008\nFigure 20 CPIX forecast\n1\n2\n3\n4\n5\n6\n7\n8\nNote: The fan chart uses confidence bands to depict varying degrees of certainty.\nThe darkest band of the fan chart covers the most likely 10 per cent of\nprobable outcomes foreseen for CPIX inflation, including the central\nprojection. Each successive band, shaded slightly lighter and added on either\nside of the central band, adds a further 10 per cent to the probability until the\nwhole shaded area depicts a 90 per cent confidence interval (see Box 4\n“Understanding the fan chart” on p. 27 of the March 2001 Monetary Policy\nReview).\nThe future is of course uncertain, as the fan chart technique is intended to communicate,\nand there are a number of risks that could cause the actual rate of CPIX inflation to differ\nfrom the central projection. Consumer demand continues to grow strongly, and with\nsustained asset price growth and consumer confidence at an all-time high, this shows\nfew signs of abating. The related growth in credit extension to the private sector, and the\nincreases in household indebtedness and debt servicing ratios are cause for concern,\nas is the widening of the deficit on the current account of the balance of payments. On\nthe international front, the oil market remains beset by geopolitical tensions and tight\ndemand and supply conditions, and the possibility of price spikes therefore also pose a\nrisk to the inflation outlook.\nAssessment and conclusion\nMonetary policy faces a challenging period ahead as a result of conflicting tendencies. On\nthe one hand the inflation outlook, as reflected in the recent inflation forecasts of the Bank,\nhas improved significantly. Most private-sector forecasts have also improved over the\npast few months. These forecasts are also consistent with the improved inflation\nexpectations which are evident in the latest inflation expectations survey. Moreover, wage\nsettlements are in line with the inflation target, and the inflation rates of most components\nof the CPIX basket have converged to within the target range. These factors, inter alia,\nappear to point to a very comfortable picture for monetary policy going forward.\nOn the other hand there are a number of developments that have led the MPC to remain\nvigilant. One of these concerns is the growth in household consumption expenditure.\nAlthough there have not been any significant inflationary consequences of this growth to\ndate, the MPC has expressed concern that if it continues to grow unchecked,\ninflationary pressures could emerge in the future. The brisk growth in demand has also\nhad a significant impact on the current account of the balance of payments. Although\nthe current levels of the deficit appear to be sustainable, a further material widening\ncould bring about a change in sentiment towards South Africa. Added to these concerns\nare the movements in the international oil prices which have experienced a renewed\nsurge in recent weeks.\nOn balance, the current outlook for inflation remains benign and indicates that the\nprevailing stance of monetary policy is appropriate. However, during the period ahead\nthe MPC will continue to be faced with the difficult task of fashioning monetary policy to\nobviate the negative consequences to the economy which would arise should the risk\nfactors which have been identified materialise.\nSouth African Reserve Bank\n33\nMonetary Policy Review May 2006", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/mprmay2006.pdf"}

clean/cb_requests/2a37ac4ab6c27a7cb1d102fc383d530a.json

@@ -0,0 +1 @@
+{"doc_id": "2a37ac4ab6c27a7cb1d102fc383d530a", "text": "CENTRAL BANK OF KENYA\nRemarks by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\naatt tthhee\nOOFFFFIICCIIAALL OOPPEENNIINNGG OOFF FFIINNAA BBAANNKK’’SS\nNNGGOONNGG RROOAADD BBRRAANNCCHH\nThursday, June 17, 2010\n\nThe Chairman and Board Members;\nGroup Chief Operating Officer;\nManagement and Staff;\nDistinguished Guests;\nLadies and Gentlemen:\nIt gives me great pleasure to be with you today at the official opening of Fina\nBank’s, Ngong Road Branch. As the regulator for the Banking Sector, the Central\nBank is pleased to be associated with the achievements of the banks we regulate,\nparticularly where these developments lead to increased access to banking services\nfor the Kenyan public. This is what Fina Bank is doing this evening.\nIt is evident that Fina Bank is focused on its programme of expansion and growth\nstrategy, having started its operations as Finance Institution of Africa in 1986\nbefore converting to the present day Fina Bank in 1996. With the opening of this\nbranch, the bank will have a network of 14 branches in the country. I also note that\nthe bank has established its presence regionally by opening subsidiaries in Uganda\nand Rwanda. This is encouraging indeed.\nMr. Chairman, let me take this opportunity to compliment the Board,\nManagement and Staff of Fina Bank for this great achievement. I note that as at\nApril 2010, the bank commanded an impressive asset portfolio of Ksh.13.5 billion\nand customer deposits of Ksh.11.5 billion, while riding on a capital base of Ksh.1.3\nbillion. The Central Bank is particularly encouraged by the bank’s leading role as a\nlender in the Small and Medium Enterprise (SME) sector, a growth sector in\nKenya’s economy which has been described as the ‘jewel’ of Kenya’s economic\ngrowth.\nThis is indeed important following from the Budget proposals that created a\nrevolving fund for SME – It may well be the best policy in our times to support the\ngrowth pole provided by SMEs.\n2\n\nLadies and Gentlemen, Kenya's growth picked up in the last quarter of 2009,\nextending into 2010 and on the back of good rainfall and a resurgence of tourism,\nwe are optimistic that this positive trend will continue, and therefore forecast that\nthe economy will post a 4 to 5 percent growth in 2010 on average.\nEqually the banks have had a spectacular performance. For the period ended\nMarch 31, 2010, the Kenyan Banking sector registered an increase in asset base\nlargely supported by growth in deposits. Assets increased by 20.8 percent to stand\nat Ksh.1.5 trillion while deposits increased by 22.8 percent to Ksh.1.1 trillion. This\ngrowth is by and large attributed to the growth of our economy that increases\nopportunities for investment and demand for credit.\nThe Central Bank is pleased to note that the banking sector has put up strategies\nthat support and stimulate the economy and responded positively to the\nsuccessive reduction of the Central Bank Rate and Cash Reserve Ratio. While it is\nnoteworthy and encouraging for banks to post healthy profits, this should also go\nin tandem with the reduction of lending rates to stimulate private sector\nborrowing and financing of investments, working capital as well as reducing the\nrisks of default. At this juncture I want to register my compliments to Fina Bank\nfor having reduced its base lending rate to 14.75 percent. I am sure there is room\nto do more. The continued lowering of base lending rates by commercial banks\nwill not only stimulate our economy but also reduce non-performing loans in the\nindustry. However, lending rates reduces the risk of default.\nLadies and Gentlemen, The Central Bank will endeavour to pursue prudent\npolicies that foster financial stability, increase financial inclusion and improve\nfinancial efficiency. Let me at this juncture highlight two policy issues that are at\nthe heart of the of financial inclusion;\n• Agent Banking Model: An amendment to the Banking Act through the\nFinance Act 2009 has enabled the banking industry embrace agent banking.\nAgent banking will permit banks to contract third parties to provide certain\nbanking services on their behalf without having to put up brick and mortar.\nThis model will therefore increase financial inclusion to the majority of the\n3\n\nunbanked Kenyans at an affordable cost to both the bank and the customer.\nThe Central Bank is pleased by the level of interest and financial innovation the\nmodel has generated.\n• Credit Reference Bureaus: To ensure the growth of credit lending at\naffordable and sustainable rates, the Central Bank has licensed the first Credit\nReference Bureau (CRB) and a few more are in the pipeline. A robust\ncredit information apparatus will enable the banking industry share critical\ncustomer information that will lead to lowering the credit risk in the industry\nand hence the lowering of lending rates in the banking industry. This policy\naims at building information capital that will allow the credit market to\nfunction properly and efficiently and change the collateral technology and\nreduce the cost of collateralization.\nThe Central Bank of Kenya will continue to pursue policies that drive financial\ninnovation, build strong banks and partnerships in the banking industry to ensure\na stable financial sector in the country. Strong banks can weather shocks more\neasily. Strong banks will support economic growth.\nLadies and Gentlemen, I wish to conclude by congratulating Fina Bank for\nopening the Ngong Road Branch and to assure the Board and Management of Fina\nBank of the Central Bank’s support in your growth initiatives and progression.\nWith these few remarks Ladies and Gentlemen, it is now my honour and\npleasure to declare Fina Bank – Ngong Road Branch – officially open.\nThank You and God bless you all.\n4", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Fina%20Bank%20Ngong%20Road%20Branch%20June%2017.pdf"}

clean/cb_requests/2be43b87257454e984481e1a0a0e4458.json

@@ -0,0 +1 @@
+{"doc_id": "2be43b87257454e984481e1a0a0e4458", "text": "CENTRAL BANK OF KENYA\nOpening Remarks by\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\naatt tthhee\n10th East African Banking School\nLaico Regency Hotel, Nairobi\nMonday, 2nd August 2010\n\n10th East African Banking School, 2nd - 5th August 2010\nMr. John Waka, Chairman, Kenya Institute of Bankers;\nChairman, Tanzanian Institute of Bankers;\nChairman, Ugandan Institute of Bankers;\nDirectors of the Institutes here present;\nDistinguished Guests;\nFacilitators and Speakers;\nParticipants;\nLadies and Gentlemen:\nIt gives me great pleasure to be here today to officially open this 10th East African\nBanking School. The School has over the years become an important forum that\nbrings together banking sector players for interactive discourse on issues affecting\nthe regional banking sector.\nTo start with, let me extend my profound appreciation to the Kenya Institute of\nBankers for hosting this year’s East African Banking School conference, and for\ninviting me to officially open it. I am indeed deeply honoured.\nAt the outset, I would like to commend all the three banking institutes for their\nworthy efforts in capacity building for their respective banking sectors. It is through\nthese capacity building initiatives that our banking sectors have been rated as\npioneers in several banking innovations – endogenous growth.\nLadies and Gentlemen: The theme of this year’s conference, “Winning Strategies\nfor Financial Services”, is very pertinent not only to commercial banks but to the\nfinancial sector as a whole. Why do I say so? A mention of the recent global financial\ncrisis sends shivers through most of us. The EAC financial sectors may not have\nexperienced direct effects due to low exposure levels of toxic assets, but we do know\nwe all suffered from the knock-on effects. The outcome also is a pointer we need\nmore financial regulatory architecture in place. This in a sense reflects the inter-\nlinkages in the global financial scene that we cannot ignore. But a second reason is to\npromote financial inclusion; savings culture and savings/investment cycles.\nThe rich programme of this conference is a pointer that participants are expected to\ncome out fully prepared to design timely solutions to some of the challenges we are\ncurrently grappling with. Innovations in the banking sector rely heavily on the quality\nof the human resource in the sector.\nAs for financial sector regulators, their desire is for the development, deepening,\nstability, inclusion and efficiency of the sector. This is the reason why regulators have\n2\n\n10th East African Banking School, 2nd - 5th August 2010\nplaced a lot of emphasis on the need for effective risk management frameworks by all\nthe players. I am sure the risk management sessions in the programme will delve\nmore into when caution should be exercised in banking business without stifling\ninnovation.\nLadies and Gentlemen: This year’s East African Banking School conference takes\nplace at a significant moment in East Africa’s history – the implementation of the\nEast African Common Market Protocol and the commencement of efforts towards an\nEast African Monetary Union. When the Common Market Protocol is fully\nimplemented, an integrated regional market of close to 130 million people will have\nbeen created. Similarly, the variety, and size of the market for financial services is\ntherefore set to widen considerably in the region. As a result, we all stand to benefit\nfrom the integration - consumers will start to enjoy quality financial services at\ncompetitive prices and the market players will have an expanded consumer base.\nFurthermore, the labour force will be able to freely transfer their expertise across the\nregion.\nTo facilitate smooth integration of our banking sectors, efforts are currently\nunderway to harmonize the legal and regulatory regimes governing the banking\nsector in the East African Community. The harmonization is not only aimed at\nachieving convergence in supervisory and regulatory practices but also to match\nglobal financial sector best practices.\nLadies and Gentlemen: To fully utilise the opportunities anticipated to emerge\nfrom the regional integration, players in the financial sectors need to develop solid\ncapacities through continuous training of both managerial and operational\npersonnel. The key asset of banking as a service industry is its human capital. To\nremain at the cutting edge in this era of increased competition, all players must be\nwilling to make adequate investments in their human capital.\nLadies and Gentlemen: The winning strategies for financial services are the\ndrivers of growth in the financial sector. Though there are many winning strategies\nfor financial services, I will today focus on only three of them;\n• being customer centric,\n• risk management frameworks, and\n• human capital development.\nMarket players who develop competitive strategies which adhere to their customers’\nneeds are on a path of success. In this regard, successful financial products, services\nand processes are those which are designed to address customers need for\n3\n\n10th East African Banking School, 2nd - 5th August 2010\nconvenience, accessibility and cost efficiency. Market participants – many and many\nproducts.\nA case in point is the ongoing convergence of the mobile telephone technology\nplatform and banks. The banks are linking their customers to their bank accounts\nthrough the mobile phone platforms and online banking. As you may be aware, the\nM-pesa platform operated by Safaricom has so far registered more than 9 million\ncustomers in just three years, some of whom do not have bank accounts. Other\nmobile phone operators have followed this innovative path of financial services\nfacilitation. This unprecedented development has informed the banks’ quest to rush\nto partner with mobile phone technology providers not only to expand their clientele\nbase but to also provide their customers with the convenience and cost savings.\nThe exponential growth experienced by M-pesa for example, is due to the\nconvenience, accessibility and cost efficiency it provides to its customers in the\ntransfer of money especially from the urban centres to the rural areas.\nLadies and Gentlemen: The other competitive strategy that the financial sector\nplayers can capitalise on is risk management. Proper identification and mitigation of\npotential risks is what distinguishes the levels of success in any form of business. As\nfar as the banking sector in the EAC is concerned, it is encouraging to note that we\nhave all adopted the Risk Based Supervision (RBS) approach in our regulatory and\nsupervisory practices. This approach is a key contributor to the financial stability\nthat our banking sectors have continued to witness over past few years – appropriate\nassessment of risk and pricing of risk.\nCurrently, our focus on credit information sharing is another avenue of helping the\nplayers to manage their credit risks. Credit information sharing is already operational\nin Uganda and Rwanda whereas it was rolled out in Kenya with effect from 31st July\n2010. Tanzania and Burundi are in the process of considering introducing\nappropriate information sharing mechanisms. With operational credit information\nsharing mechanisms, we expect the levels of non –performing loans to decline as a\nresult of increased information symmetry while at the same time the level of credit\nwill increase due to the use of information capital to obtain credit. Information\ncapital – solve information asymmetry.\nLadies and Gentlemen: Investing in human capital is yet another critical\ncompetitive strategy in the financial sector. Both the financial sector regulators and\nthe market players require human capital with the requisite cutting edge knowledge\nand skills to enable them move the sector’s development to new frontiers. The\n4\n\n10th East African Banking School, 2nd - 5th August 2010\nwinning growth model: endogenous growth model – relies on human capital to drive\ngrowth. In this regard, I appreciate the efforts of the three bankers’ institutes’\ntowards this Banking School, which will enable participants to improve their\nknowledge, skills and professionalism. On the same note, every two years, the EAC\ncentral banks convene an East African Central Banking Course to enable their\npersonnel to sharpen their skills and to equip them with knowledge on emerging\ndevelopments in the global financial sector. The latest East African Central Banking\nCourse was hosted by the Central Bank of Kenya in July 2010 at the Kenya School of\nMonetary Studies.\nAs I conclude, Ladies and Gentlemen, I would like to reiterate that the integration\nof the EAC member states will open many opportunities for the players in the\nfinancial sector. There will be challenges on 1) harmonizing frameworks 2) new\nanalytical and design issues. What the players need are winning strategies, which I\nam sure you will have exhaustively delved into by the end of this conference. I\ntherefore urge all of you to openly share your knowledge and experiences as a means\nto coming up with winning strategies applicable to our respective financial sectors. I\nbelieve that by the end of this conference, all of you will accept to be the goodwill\nambassadors of development in our respective financial sectors. This will be an\nindirect push to the benefits of regional integration.\nIn view of the intensive programme ahead of you, I shall not extend my remarks any\nfurther. It is my hope that the knowledge you will acquire over the next four days, will\nmake you the agents of positive transformation in our banking sectors to upscale our\nranking in the global scene. I therefore take this opportunity to wish you all a fruitful\nconference.\nWith these remarks, Ladies and Gentlemen, it is now my honour and duty to\ndeclare the 10th East African Banking School officially opened.\nThank You\n5", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Governor%27s%20Remarks%20at%20East%20African%20Banking%20School%202010.pdf"}

clean/cb_requests/2dbd5a47f04b6eb99391f0ce604c137c.json

@@ -0,0 +1 @@
+{"doc_id": "2dbd5a47f04b6eb99391f0ce604c137c", "text": "Monetary Policy\nReview\n \n \n November 2006\nMonetary Policy\nReview\n \n \n November 2006\nSouth African Reserve Bank\nMonetary Policy Review November 2006\n© South African Reserve Bank\nAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in\nany form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior\npermission of the publisher. The contents of this publication are intended for general information only and are\nnot intended to serve as financial or other advice. While every precaution is taken to ensure the accuracy of\ninformation, the South African Reserve Bank shall not be liable to any person for inaccurate information or\nopinions contained in this publication.\nEnquiries relating to this Review should be addressed to:\nExecutive General Manager and Chief Economist\nResearch Department\nS A Reserve Bank\nP O Box 427\nPretoria 0001\nTel. 27-12-3133668/3944\nhttp://www.reservebank.co.za/mpr\nISSN: 1609-3194\nSouth African Reserve Bank\nMonetary Policy Review November 2006\nContents\nMonetary Policy Review\nIntroduction...........................................................................................................................\n1\nRecent developments in inflation...........................................................................................\n1\nThe evolution of indicators of inflation..............................................................................\n1\nFactors affecting inflation.................................................................................................\n8\nMonetary policy.....................................................................................................................\n18\nThe outlook for inflation.........................................................................................................\n21\nInternational outlook........................................................................................................\n21\nOutlook for domestic demand and supply ......................................................................\n23\nIndicators of inflation expectations ..................................................................................\n26\nThe Reserve Bank inflation forecast ................................................................................\n28\nAssessment and conclusion..................................................................................................\n32\nSouth African Reserve Bank\n1\nMonetary Policy Review November 2006\nMonetary Policy Review\nIntroduction\nAlthough inflation remains within the target range, recent economic developments\nindicate that there are significant risks to the inflation outlook. Since the publication of\nthe previous Monetary Policy Review in May, the domestic economy has continued to\ngrow strongly, with buoyant domestic demand supported by strong credit extension.\nThe exchange rate has depreciated somewhat, pressure from production prices has\nemerged, and the deficit on the current account of the balance of payments continues\nto be at higher levels. The outlook for domestic economic growth, however, remains\ngenerally positive. International oil prices, having reached record high levels in August,\nhave receded somewhat, and this has impacted positively on domestic petrol prices.\nGlobal growth is expected to moderate slightly in 2006 and 2007, while world inflation\nis anticipated to remain under control with tighter monetary conditions prevailing in most\nparts of the world. \nThese and other developments resulted in the Monetary Policy Committee (MPC) raising\nthe repo rate by 50 basis points at the June 2006 meeting, the first change in the\nmonetary policy stance since April 2005. This was followed by successive 50-basis-\npoint increases at the August and October 2006 meetings, as the MPC sought to ensure\nthat the monetary policy stance remains consistent with achieving the inflation target.\nThis review of monetary policy begins by analysing inflation developments and the\nfactors that impact on inflation. This is followed by an assessment of recent monetary\npolicy developments and a discussion of the outlook and uncertainties relating to some\nof the factors that are considered by the MPC in setting monetary policy. As usual, three\ntopical issues are addressed in the boxes. The first box reports on research into the\nestimation of a trimmed mean measure of core inflation for South Africa, while the\nsecond box provides information on surveys that measure business confidence and\ntrade conditions. The final box assesses the accuracy of the forecasts of inflation\nprovided by the Bank’s suite of models.\nRecent developments in inflation\nThis section analyses recent trends in the main inflation indices, and reviews\ndevelopments in the primary factors impacting on inflation in South Africa.\nThe evolution of indicators of inflation\nThe Bank’s targeted measure of inflation, the year-on-year increase in the consumer\nprice index excluding mortgage interest cost for metropolitan and other urban areas\n(CPIX), has remained within the inflation target range of 3 to 6 per cent for the past\n37 months. However, as Figure 1 shows, the inflation rate has risen in the period under\nreview. When the previous Monetary Policy Review was published in May 2006, the\nlatest available CPIX inflation rate, for March, was 3,8 per cent. Since then CPIX inflation\nhas increased to 5,1 per cent in September 2006, with its evolution influenced mainly by\ndevelopments in food and energy prices.\nInflation measured in terms of the headline consumer price index for metropolitan areas\n(CPI) declined marginally from 3,4 per cent in March 2006 to 3,3 per cent in April, and\nthen increased significantly to reach 5,4 per cent in August before slowing once again to\n5,3 per cent in September.\n2\nDevelopments in the food and transport components of the CPIX contributed\nsignificantly to the fluctuations noted above. Figure 2 reveals that the year-on-year\ninflation rate for food prices, which have a weight of 25,7 per cent in the index, has\nexceeded that of the overall CPIX in each month since February. By September, food\nprice inflation was 7,9 per cent, contributing 2,0 percentage points to the overall CPIX\ninflation rate of 5,1 per cent (Table 1). Of the food price components, meat prices have\nrisen particularly strongly, growing by 17,2 per cent year on year in September.\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nPercentage change over twelve months\n0\n3\n6\n9\n12\n15\n2001\n2002\n2003\n2004\n2005\n2006\n \nCPI\n \nCPIX\nFigure 1 \nConsumer price inflation: CPIX and CPI\nSource: Statistics South Africa\nPercentage change over twelve months\n-15\n-10\n-5\n0\n5\n10\n15\n20\n25\n30\n2001\n2002\n2003\n2004\n2005\n2006\n \nCPIX\n \nAll food items\n \nGrain products\n \nMeat\n \nVegetables\n \nSource: Statistics South Africa\nFigure 2 \nCPIX and food inflation\nThe contribution of the transport component to CPIX inflation is largely driven by\nmovements in petrol prices, which have been volatile in the period under review. The\ninland pump price of 93 octane unleaded petrol increased from R5,39 per litre in March\nto R6,92 per litre in August 2006, before declining to R5,85 per litre in November. Table\n1 shows that the contribution of the transport component to overall CPIX inflation\ntherefore increased from 0,5 percentage points in April to 1,2 percentage points from\nJune to August 2006, before declining to 0,7 percentage points in September.\nTable 1\nContributions to CPIX inflation\nPercentage change over twelve months* and percentage points\n2006\nMar\nApr\nMay\nJun\nJul\nAug\nSep\nTotal* ................................................\n3,8\n3,7\n4,1\n4,8\n4,9\n5,0\n5,1\nOf which:\nFood ................................................\n1,2\n1,4\n1,5\n1,8\n1,8\n1,9\n2,0\nHousing ............................................\n0,5\n0,5\n0,5\n0,5\n0,6\n0,6\n0,6\nMedical care and health expenses ...\n0,6\n0,6\n0,6\n0,6\n0,6\n0,6\n0,6\nTransport ..........................................\n0,7\n0,5\n0,8\n1,2\n1,2\n1,2\n0,7\nEducation .........................................\n0,4\n0,4\n0,4\n0,4\n0,4\n0,4\n0,4\nFuel and power .................................\n0,1\n0,1\n0,1\n0,1\n0,2\n0,2\n0,3\nOther ................................................\n0,3\n0,2\n0,2\n0,2\n0,1\n0,1\n0,5\nSource: Statistics South Africa\nThe contributions of the other main components of the CPIX index in this period remained\nrelatively subdued. The housing component, which contributed 0,5 percentage points\nbetween March and June 2006, contributed 0,6 percentage points from July to\nSeptember 2006. The marginal increase reflected the results of the July survey of non-\nmortgage property costs (i.e. property taxes, rent and insurance). The fuel and power\ncomponent’s contribution increased from 0,1 percentage points from March to June\n2006 to 0,2 percentage points in July and August, and 0,3 percentage points in\nSeptember.\nFigure 3 illustrates the effect of excluding energy prices and food prices from the CPIX\ninflation measure. Box 1, presented at the end of this section, reports on related\nresearch by the Bank to estimate a trimmed mean measure of core inflation for South\nAfrica. As the discussion above suggests, the exclusion of both energy and food\nprices from the CPIX has a significant impact on inflation, with the year-on-year\ninflation rate recording a value of 2,5 per cent from March to June 2006 before\naccelerating to 3,5 per cent in September. Excluding only food, CPIX inflation declined\nfrom 3,5 per cent in March 2006 to 3,2 per cent in April before increasing to 4,3 per\ncent in August, and then slowing to 4,1 per cent in September. CPIX excluding energy\ninflation increased from 3,2 per cent in March to 4,7 per cent in September.\nSouth African Reserve Bank\n3\nMonetary Policy Review November 2006\n4\nThe inflation rates for the goods and services categories of CPIX inflation, presented in\nFigure 4, indicate that goods prices continue to advance at a faster pace than services\ninflation. The year-on-year inflation rate for goods prices declined from 4,1 per cent in\nMarch to 3,9 per cent in April before increasing to 6,0 per cent by August 2006 and then\nslowing to 5,4 per cent in September. These developments can be attributed mainly to\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nPercentage change over twelve months\n2001\n2002\n2003\n2004\n2005\n2006\n \nCPIX\n \nCPIX excluding energy prices\n \nCPIX excluding food prices\n \nCPIX excluding food and energy prices\nSource: Statistics South Africa and SARB calculations\nFigure 3 \nThe effect of food and energy prices on CPIX inflation\n2\n4\n6\n8\n10\n12\nPercentage change over twelve months\n2002\n2001\n2003\n2004\n2005\n2006\n0\n3\n6\n9\n12\n15\n \nGoods\nServices\nCPIX\n \nFigure 4 \nCPIX: Goods and services inflation \nSource: Statistics South Africa\nprice increases in the food and transport components of the index, moderated by the\nprices of goods such as clothing and footwear which continued to decline. Services\nprice inflation fluctuated between 3,5 and 3,3 per cent from June to August 2006,\nbefore rising to 4,4 per cent in September. The acceleration in September could partly\nbe attributed to an increase in the rate of change in the domestic workers wages\ncomponent of the index.\nThe year-on-year inflation rate for the administered price index (API) declined from \n6,2 per cent in March to 5,2 per cent in April, rebounded to 8,9 per cent in August 2006\nbefore slowing once again to 6,7 per cent in September (Figure 5). As is generally the\ncase, however, fluctuations in petrol prices had a significant impact on the index. Once\npetrol prices are excluded from the API, the inflation rate for the remaining administered\nprices initially increased from 3,2 per cent in March to 3,3 per cent in April before\ndeclining to 3,1 per cent in June. Since June, however, even when petrol prices are\nexcluded, API inflation increased significantly to reach 5,4 per cent in September. \nTable 2, which presents the contributions of the various components to the overall API\ninflation rate, provides more insight into these movements in API inflation. Besides the\nimpact of petrol prices, the contribution of increases in electricity prices to these\nmovements is notable. The contribution of the petrol component declined from 3,8\npercentage points in March to 2,6 percentage points in April before increasing to 5,9\npercentage points in June. Thereafter, however, the contribution of the petrol component\ndecreased to 5,3 percentage points in August and to 2,5 percentage points in\nSeptember. The table shows that the increase in the overall API inflation rate from 8,4\nper cent in June to 8,9 per cent in July and August was therefore mainly attributable to\nan increase in the electricity component of the index. The contribution of this component\nto the overall API inflation rate increased sharply to 0,7 percentage points in July and\nAugust 2006, and to 1,1 percentage points in September. \nSouth African Reserve Bank\n5\nMonetary Policy Review November 2006\nPercentage change over twelve months\n2003\n2004\n2006\n2005\n0\n3\n6\n9\n12\n15\n \nAdministered price index (API)\n \nAPI excluding petrol\n \nCPIX\nSources: Statistics South Africa and SARB calculations\nFigure 5 \nCPIX and administered prices\n6\nTable 2\nContributions to administered price inflation \nPercentage change over twelve months* and percentage points\n2006\nMar\nApr\nMay\nJun\nJul\nAug\nSep\nTotal* .................................................\n6,2\n5,2\n6,0\n8,4\n8,9\n8,9\n6,7\nOf which:\nPetrol .................................................\n3,8\n2,6\n3,4\n5,9\n5,4\n5,3\n2,5\nElectricity ...........................................\n0,0\n0,1\n0,1\n-0,1\n0,7\n0,7\n1,1\nAssessment rates ..............................\n0,5\n0,5\n0,5\n0,5\n0,5\n0,5\n0,5\nEducation services ............................\n1,1\n1,1\n1,1\n1,1\n1,1\n1,1\n1,1\nMedical services ................................\n-0,1\n-0,1\n-0,1\n-0,1\n-0,1\n-0,1\n-0,1\nCommunication .................................\n-0,4\n-0,4\n-0,4\n-0,4\n-0,4\n-0,4\n-0,0\nOther .................................................\n1,3\n1,4\n1,4\n1,5\n1,7\n1,8\n1,6\nSource: Statistics South Africa\nInflation measured in terms of the production price index (PPI) accelerated significantly\nin the period under review, with the overall PPI inflation rate increasing from 5,4 per cent\nin March to 9,2 per cent in August before easing slightly to 9,0 per cent in September.\nFigure 6 shows that the domestic component of PPI inflation rose at a faster pace than\nthe imported component since May, mainly as a result of robust increases in the\nagricultural and manufacturing food prices components, to record a year-on-year\ninflation rate of 9,2 per cent in September. The imported component of the inflation rate\ninitially declined from 6,7 per cent in March to 4,7 per cent in May, and then increased\nto 8,2 per cent in September. The weighted contribution of the domestic component\nincreased from 3,8 percentage points in March to 7,2 percentage points in August\nbefore declining to 6,8 percentage points in September, while that of the imported\ncomponent declined from 1,6 percentage points to 1,2 percentage points in May before\nincreasing to 2,1 percentage points in September.\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nPercentage change over twelve months\n2001\n2002\n2003\n2004\n2005\n2006\n-10\n-5\n0\n5\n10\n15\n20\n \nImported component\n \nDomestically produced component\n \nProduction price index (PPI)\nSource: Statistics South Africa \nFigure 6 \nProduction price inflation\nSouth African Reserve Bank\n7\nMonetary Policy Review November 2006\nBox 1 Measuring core inflation for South Africa: A trimmed mean approach \nIt is generally agreed that monetary policy should focus less on short-term, reversible movements in\nprices and inflation rates, and more on the persistent sources of inflationary pressures. Measures of\ncore inflation aim to capture these persistent inflationary pressures by abstracting from short-run\nvolatility and attempting to distinguish “the signal from the noise” in inflation data (Blinder, 1997:\n157). This box reports on research by the South African Reserve Bank (Bank) on the measurement\nof a trimmed mean core inflation rate for South Africa (Blignaut et al., 2005). \nThe overall inflation rate πt may be viewed as consisting of an underlying component π\nand a\ntransitory component π . While there is agreement on what core inflation should depict – namely\nunderlying inflationary pressures – there is no consensus regarding a single measure that\nconsistently and accurately captures these inflationary pressures. \nThree main approaches are used to measure core inflation, namely the behavioural or exclusion-\nbased approach (which entails permanently excluding certain items such as food and/or energy\nprices from the headline measure of inflation), the model-based set of methods that extend\neconometric techniques to non-price variables and are more deeply rooted in economic theory, and\nfinally a set of techniques that use statistical methods to extract the persistent or underlying trend\ncomponent, π , of the inflation rate. \nThe trimmed mean measure of core inflation, introduced by Bryan and Cecchetti (1993), falls into\nthe last of these broad approaches. The rationale for the measure is the finding that when the data\nare not drawn from a normal distribution, the sample mean is not the most efficient (minimum\nvariance) estimator of the first moment. Internationally, research has found that price changes are\nnot normally distributed, a finding replicated in this study for South African data.1\nThe study used monthly price indices and weights published by Statistics South Africa for \n33 components of the consumer price index (CPI for metropolitan areas). The sample period ran\nfrom January 1980 to January 2005, providing 301 observations which generated 289 12-month\nchanges over the sample period January 1981 to January 2005. The trimmed mean estimator of\ninflation then removed from the overall CPI for each month those components for which the 12-month\npercentage changes were ranked the smallest or largest. A proportion of each tail of the distribution\nof the price changes was therefore trimmed, and the weighted average price change of the remaining\ncentral region of the distribution was calculated. \nAs theory provides little guidance regarding the size of the trim or its symmetry, an “optimal” trim\nwas chosen from a range of trimmed means on the basis of the ability to track a proxy for the trend\ncomponent of inflation. Following Bryan, Cecchetti and Wiggins (1997), one option is to choose a\ncentred 36-month moving average (MA36) of the overall CPI inflation rate as the benchmark.2\nVarious trimmed mean estimators were computed and compared using the mean absolute\ndeviations (MADs) between the trimmed series and trend inflation proxied by the centred 36-month\nbenchmark. This comparison was undertaken for both the case where only symmetric trimming was\nundertaken and for the case where asymmetric trimming was permitted. In the case of a symmetric\ntrim, the minimum MAD (1,528 percentage points) was achieved when 14 per cent was trimmed\nfrom each tail of the distribution (π ). The MAD of this symmetric trim was 3,16 per cent lower\nthan that of the overall CPI inflation rate. When an asymmetric trim was allowed, a minimum MAD\nof 1,484 percentage points was achieved with 26 per cent trimmed from the lower tail and 21 per\ncent from the upper tail (π\n). The MAD is 5,91 per cent lower than that of the overall CPI inflation\nrate. The trim which best reproduces the benchmark is therefore an asymmetric one which\nremoves a larger proportion of the lower tail.3 The π\nand π\ntrimmed mean estimators are\nplotted in Figure B1.1.\nFor the π\ntrimmed mean estimator, an analysis was undertaken to determine the number of\ntimes that each of the 33 product groups was ranked in the tails of the distribution and also to\nconsider the incidence in the upper and lower tails of the distribution. The results show that the most\nvolatile elements are scattered across a variety of product sub-groups and are not necessarily\nconfined to any particular main group(s). The analysis also compared the products excluded in the\ncalculation of core CPI by Statistics South Africa4 to ascertain if they correspond to those identified\nby the trimmed mean methodology. The analysis shows that the product categories excluded in the\ncalculation of the official core inflation measure have not necessarily experienced the most volatile\nprice movements in practice. \nU\nt\nU\nt\nTr\nt\nT\n26,21\nT\n26,21\nT\n14,14\nT\n14,14\n1\nOn average, the distribution\nof the price changes of the\nSouth African CPI is positively\nskewed and leptokurtic.\n2\nThis benchmark cannot be\nused in real time as an indicator\nof the trend, which is a key\nrequirement of a core measure,\nbut may be useful in an\nhistorical context. The choice of\nan MA36 is essentially arbitrary,\nand alternative filters have been\nproposed and used in the\nliterature. Comparisons were\ntherefore undertaken using a\nrange of benchmarks, although\nresults are reported only for the\nMA36 benchmark.\n3\nThis is consistent with the\nfinding that the distributions of\nthe CPI component price\nchanges are positively skewed.\nT\n26,21\n4\nProducts excluded by\nStatistics South Africa in the\ncalculation of the Core CPI are\nmainly confined to five\ncategories, namely meat; fish\nand other seafood; fruit and\nnuts; vegetables; and housing.\nFactors affecting inflation\nRecent developments in some of the main variables influencing inflation in South Africa\nare reviewed in this section, while the outlook for these variables and their likely impact\non inflation are discussed in a later section.\nThe analysis presented in the paper has significant potential usefulness for policy-makers. The\ncalculation of the trimmed mean measure of core inflation improves the ability to dissect inflation\ndata and helps to distinguish the signal from the noise in these data. The performance of the\nmeasure in this regard, and indeed in other areas such as the forecasting of inflation, can and should\nbe compared with that of alternative measures. Moreover, once a sufficiently long data sample is\navailable, the methodology can be applied to the CPIX measure employed in the inflation-targeting\nframework. In fact, with certain restrictions in place, this type of analysis is already possible.\nReferences\nBlignaut, Z, Farrell, G N, Munyama, T V and Rangasamy, L. 2005. Measuring Core Inflation for South\nAfrica: A Trimmed Means Approach. South African Reserve Bank Discussion Paper DP/05/10.\nBlinder, A S. 1997. Commentary. Federal Reserve Bank of St. Louis Review. May/June.\nBryan, M F and Cecchetti, S G. 1993. Measuring Core Inflation. NBER Working Paper No 4303,\nNBER, Washington.\nBryan, M F, Cecchetti S G and Wiggins, R L. 1997. Efficient Inflation Estimation. NBER Working\nPaper No 6183, NBER, Washington.\nCecchetti, S G. 1996. Measuring Short-run Inflation for Central Bankers. NBER Working Paper No\n5786, NBER, Washington.\n8\nMonetary Policy Review November 2006\nSouth African Reserve Bank\n12-month percentage changes\n1981\n85\n90\n95\n2000\n04\n \nCPIM\n \n \n0\n5\n10\n15\n20\n25\n \nMA36\nT\n26,21\nT\n14,14\nFigure B1.1\nThe π\nand π\ntrimmed mean CPI\ninflation rates\nT\n26,21\nT\n14,14\nπ\nπ\nInternational economic developments\nGlobal economic expansion remains vigorous, with the most recent International\nMonetary Fund (IMF) data showing global real gross domestic product (GDP) having\ngrown by 4,9 per cent in 2005 and being projected to increase by 5,1 per cent in\n2006 (Table 3). This growth has been broad based, with both the advanced and\nemerging-market and developing economies contributing strongly. However, major\nglobal imbalances have continued widening as the United States of America (US)\ncurrent-account deficit rose to its second-highest level ever in the second quarter of\n2006. There are also indications that sustained high rates of global growth have\nabsorbed spare capacity and led to emerging signs of inflationary pressures in\nvarious countries. \nGrowth in the US, which was strong in the first quarter of the year before slowing in the\nsecond quarter, is forecast to reach 3,4 per cent in 2006 compared with 3,2 per cent in\n2005. However, a complex situation of rising inflation in a slowing economy appears to\nbe developing, with the inflation rate projected to increase to 3,6 per cent this year from\n3,4 per cent in 2005. \nTable 3\nAnnual percentage change in real gross domestic product and\nconsumer prices \nReal GDP\nConsumer prices\n2006\n2006\n2005\n(estimate)\n2005\n(estimate)\nWorld ......................................................................\n4,9\n5,1\n3,7\n3,8\nAdvanced economies ............................................\n2,6\n3,1\n2,3\n2,6\nUnited States ....................................................\n3,2\n3,4\n3,4\n3,6\nJapan ................................................................\n2,6\n2,7\n-0,6\n0,3\nEuro area ..........................................................\n1,3\n2,4\n2,2\n2,3\nUnited Kingdom ................................................\n1,9\n2,7\n2,0\n2,3\nOther advanced economies ..............................\n3,1\n3,6\n2,1\n2,3\nOther emerging-market and developing countries ..\n7,4\n7,3\n5,3\n5,2\nAfrica ................................................................\n5,4\n5,4\n8,5\n9,9\nCentral and eastern Europe ..............................\n5,4\n5,3\n4,8\n5,3\nCommonwealth of Independent States ............\n6,5\n6,8\n12,3\n9,6\nDeveloping Asia ................................................\n9,0\n8,7\n3,5\n3,8\nChina ..............................................................\n10,2\n10,0\n1,8\n1,5\nIndia ................................................................\n8,5\n8,3\n4,0\n5,6\nMiddle East ......................................................\n5,7\n5,8\n7,7\n7,1\nWestern hemisphere ........................................\n4,3\n4,8\n6,3\n5,6\nSource: IMF World Economic Outlook, September 2006\nThe Japanese economy is expected to grow by 2,7 per cent this year on account of\nsolid domestic demand, after recording growth of 2,6 per cent in 2005. Business\ninvestment and consumer spending accelerated in the second quarter of 2006, and\nthere is increasing confidence that the economy has emerged from seven years of\ndeflation. In the euro area, growth has picked up and is expected to rise to 2,4 per cent\nin 2006 from the 1,3 per cent recorded in 2005, while the United Kingdom (UK) economy\nhas regained momentum, with growth accelerating from 1,9 per cent in 2005 to a\nforecast 2,7 per cent in 2006. However, inflation pressures have increased steadily amid\nrising energy costs, and inflation is expected to rise to 2,3 per cent in 2006. \nSouth African Reserve Bank\n9\nMonetary Policy Review November 2006\n10\nIn Africa, GDP growth of 5,4 per cent is expected this year, the same rate recorded in\n2005. Sub-Saharan Africa is experiencing its strongest period of sustained economic\nexpansion since the early 1970s, with regional growth expected to be above 5 per cent\nfor the third successive year. While oil-exporting countries are contributing significantly\nto this strong performance, growth in many oil-importing countries has also been\nsurprisingly robust as the rise in non-fuel commodity prices has helped to cushion the\nimpact of higher oil prices. \nDeveloping Asia continues to grow strongly. The IMF forecasts that China will grow by\n10 per cent in 2006 (its fourth year of double-digit growth), and India is expected to\nrecord 8,3 per cent growth in 2006 compared with 8,5 per cent in 2005. Growth in\nLatin-American economies, by contrast, continues to lag behind other emerging\neconomies, although prospects have improved in the region and these economies are\nforecast to grow by 4,8 per cent in 2006 compared with 4,3 per cent in 2005. Middle\nEastern economies are forecast to expand by 5,8 per cent this year compared with \n5,7 per cent in 2005, with the management of the windfall gain from rising energy prices\npresenting a challenge to the region’s oil producers. \nOil prices\nCrude oil prices remained volatile during 2006 amid strong global oil demand, mounting\ngeopolitical concerns, supply constraints and limited spare capacity. Figure 7 shows that\nthe daily spot price of Brent crude oil reached levels of around US$75 per barrel towards\nthe end of April, fuelled by geopolitical tensions in Nigeria, Iran and Iraq, falling US fuel\ninventories as a result of refinery maintenance and unplanned outages as well as supply\nconstraints in the Gulf of Mexico. Prices then trended downwards, reaching levels below\nUS$67 per barrel by mid-June due to rising US fuel and crude oil inventories, the\ndecision by the Organization of the Petroleum Exporting Countries (OPEC) in June to\nleave production quotas unchanged, and global monetary policy tightening. \nMonetary Policy Review November 2006\nSouth African Reserve Bank\nFigure 7 \nPrice of brent crude oil \n2004\n2005\n2006\n2007\nJ M M J\nS\nN\nJ M M J\nS\nN\nJ M M J\nS\nN\nJ M M J\nS\nN\nUS dollar per barrel\n \nBrent crude spot price\n \nFutures prices (3 August 2006)\n \nFutures prices (12 October 2006)\n \nFutures prices (26 October 2006)\n25\n30\n35\n40\n45\n50\n55\n60\n65\n70\n75\n80\n85\nHowever, towards the end of June oil prices began to increase sharply once more,\nreaching levels approaching US$80 per barrel at the start of August 2006. This was due\nto robust US fuel demand, mounting tensions in Nigeria, North Korea, Iran, Israel and\nLebanon, and the partial shutdown of the largest US oil field in Alaska (Prudhoe Bay).\nOil prices then decreased throughout August and September, reaching an eight-month\nlow of around US$57 per barrel in mid-October. The decrease was due to the easing of\ntensions in the Middle East and increasing US fuel and crude oil inventories towards the\nend of the summer driving season. In addition, supply uncertainties faded as output levels\nat the Prudhoe Bay oil field were restored by late September, and above-average US fuel\nand crude oil inventories helped restore confidence as the US prepares for strong winter\ndemand. A milder-than-expected Atlantic hurricane season also added to output\nassurances. \nThe oil price rebounded towards the end of October to levels of around US$60 per barrel\nafter OPEC announced cutbacks of 1,2 million barrels per day, effective from the start of\nNovember, to prevent oil prices from declining further. However, the futures price for\nBrent crude oil to be delivered in the first quarter of 2007 is nevertheless currently almost\nUS$15 per barrel lower than the corresponding price at the time of the MPC meeting on\n2 and 3 August 2006. \nInternational monetary policy developments\nHigher oil prices and sustained strong global economic growth have adversely\ninfluenced inflationary prospects in several countries. Central banks around the globe\ntherefore generally continued to tighten monetary policy in recent months (see Table 4). \nTable 4\nSelected central bank interest rates\nPer cent\nCountries\n1 Jan 2006 26 October 2006\nLatest change\n(percentage points)\nUnited States ..................................\n4,25\n5,25\n29 Jun 2006\n(+0,25)\nJapan ..............................................\n0,00\n0,25\n14 Jul 2006\n(+0,25)\nEuro area ........................................\n2,25\n3,25\n11 Oct 2006\n(+0,25)\nUnited Kingdom ..............................\n4,50\n4,75\n3 Aug 2006\n(+0,25)\nCanada ............................................\n3,25\n4,25\n24 May 2006\n(+0,25)\nDenmark ..........................................\n2,25\n3,25\n6 Oct 2006\n(+0,25)\nSweden ............................................\n1,50\n2,50\n6 Sep 2006\n(+0,25)\nSwitzerland ......................................\n0,50 – 1,50\n1,25 – 2,25\n14 Sep 2006 \n(+0,25)\nAustralia ..........................................\n5,50\n6,00\n2 Aug 2006\n(+0,25)\nNew Zealand ....................................\n7,25\n7,25\n8 Dec 2005\n(+0,25)\nIsrael ................................................\n4,50\n5,25\n1 Nov 2006\n(-0,25)\nChina ..............................................\n5,58\n6,12\n19 Aug 2006\n(+0,27)\nHong Kong ......................................\n5,75\n6,75\n30 Jun 2006\n(+0,25)\nIndonesia ..........................................\n12,75\n10,75\n5 Oct 2006\n(-0,50)\nMalaysia ..........................................\n3,00\n3,50\n26 Apr 2006\n(+0,25)\nSouth Korea ....................................\n3,75\n4,50\n10 Aug 2006\n(+0,25)\nTaiwan ..............................................\n2,25\n2,625\n28 Sep 2006\n(+0,125)\nThailand ..........................................\n4,00\n5,00\n7 Jun 2006\n(+0,25)\nIndia ................................................\n5,25\n6,00\n25 Jul 2006\n(+0,25)\nBrazil ................................................\n18,00\n13,75\n18 Oct 2006\n(-0,50)\nChile ................................................\n4,50\n5,25\n13 Jul 2006\n(+0,25)\nMexico ............................................\n8,25\n7,00\n21 Apr 2006\n(-0,25)\nCzech Republic ................................\n2,00\n2,50\n27 Sep 2006\n(+0,25)\nHungary ..........................................\n6,00\n8,00\n25 Oct 2006\n(+0,25)\nPoland ..............................................\n4,50\n4,00\n28 Feb 2006\n(-0,25)\nRussia ..............................................\n12,00\n11,00\n23 Oct 2006\n(-0,50)\nSource: National central banks\nSouth African Reserve Bank\n11\nMonetary Policy Review November 2006\n12\nIn the US, the Federal Open Market Committee has been concerned about inflationary\npressures and increased the target for the federal funds rate at seventeen consecutive\nmeetings, before keeping it unchanged at 5,25 per cent since June 2006. The Bank of\nJapan ended its quantitative easing monetary policy in March 2006 and increased the\nuncollateralised overnight call rate in July by 25 basis points. The European Central Bank\nincreased the repo rate in early October to 3,25 per cent, the fifth increase in ten\nmonths, while the Bank of England raised the official bank rate in early August 2006 by\n25 basis points to 4,75 per cent.\nMonetary policy was also tightened in recent months in other countries, including Australia,\nCanada, Chile, China, the Czech Republic, Denmark, Hong Kong, Hungary, India, Malaysia,\nSouth Korea, Sweden, Switzerland, Taiwan and Thailand. However, the central banks of\nBrazil, Indonesia, Israel, Mexico, Poland and Russia recently lowered interest rates.\nExchange rate developments\nThe exchange rate of the rand exhibited considerable volatility in the period under review.\nAlong with other emerging-market currencies, the rand came under pressure in May as\nglobal risk aversion increased, resulting in a re-rating of emerging-market risk amid\nconcerns regarding global growth prospects and the path of interest rates. More recently,\nconcerns about the deficit on the domestic current account of the balance of payments\nand global commodity prices have influenced developments in the foreign exchange rate\nof the rand.\nFigure 8 shows that the nominal effective exchange rate of the rand (NEER), which\nmeasures the foreign exchange rate against a basket of thirteen currencies, depreciated\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nIndex: 2000=100 (foreign currency per rand)\nRand per euro\nRand per US dollar\nFigure 8 \nExchange rates of the rand\n2005\n2006\nMar\nMay\nJul\nSep\nNov\nJan\nMar\nMay\nJul\nSep\nJan\n \nNominal effective exchange rate of the rand (NEER)\n \nRand per US dollar \n \nRand per euro (right-hand scale)\n70\n75\n80\n85\n90\n95\n100\n105\n5,0\n6,0\n7,0\n8,0\n7,0\n7,5\n8,0\n8,5\n9,0\n9,5\n10,0\n10,5\nfrom a level of 98,9 index points on 20 April 2006 to 78,4 index points on 23 June. The\nNEER then recovered to 84,8 on 14 August but subsequently depreciated once more\nand is currently trading at levels of around 77 index points. Measured on a bilateral basis\nagainst the US dollar and the euro, the rand performed similarly to the NEER,\ndepreciating from R5,97 on 20 April to R7,50 on 26 October against the US dollar and\nfrom R7,72 to R9,54 against the euro over the same period.\nLabour markets\nThe labour market developments detailed in Figure 9 reveal that the year-on-year increase\nin economy-wide unit labour cost (i.e. wage increases adjusted for productivity changes\nin the formal non-agricultural sector), rose from 2,3 per cent in the final quarter of 2005\nto 7,3 per cent in the first quarter of 2006, before slowing to 3,2 per cent in the second\nquarter of the year. These movements reflect to some extent the low base for year-on-\nyear calculations established by employment data for the first quarter of 2005, which\ninfluenced in particular the labour productivity component of nominal unit labour cost.\nGrowth in nominal remuneration per worker in the formal non-agricultural sector rose\nfrom 4,4 per cent in the final quarter of 2005 to 7,3 per cent in the first quarter of 2006,\nbefore declining to 4,5 per cent in the second quarter. By contrast, growth in labour\nproductivity (measured by the ratio of real value added to employment in the formal\nnon-agricultural sector) slowed from 2,1 per cent in the final quarter of 2005 to 0,0 per\ncent in the first quarter of 2006, before rising once again to 1,3 per cent in the second\nquarter of the year.\nThe average level of wage settlements, according to Andrew Levy Employment\nPublications, was 6,2 per cent in the first six months of 2006, compared to 6 per cent\nin the first half of 2005 and the annual average of 6,3 per cent for 2005 as a whole. It\nmust be borne in mind, however, that the impact of these settlements on inflation\ndepends on what happens to labour productivity over time.\nSouth African Reserve Bank\n13\nMonetary Policy Review November 2006\nPercentage change over four quarters\n2001\n2002\n2003\n2004\n2006\n2005\nFigure 9 \nRemuneration per worker, labour productivity and unit\n \nlabour cost in the formal non-agricultural sector\n \nNominal unit labour cost\n \nRemuneration per worker\n \nLabour productivity\n0\n3\n6\n9\n12\n15\n18\n14\nDemand and output\nThe South African economy has continued to expand at a firm pace in 2006. The latest\navailable data show that the economy grew at an annualised rate of 4,9 per cent in the\nsecond quarter, an increase of 0,9 percentage points on the growth of 4,0 per cent\nachieved in the first quarter of the year (Table 5).\nTable 5\nGrowth in real gross domestic product and expenditure\ncomponents\nPer cent*\n2005\n2006\n2nd qr\n3rd qr\n4th qr\nYear\n1st qr\n2nd qr\nFinal consumption expenditure:\nHouseholds ....................................\n6,7\n6,1\n6,8\n6,9\n7,1\n8,0\nGovernment ....................................\n5,9\n5,5\n14,7\n5,6\n-2,3\n16,1\nGross fixed capital formation ..............\n5,4\n8,3\n8,6\n9,2\n10,7\n11,3\nChanges in inventories (R billions)** ....\n6,1\n13,3\n2,3\n8,5\n12,9\n14,9\nGross domestic expenditure ............\n5,8\n7,3\n3,8\n5,9\n14,5\n7,4\nExports of goods and services ..........\n23,5\n10,5\n-4,1\n6,7\n-19,3\n23,2\nImports of goods and services ..........\n23,2\n21,6\n-1,2\n10,1\n17,5\n28,6\nGross domestic product ..................\n5,3\n4,1\n3,2\n4,9\n4,0\n4,9\n*\nQuarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data \n**\nConstant 2000 prices\nThe robust performance in the second quarter reflected brisk growth in the secondary\nand tertiary sectors, which grew at rates of 7,0 and 5,5 per cent, respectively. In the\nsecondary sector, a growth rate of 14,0 per cent was recorded in construction and 6,0\nper cent in manufacturing, with the latter benefiting from both buoyant domestic\ndemand and the relatively weaker foreign exchange rate of the rand. The primary sector,\nby contrast, contracted largely on account of a fall of 8,5 per cent in the real value added\nby the agricultural sector. \nTable 5 shows that domestic expenditure continues to grow at a robust rate. Gross\ndomestic expenditure recorded annualised growth of 7,4 per cent in the second quarter\nof the year, supported by strong increases in all components of domestic final demand.\nHousehold consumption expenditure grew at a rate of 8,0 per cent, government\nconsumption expenditure at 16,1 per cent and gross fixed capital formation at 11,3 per\ncent in the quarter. The last of these categories contributed to the ratio of gross fixed\ncapital formation to GDP rising to 18,4 per cent, its highest level since 1990.\nAlthough the deficit on the trade account widened in the second quarter of 2006, a\ndecline in net service and income payments to non-residents resulted in the deficit on\nthe current account of the balance of payments narrowing slightly to 6,1 per cent of\nGDP from 6,4 per cent in the first quarter. The adjustment in the exchange rate of the\nrand combined with relatively high international demand and commodity prices\ncontributed to export growth recovering to 23,2 per cent in the second quarter. Real\nexports had contracted in the preceding two quarters. However, import volumes\ncontinued to be supported by strong domestic demand, resulting in imports of goods\nand services rising by 28,6 per cent in the second quarter. \nBoth the gross gold and other foreign exchange reserves and the international liquidity\nposition of the Bank rose moderately over the past six months to reach levels of \nUS$24,6 billion and US$21,2 billion, respectively, at the end of September 2006. \nMonetary Policy Review November 2006\nSouth African Reserve Bank\nReal-estate and equity prices \nAccording to both the Absa and Standard Bank nominal house price indices, growth in\nhouse prices has continued to slow in recent months.1 In nominal terms, Figure 10 shows\nthat the year-on-year rate of increase in the Absa index slowed from a revised 15,8 per\ncent in March 2006 to 13,3 per cent in September 2006, while that of the Standard Bank\nindex declined from 13,8 to 2,9 per cent over the same period.\nThe building statistics published by Statistics South Africa suggest that the level of\neconomic activity in the real-estate sector has also slowed in the period under review \n(Table 6). The real value of buildings completed rose by 15,3 per cent in the first eight\nmonths of 2006 compared with the same period in 2005, a lower rate than the 36,6 per\ncent recorded for 2005 as a whole. \nTable 6\nReal value of building plans passed and buildings completed in\nlarger municipalities\nAnnual percentage change\n2003\n2004\n2005\n2006*\nBuilding plans passed\nTotal ....................................................................\n11,3\n35,7\n45,2\n3,2\nResidential ....................................................\n16,3\n42,0\n37,9\n1,2\nNon-residential ..............................................\n3,5\n23,8\n66,3\n13,6\nAdditions and alterations ................................\n6,3\n29,1\n50,4\n0,5\nBuildings completed\nTotal ....................................................................\n6,8\n26,2\n36,6\n15,3\nResidential ......................................................\n8,1\n38,4\n44,6\n14,2\nNon-residential................................................\n8,7\n8,2\n16,6\n10,6\nAdditions and alterations ................................\n1,4\n7,9\n26,4\n24,0\n*\nFigures in this column are the percentage changes for the first eight months of 2006 compared to the first eight\nmonths of 2005\nSource: Statistics South Africa\nSouth African Reserve Bank\n15\nMonetary Policy Review November 2006\nPercentage change over twelve months\n2002\n2003\n2004\n2005\n2006\n0\n5\n10\n15\n20\n25\n30\n35\n40\n \nAbsa House Price Index\n \nStandard Bank House Price Index\nSource: Absa and Standard Bank\nFigure 10 House prices \n1\nThe Absa House Price\nIndex records the total\npurchase price of houses in the\n80 – 400 m2 size category,\nvalued at R2,6 million or less in\n2006 and for which loan\napplications were approved by\nAbsa. The Standard Bank index\nis based on the median price of\nthe full spectrum of recorded\nhouse prices. Standard Bank\nhas a market share of about\n27,7 per cent, and states that\nthese prices are generally highly\ncorrelated with those of the\nDeeds Office.\n16\nFurthermore, the corresponding real value of building plans passed (an indication of future\nconstruction activity) points to a slowdown in building activity, particularly in the residential\nsector. The real value of building plans passed grew by 3,2 per cent year on year in the\nfirst eight months of 2006, compared to growth of 45,2 per cent in 2005. So far in 2006,\nthe value of the residential buildings plans and additions and alterations components grew\nby 1,2 and 0,5 per cent, respectively, while growth in the real value of non-residential\nbuildings plans was 13,6 per cent.\nOn the JSE Securities Exchange SA (JSE), the reassessment of emerging-market\nexposure by international investors which was noted earlier led to a correction in May\nand June of 2006 (Figure 11). The closing levels of the daily indices receded from the\nrecord highs that had been experienced in the preceding period, and the daily all-share\nindex declined by 16,8 per cent from a level of 22 094 on 11 May to 18 380 on 13 June.\nThe resources index fell by 21,0 per cent from 41 609 to 32 860 over the same period.\nHowever, with the support of stronger international commodity prices, the demand for\nresources shares led to an improved performance of the resources index from mid-June.\nThe index recorded a new record high of 44 863 on 25 October 2006, supporting the\nall-share index to a high of 23 489 on the same date. The recent performances of\nfinancial and industrial stocks have been more subdued, however, partly as a result of\ntighter international and domestic monetary conditions.\nFiscal policy \nRevised estimates of key public finance data for the fiscal year 2006/07, together\nwith the medium-term projections for the fiscal years to 2008/09, were published in\nthe Medium Term Budget Policy Statement (MTBPS) released on 25 October 2006\n(Table 7). The budget deficit for 2006/07 is estimated at R7,8 billion, or 0,4 per cent\nof GDP, compared to the 1,5 per cent of GDP projected in February 2006. A budget\nsurplus amounting to 0,5 per cent of GDP is expected in 2007/08, followed by\ndeficits amounting to 0,2 and 0,4 per cent of GDP, respectively, for fiscal years\n2008/09 and 2009/10. \nMonetary Policy Review November 2006\nSouth African Reserve Bank\nIndex\nIndex\n2004\n2005\n2006\nFTSE/JSE all-share index\nFTSE/JSE resources index (right-hand scale)\nFTSE/JSE industrials index\nFTSE/JSE financials index\nFigure 11 Share price indices\n5000\n10000\n15000\n20000\n25000\n15000\n20000\n25000\n30000\n35000\n40000\n45000\n50000\nTable 7\nPublic finance data\nR billions and per cent\n2005/06\n2006/07\n2007/08\n2008/09\n2009/10\nActual\nBudget\nRevised\nMedium-term\nestimates\nestimates\nNational government \nRevenue ..............................\n411,7\n446,4\n466,4\n543,0\n586,4\n633,5\nExpenditure ..........................\n416,7\n472,7\n474,2\n533,7\n590,2\n643,7\nBudget balance* ..................\n-5,0\n-26,4\n-7,8\n+9,3\n-3,8\n-10,2\nAs percentage of GDP:\nBudget balance* ..................\n-0,3\n-1,5\n-0,4\n+0,5\n-0,2\n-0,4\nTotal net loan debt ................\n30,1\n29,6\n28,3\n25,6\n23,7\n22,0\nPSBR** ................................\n-0,7\n2,4\n1,2\n0,5\n1,5\n1,8\n*\nA positive number reflects a surplus and a negative number a deficit\n**\nPSBR: Public-sector borrowing requirement\nSource: National Treasury 2006 Medium Term Budget Policy Statement\nThe revenue estimate for 2006/07, at R466,4 billion or 26,7 per cent of GDP, is\nR20,0 billion more than the estimate provided in the February 2006 Budget. The growth in\nrevenue is in part attributable to the strong growth performance of the economy and robust\nconsumer expenditure. The revised estimate for expenditure in 2006/07 is R474,2 billion,\nor 27,2 per cent of GDP, which is slightly above the R472,7 billion projected in the 2006\nBudget in February. The revised public-sector borrowing requirement is estimated at \n1,2 per cent of GDP in 2006/07, and is projected to decline to 0,5 per cent of GDP in\n2007/08 before increasing to around 1,8 per cent of GDP by 2009/10.\nMonetary conditions\nGrowth in the broad monetary aggregate (M3) showed a downward trend in the period\nunder review, although the twelve-month rate of increase remained at a relatively high level\n(Figure 12). The growth rate for M3 declined from a peak of 26,8 per cent in March 2006\nto 21,9 per cent in September, while the corresponding rates for the narrower M1 and M2\nSouth African Reserve Bank\n17\nMonetary Policy Review November 2006\nPer cent\n2002\n2003\n2004\n2006\n2005\n5\n10\n15\n20\n25\n30\n \nM3\n \nTotal loans and advances to the domestic private sector\nFigure 12 Growth in M3 and in bank loans and advances\n18\naggregates slowed from 24,5 to 15,7 per cent and from 23,3 to 18,9 per cent,\nrespectively, over the same period. \nThe twelve-month growth in total loans and advances to the private sector2 declined\nfrom 24,1 per cent in March 2006 to 22,2 per cent in May before increasing to 26,1 per\ncent in September. Of the asset-backed finance categories, mortgage advances\ncontributed significantly to total loans and advances (Figure 13). Mortgage advances\ngrew at a rate of around 30 per cent on a year-on-year basis between March and\nSeptember, while instalment sale credit and leasing finance continued to moderate,\ndeclining from 19,6 to 16,4 per cent over this period as banks continued with\nsecuritisation activity. In the other loans and advances category, credit card advances\ncontinued to grow strongly at 40,8 per cent in September, although this was well below\nthe rate of 47,4 per cent recorded in December 2005.\nMonetary policy \nSince the publication of the previous Monetary Policy Review there has been a\nsignificant change in the monetary policy stance. In the previous Review it was noted\nthat the MPC had to balance the benign inflation outlook at that time with the evolution\nof a number of risk factors affecting the outlook that had been emerging. In the\nstatement issued after the April meeting, the MPC had warned of these upside risks to\nthe forecast. During the past few months the view of the MPC was that these risks had\nincreased sufficiently to justify pre-emptive action in order to keep CPIX inflation within\nthe target range. Accordingly the repo rate was increased by 50 basis points at each of\nthe past three meetings of the MPC.\nAt the June meeting, the forecast generated by the Bank’s forecasting models showed\na marked deterioration compared to the previous benign outlook. Whereas the previous\nforecast had projected CPIX inflation to peak at a level just below 5 per cent in the first\nquarter of 2007, it was now expected to breach the upper end of the target range at\nthat time and peak at a level of 6,2 per cent. By the following quarter it was expected\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nPercentage change over twelve months\n2002\n2003\n2004\n2005\n2006\n5\n10\n15\n20\n25\n30\n35\n \nTotal loans and advances to the domestic private sector\n \nInstalment sale and leasing finance\n \nMortgage advances\n \nFigure 13 Bank loans and advances\n2\nTotal loans and advances\nto the private sector consist of\ninstalment sale credit, leasing\nfinance, mortgage advances,\noverdrafts, credit card and\ngeneral advances. The first\nthree categories are referred to\nas asset-backed credit, while\nthe last three are referred to as\nother loans and advances.\nto be back below the upper end of the target, and to decline gradually to reach 4,8 per\ncent by the end of 2008. The main reason for the higher trajectory was a significant\nupward revision of the international oil price assumptions.\nA number of risk factors were identified and the risks were seen to be on the upside. On\nthe domestic front, the strong rate of growth of household real consumption expenditure\nwas underlined. Consumer demand was showing no sign of tapering off, and continued\nto be reflected in the growth of credit extension in excess of 27 per cent, and rising\nhousehold indebtedness, which had risen to 68 per cent of annualised household\ndisposable income.\nOf further concern to the committee was the impact of the higher consumer demand on the\ndeficit on the current account of the balance of payments, which in the first quarter of 2006\nhad reached a level of 6,4 per cent of GDP. The deficit had averaged 3,4 per cent and \n4,2 per cent of GDP in 2004 and 2005, respectively. The MPC had previously expressed\nconcern about the deficit on the current account and its possible impact on inflation.\nAt the time of the June meeting, the exchange rate was also identified as a potential risk\nfactor. Previously, the relative stability of the exchange rate that had prevailed for some\ntime had contributed to the positive inflation outlook. By June, the rand had depreciated\nby 13 per cent on a trade-weighted basis since early May. The move in the rand was\nmainly a result of the re-rating of emerging-market risk and a decline in commodity\nprices. In light of these uncertain developments and combined with the possible reaction\nto the current-account deficit, the committee saw the exchange rate outlook as posing\na potential risk to the inflation outlook. \nInternational developments also weighed heavily on the committee’s decision. The\nprimary concern was the international oil price. The price of Brent crude oil had reached\na new record high of just below US$75 per barrel in the third week of April and at the\ntime of the meeting was at a level of around US$68 per barrel. Tight supply and demand\nconditions and geopolitical tensions were identified as the factors that would keep the\nSouth African Reserve Bank\n19\nMonetary Policy Review November 2006\nPer cent\n2002\n2003\n2004\n2005\n2006\nFigure 14 The repo and other short-term interest rates\n6\n8\n10\n12\n14\n16\n18\n \nPrime overdraft rate\n \nRepo rate\n \n3-month NCD rate\n20\noil price at these levels or higher. These developments had by then resulted in the\ndomestic petrol price increasing by almost R1 per litre between April and June 2006.\nAt that stage the economy had shown signs of sustained growth in the second quarter of\n2006 and the view of the committee was that overall growth in 2006 would remain more or\nless in line with potential output. The outlook for world growth, however, remained uncertain.\nAlthough forecasts indicated that robust world growth would continue, it was unclear at that\nstage whether the uncertainties prevailing at the time in the international financial markets\nwere a reflection of a temporary correction or of a more sustained period of volatility which\ncould undermine world growth in general and in emerging markets in particular.\nThere were some favourable factors to the inflation outlook which included continued\nfiscal discipline, the moderate trend in unit labour costs and wage settlements, and\nbenign world inflation forecasts. Although the latest inflation expectations survey\nindicated that there was a slight deterioration in expectations for 2007 and 2008,\nexpectations were still firmly entrenched within the inflation target range. Overall, the\ncommittee concluded that although the forecast was showing that inflation was likely to\nremain within the target range for most of the forecast period, inflation was likely to trend\ntowards the upper end of the range and the risks to the forecast were firmly on the\nupside. Accordingly, the repo rate was increased by 50 basis points.\nThis move, which took a number of analysts in the market by surprise, was interpreted in\nsome quarters as representing a change in the objectives or goals of the MPC. In\nparticular it was noted that the concern of the MPC was no longer with inflation but with\nmacroeconomic balance, whether it is the current account, consumer debt, consumer\ndemand or the exchange rate. However, although the MPC is and should be concerned\nwith such imbalances, the primary objective remains the inflation target, and the\noverriding concern about developments in these variable relates to the impact of these\nimbalances on the inflation outlook. \nIn the subsequent meetings in August and October, the risks to the outlook remained\ngenerally the same. Consumer demand growth continued unabated and in fact increased\nfurther, supported by continued strong credit extension growth, and higher asset prices.\nThe deficit on the current account of the balance of payments, although slightly narrower\nin the second quarter, remained a concern. On the positive side, unit labour costs, fiscal\npolicy and world inflation trends remained supportive of the inflation outlook.\nThere were, however, a number of new developments which are highlighted below. By\nthe time of the August 2006 meeting, CPIX inflation had risen to 4,8 per cent, more or\nless in line with the Bank’s short-term forecast. The longer-term forecast, however, had\ndeteriorated moderately, and CPIX inflation was expected to peak marginally above the\nupper end of the target range for the first two quarters of 2007 and then to decline\nslowly to reach a level marginally above 5 per cent. The October forecast, which is\nreproduced later in this Review, showed a marginal improvement in 2007, where the\npeak was expected to be around 6 per cent, but the longer-term forecast showed\ninflation declining to a level of around 5,4 per cent by the end of 2008. The October\nforecast incorporated the two previous repo rate increases.\nCompared to the previous quarter, inflation expectations in the third quarter of 2006\nincreased in respect of every forecast year. Market inflation expectations as indicated in\nthe breakeven inflation rates also showed that expectations had deteriorated.\nExpectations, as reflected in the surveys, were nevertheless still entrenched within the\ninflation target range during all the forecast years. \nMonetary Policy Review November 2006\nSouth African Reserve Bank\nBy the August meeting the exchange rate had depreciated by a further 2,5 per cent on a\ntrade-weighted basis from the previous meeting. In late June the rand had reached a level\nof around R7,50 to the US dollar as a result of increased global risk aversion as well as\nconcerns relating to the deficit on the current account of the balance of payments.\nHowever, following expectations that the global monetary policy tightening was at or near\nits peak, it appreciated to around R6,90 at the time of the August meeting. By October\nthe rand had depreciated by almost 22 per cent on a trade-weighted basis since May.\nThe MPC noted that at these levels, it is possible that some pass-through to higher\ndomestic prices may occur, and stressed that the challenge for monetary policy is to\nensure that any inflationary effect is minimised.\nProduction price inflation was highlighted as a particular concern in the statement\nreleased after the October meeting. By this time, production prices were rising at year-\non-year rates in excess of 9 per cent, and this was perceived to be a short-term indicator\nof possible pressures on consumer prices. Food price developments were also\nhighlighted. Trends in meat prices were a particular concern, as was the fact that higher\nmaize prices were still not fully reflected in grain product prices at the consumer level.\nFinally, oil prices remained a risk factor over the past months, although by the time of the\nOctober meeting, the price of Brent crude had fallen to below US$60 per barrel. The\nMPC welcomed this development, particularly at the time of a depreciating rand.\nNevertheless the committee still viewed the oil price as a potential risk given the tight\nsupply and demand conditions in the market, the sensitivity of oil prices to geopolitical\ntensions and the OPEC response to the downward trend in the price. \nBy October there had as yet been little response to the changes in interest rates as\ndemand and credit extension remained robust. However, the MPC recognised that there\nare lags in the responsiveness to interest rate changes. For example, the biggest\ncomponent of credit extension is mortgage advances. Given the time taken to effect\nproperty transfers, the current mortgages that are being registered probably reflect\ntransactions that were undertaken two to three months ago. One tentative indication of a\npossible slowdown in demand growth has been seen in new motor vehicle sales which\ndeclined by 3,6 per cent in September on a month-on-month basis. In the third quarter of\nthis year, sales of new motor vehicles declined by 0,3 per cent. The MPC carefully monitors\nthe response to the repo rate increases, and although inflation is still expected to remain\nwithin the target range, albeit at the upper end, the risks are still seen to be on the upside.\nThe outlook for inflation\nThe outlook and uncertainties relating to some of the international and domestic factors\nthat are considered by the MPC in setting monetary policy, including indicators of\ninflation expectations and the fan chart representation of the Bank’s forecast, are\ndiscussed below.\nInternational outlook\nThe world economy continues to perform well, with broad-based expansion\nexperienced in the first half of 2006. Inflation in most major countries remains low by\nhistorical standards, although sustained high rates of global growth have absorbed\nspare capacity and signs of inflationary pressures are beginning to emerge in a number\nof countries. According to the projections published by the IMF in the September 2006\nWorld Economic Outlook (WEO), reproduced in Table 8, world inflation will be 3,8 per\ncent in 2006 and 3,7 per cent in 2007. While the inflation projection for 2006 is\nunchanged from that published in the April 2006 WEO, the projection for 2007 has been\nrevised upward by 0,2 percentage points.\nSouth African Reserve Bank\n21\nMonetary Policy Review November 2006\n22\nTable 8 reveals that global growth is projected at 5,1 and 4,9 per cent in 2006 and 2007,\nrespectively. Both projections are 0,2 percentage points higher than those published in\nthe April 2006 WEO, although the IMF anticipates the balance of risks to be decidedly\non the downside. These risks include the possibility of higher interest rates as monetary\npolicy tightens in response to building inflationary pressure; the threat of volatility in the\noil market related primarily to ongoing geopolitical uncertainties; and the potential for a\nslowdown in the US economy partly owing to the cooling down of the housing market.\nThe potential for a disorderly unwinding of global imbalances remains a concern, even\nthough a smooth unwinding of these imbalances is seen to be the most likely outcome. \nTable 8\nIMF projections of world growth and inflation for 2006 and 2007 \nPer cent\nReal GDP\nInflation rates\n2006\n2007\n2006\n2007\nWorld ...................................................................... (4,9) 5,1\n(4,7)\n4,9\n(3,8)\n3,8\n(3,5)\n3,7\nAdvanced economies ............................................ (3,0) 3,1\n(2,8)\n2,7\n(2,3)\n2,6\n(2,1)\n2,3\nUSA .................................................................. (3,4) 3,4\n(3,3)\n2,9\n(3,2)\n3,6\n(2,5)\n2,9\nJapan ................................................................ (2,8) 2,7\n(2,1)\n2,1\n(0,3)\n0,3\n(0,6)\n0,7\nEuro area .......................................................... (2,0) 2,4\n(1,9)\n2,0\n(2,1)\n2,3\n(2,2)\n2,4\nUnited Kingdom ................................................ (2,5) 2,7\n(2,7)\n2,7\n(1,9)\n2,3\n(1,9)\n2,4\nOther advanced economies .............................. (4,1) 4,1\n(3,7)\n3,7\n(2,3)\n2,3\n(2,1)\n2,2\nOther emerging-market and developing countries .. (6,9) 7,3\n(6,6)\n7,2\n(5,4)\n5,2\n(4,8)\n5,0\nAfrica ................................................................ (5,7) 5,4\n(5,5)\n5,9\n(9,1)\n9,9\n(7,3) 10,6\nCentral and eastern Europe .............................. (5,2) 5,3\n(4,8)\n5,0\n(4,1)\n5,3\n(3,4)\n4,6\nCommonwealth of Independent States ............ (6,0) 6,8\n(6,1)\n6,5 (10,4)\n9,6\n(9,7)\n9,2\nDeveloping Asia ................................................ (8,2) 8,7\n(8,0)\n8,6\n(3,9)\n3,8\n(3,5)\n3,6\nChina .............................................................. (9,5) 10,0\n(9,0) 10,0\n(2,0)\n1,5\n(2,2)\n2,2\nIndia ................................................................ (7,3) 8,3\n(7,0)\n7,3\n(4,8)\n5,6\n(4,9)\n5,3\nMiddle East ...................................................... (5,7) 5,8\n(5,4)\n5,4\n(8,7)\n7,1\n(8,5)\n7,9\nWestern hemisphere .......................................... (4,3) 4,8\n(3,6)\n4,2\n(5,8)\n5,6\n(5,6)\n5,2\nIMF projections for 2006 and 2007 as at April 2006 in parentheses \nSource: IMF World Economic Outlook, April and September 2006\nGrowth in the US, while still strong, is slowing in response to developments in the\nhousing market, higher fuel costs and a tighter monetary policy environment. It is\nexpected that the economy will grow by around 3,4 per cent in 2006 before slowing to\n2,9 per cent in 2007. Inflation is expected to be 3,6 per cent in 2006 and 2,9 per cent\nin 2007. For both 2006 and 2007, the inflation rates forecast for the US reflect an\nupward revision from the April WEO. \nIn the euro area, it is expected that growth will slow to 2,0 per cent in 2007 from 2,4\nper cent in 2006, although both projections have been revised upwards from those\npublished in April. Inflationary pressures continue to build, with inflation expected to\naverage 2,3 per cent in 2006 before edging up to 2,4 per cent in 2007. Domestic\nactivity in Japan has been supported by continued strength in consumption and\nbusiness investment spending, although growth is expected to slow from 2,7 per cent\nin 2006 to 2,1 per cent in 2007. Inflation is expected to increase from 0,3 per cent in\n2006 to 0,7 per cent in 2007. The UK economy is expected to expand by 2,7 per cent\nin both 2006 and 2007, with expected inflation rates closely resembling those of the\neuro area. \nMonetary Policy Review November 2006\nSouth African Reserve Bank\nEmerging-market and developing countries appear set to continue their recent strong\ngrowth performances, and are projected to grow at 7,3 and 7,2 per cent, respectively,\nin 2006 and 2007. Growth in developing Asia, with strong contributions from China and\nIndia, is expected to be 8,7 per cent this year and 8,6 per cent in 2007. Compared to\nthe forecasts in the April WEO, these rates represent increases of 0,5 and \n0,6 percentage points, respectively. Africa, and in particular sub-Saharan Africa, is\nprojected to extend its strongest period of sustained economic expansion since the early\n1970s, growing at 5,2 per cent this year and by 6,3 per cent in 2007 as oil output\nrecovers in Nigeria and new oil fields in Angola and Equatorial Guinea come on stream.\nThe IMF’s projection that growth will slow in the advanced economies is supported by\nthe latest OECD composite leading indicators (CLIs). August 2006 data show weakening\nperformance in the CLI’s six-month rate of change in all the G-7 economies except\nCanada. The CLI for the OECD area decreased by 0,1 percentage points from \n109,7 in July to 109,6 in August, and its six-month rate of change declined for the fifth\nconsecutive month. \nFinally, crude oil prices remain a volatile factor in the international environment. Although\nprices have fallen below US$60 per barrel recently, OPEC will trim its daily production of\ncrude oil by 1,2 million barrels from the beginning of November. Oil prices also remain\nsensitive to geopolitical developments. The outlook as indicated by the futures price of\nBrent crude oil is for oil prices in the region of US$64,50 per barrel in March 2007\n(futures prices as at 26 October were presented in Figure 7).\nOutlook for domestic demand and supply\nThe outlook for the South African economy remains favourable, but most forecasts\nsuggest that the growth rate for 2006 will slow to below the 4,9 per cent recorded last year.\nAlthough it is too early to assess fully the impact of monetary policy actions, and even\nthough indicators such as sales of new motor vehicles suggest some slowing, domestic\ndemand remains resilient and continued high levels of consumer and business confidence\nindicate that significant strength will be sustained in the domestic economy into the second\nhalf of 2006.\nThe latest Reuters consensus forecast, based on the September 2006 survey, is for real\nGDP growth of 4,3 per cent in 2006 and 2007. These forecasts represent the mean of\n16 individual forecasts ranging between 4,0 per cent and 4,6 per cent for 2006, and\nbetween 3,8 per cent and 5,5 per cent in 2007. The National Treasury in its MTBPS\nexpects real economic growth of 4,4 per cent in both 2006 and 2007.\nHousehold consumption expenditure is expected to ease somewhat from the rapid pace\nof the past two years. Consumer confidence, as measured by the FNB/BER consumer\nconfidence index, declined modestly by 3 percentage points to +17 in the third quarter of\n2006. The relatively high level of overall consumer confidence (zero is neutral, and the\nreading for the third quarter is only 4 percentage points below the all-time high achieved\nin the first quarter) implies sustained buoyancy in consumer spending. However, the\nrecent interest rate changes and increasing levels of household debt, as well as a further\ncooling down of house prices are expected to moderate consumer spending somewhat\ngoing forward.\nBy contrast, government consumption outlays can be expected to remain high given\ngovernment’s stated objectives as set out in the most recent MTBPS. Fixed capital\nformation growth will probably accelerate in 2007 given that fiscal policy has become\nmore explicitly growth oriented with greater emphasis placed on the Accelerated and\nSouth African Reserve Bank\n23\nMonetary Policy Review November 2006\n24\nShared Growth Initiative of South Africa (ASGISA), plant and equipment expansions\ndriven by high and increasing levels of capacity utilisation in various industries, and\nescalating infrastructural investment associated with the 2010 Soccer World Cup. \nBusiness conditions indicators, discussed in more detail in Box 2, suggest that business\nconfidence remains upbeat. The RMB/BER Business Confidence Index, which reports\nthe gross percentage of respondents who perceive business conditions as satisfactory,\nrose to 85 per cent in the third quarter of 2006, pointing to sustained strong growth in\nthe broader economy. While there is some evidence in certain subsectors of slowing\nbusiness volumes, respondents’ improving pricing power boosted confidence. The\nTrade Activity Index, compiled from the Absa/SACOB Trade Conditions Survey,\nregistered a reading of 56 in August 2006 compared with 54 in July. The rise in the Trade\nActivity Index can be ascribed to a higher proportion of respondents who reported an\nincrease in sales, new orders and supplier deliveries. The seasonally adjusted\nInvestec/BER Purchasing Managers Index (PMI), which is a barometer of manufacturing\nactivity, declined to 59,8 index points in August 2006, reversing the increase to a record\nhigh of 63,2 points in July. Manufacturing activity remains lively, despite the dip in the\nindex, with supportive domestic demand conditions and export prospects improving on\nthe back of a more competitive currency.\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nBox 2 Selected business conditions indicators \nWhile monetary policy needs to be forward looking, much of the published official data is by its\nnature historical. Monetary policy decision-making is therefore based on a multi-criteria\nassessment using numerous forward-looking indicators, many of them survey-based and\ncompiled by different institutions. A subset of these indicators comprising surveys that measure\nbusiness confidence and trade conditions are discussed in this box. Three of the regular business\nsurveys that are discussed in this Review are the RMB/BER Business Confidence Index, the\nAbsa/SACOB Trade Conditions Survey and the Investec/BER Purchasing Managers Index (PMI).\nMeasures of business confidence provide important information regarding the current and\nexpected state of the economy. It is widely recognised that business people’s subjective\nindividual expectations play a key role in economic developments. The Bureau for Economic\nresearch (BER) derives the RMB/BER business confidence index from the results of quarterly\nbusiness surveys, conducted among some 940 manufacturers, retailers, wholesalers, the motor\ntrade, building contractors, architects, quantity surveyors, engineers, manufacturing purchasing\nPercentage\n1980\n82\n84\n86\n88\n90\n92\n94\n96\n98\n2000\n02\n04\n06\n0\n50\n100\nSources: RMB and BER\nFigure B2.1 \nRMB/BER Business confidence index\nNet positive\nNet negative\nSouth African Reserve Bank\n25\nMonetary Policy Review November 2006\nmanagers, banks, asset managers and life insurers. The business survey questionnaire contains\nquestions on, among other things, current and expected developments regarding sales, orders,\nemployment, inventories, selling prices and constraints. All the above have an impact on\nbusiness confidence. Poor sales, for instance, dampen confidence, as will a lack of orders\nreceived. The various determinants listed above do not always have a similar impact on\nconfidence. This implies that the responses need to be weighted in order to obtain a reliable\ncomposite index. The weights do not remain constant over the course of the business cycle.\nFurthermore, it is difficult to use conventional statistical measures to obtain a weighted index\nbased on subjective input. \nThe Trade Conditions Survey for South Africa is compiled by SACOB and is supported financially\nby Absa. The survey is conducted monthly to reflect the view, by business, on the levels of trade\nin the South African economy. It provides the following indices:\n-\nSA Trade Activity Index (SATAI) – measures the view of business on current trade activity for\nthe past month. \n-\nSA Trade Expectations Index (SATEI) – measures the expectations of business for trade\nconditions six months ahead.\nThis survey reflects a monthly business assessment of the trade environment in the country. The\nSATAI and SATEI are composite indices of sales volumes, new orders, supplier deliveries,\ninventory levels and employment. Although the SATAI and SATEI are the two most prominent\nindices of the survey, the overview of trading conditions also reports on inventory holdings, new\norders, backlog on orders received, supplier deliveries, input and selling-price movements,\nexport and import activity of business, and job creation activities and prospects. Approximately\n750 businesses are polled.\nThe PMI is an economic activity index based on a survey conducted by the BER in conjunction\nwith the Institute of Purchasing Managers in South Africa and sponsored by Investec Asset\nManagement. The index is compiled on a monthly basis by the BER in collaboration with the\nInstitute of Purchasing and Supply South Africa (IPSA) and focuses on business conditions in the\nmanufacturing sector. Around 280 manufacturers are included in the sample. In all countries for\nwhich PMIs are available, the index serves as an important indicator of business conditions. \nPercentage\n2003\n2004\n2006\n2005\n35\n40\n45\n50\n55\n60\n65\n70\n75\n \nCurrent conditions\n \n6-month expectations\nSources: Absa and SACOB\nFigure B2.2 \nTrade conditions\n26\nIndicators of inflation expectations\nMeasures of CPIX inflation expectations have risen recently, although they remain\nconsistent with the inflation target range of 3 to 6 per cent. The results of the latest BER\nquarterly survey of inflation expectations in the South African economy show that the\naverage expectation for 2006 is 4,9 per cent, rising slightly to 5,3 per cent for 2007 and\nthen decreasing again to 5,0 per cent in 2008 (Figure 15). Compared to the survey\nundertaken in the second quarter of 2006, these expectations have been revised\nupward by 0,5 percentage points for 2006, by 0,4 percentage points for 2007, and by\n0,1 percentage points for 2008.\nTable 9 shows the inflation expectations of financial analysts, business executives and\ntrade unions. All expect that CPIX inflation will be higher in 2007 than in 2006, and all\nhave revised upward their forecasts for both years since the survey undertaken in the\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nThe BER questionnaire for the PMI consists of nine questions on the monthly changes in\nbusiness conditions in the manufacturing sector. The respondents have to indicate qualitative\nchanges only, i.e. whether a particular activity has increased, decreased or remained unchanged.\nThe questions focus on business activity (production), new sales orders, employment, backlog\nof sales orders, purchasing inventories, purchasing commitments, purchasing supplier deliveries,\npurchasing prices and purchasing conditions. An index is compiled from the responses to each\nquestion. The index is constructed as the sum of the percentage of respondents who indicated\nan increase plus one-half of the percentage of respondents that indicated no change. This\nprovides an index that ranges between 0 and 100, with 0 indicating a decline experienced by all\nthe respondents and 100 indicating an increase experienced by all the respondents. An index\nvalue of more than 50 indicates increased activity. The questionnaires are completed during the\nsecond and third week of every month and processed during the final week of the month. The\nresults are made available on the first working day of the following month.\n2002\n2001\n2000\n1999\n2003\n2004\n2005\n2006\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\n25\n30\n40\n45\n50\n55\n60\n65\n \nInvestec PMI\n \nManufacturing production volume (right-hand scale)\nSource: Investec and BER\n \nFigure B2.3 \nInvestec Purchasing Managers Index\nPercentage\n3-month annualised percentage change\nsecond quarter of the year. With respect to 2008, analysts and union officials expect\nCPIX inflation to slow once more to 2006 levels. Business executives expect it to remain\nat the level they projected for 2007. While analysts and business executives revised their\n2008 expectations upward, trade unions revised theirs downward, and now expect\nCPIX inflation to average 4,9 per cent in 2008.\nTable 9\nBER survey of CPIX inflation expectations: Third quarter 2006\nPer cent\n2006\n2007\n2008\n1. Financial analysts ..............................................\n[4,4] 4,8\n[4,8] 5,4\n[4,5] 4,7\n2. Business ............................................................\n[4,5] 5,0\n[4,8] 5,4\n[5,0] 5,4\n3. Trade unions ......................................................\n[4,4] 5,0\n[5,0] 5,2\n[5,1] 4,9\nAverage 1 – 3 ........................................................\n[4,4] 4,9\n[4,9] 5,3\n[4,9] 5,0\nSecond-quarter 2006 results in parentheses\nSource: Bureau for Economic Research, University of Stellenbosch\nThe BER inflation expectations are closely aligned with those obtained from the\nSeptember Reuters survey of long-term forecasts for the South African economy, which\nreports that CPIX inflation is expected to average 4,7 per cent in 2006, rising to 5,3 per\ncent in 2007 and then receding to 4,7 per cent in 2008 (Table 10). The median forecasts\nare unchanged from the previous survey except for 2008, where CPIX inflation is\nexpected to be 4,7 per cent as opposed to 4,4 per cent in the August survey. \nSouth African Reserve Bank\n27\nMonetary Policy Review November 2006\nAnnual averages, per cent\n4\n5\n6\n7\n2006\n2007\n2008\nFigure 15 \nBER surveys of CPIX inflation expectations\n5,2\n4,4\n4,4\n4,9\n5,2\n4,6\n4,9\n5,3\n5,0\n4,9\n4,8\n05Q4\n06Q1\n06Q2\n06Q3\nSource: Bureau for Economic Research, University of Stellenbosch\nSurvey conducted during:\n28\nTable 10\nReuters survey of CPIX forecasts: September 2006\nPer cent\n2006\n2007\n2008\n1. Mean ................................................................\n[4,7] 4,7\n[5,3] 5,3\n[4,4] 4,7\n2. Median ..............................................................\n[4,7] 4,7\n[5,2] 5,2\n[4,4] 4,7\n3. Highest ..............................................................\n[5,0] 4,9\n[6,0] 6,0\n[5,1] 5,8\n4. Lowest ..............................................................\n[4,6] 4,5\n[4,5] 4,3\n[3,9] 3,8\nNumber of forecasters ............................................\n[15] 16\n[15] 17\n[9] 12\nAugust survey results in parentheses\nSource: Reuters\nMarket-based expectations of inflation, provided by the breakeven inflation rates\npresented in Figure 16, also suggest that inflation expectations have risen. These rates\nare measured as the spreads between the yields on South African government CPI\ninflation-linked bonds and conventional nominal bonds of similar maturity, and assuming\nno differences in the liquidity of the bonds and their payment patterns and no changes\nto the risk premium associated with future inflation, they provide an indication of\nexpected inflation over the period until the bond matures. \nBreakeven inflation rates obtained from the R197 (maturing 2023), R189 (maturing\n2013) and R198 (maturing 2008) inflation-linked bonds have increased from just above\n4,0 per cent in late February 2006 to between 5,4 per cent for the longer-dated and 6,4\nper cent for the shorter-dated spreads in late October. The spreads on both the R198\nand R189 bonds have been above the upper limit of the inflation target range at times\nduring September and October 2006.\nThe Reserve Bank inflation forecast\nFigure 17 presents the Bank’s latest quarterly forecast for CPIX inflation. The fan chart\nhas a forecast horizon running to the fourth quarter of 2008, and was presented at the\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nPercentage points\n2001\n2002\n2003\n2004\n2005\n2006\nFigure 16 Breakeven inflation rates\n3\n4\n5\n6\n7\n8\n9\n \nSpread between R198 and R194 bonds\n \nSpread between R189 and R153 bonds\n \nSpread between R197 and R186 bonds\nMPC meeting on 11 and 12 October 2006. The Bank’s forecast is for the CPIX inflation\nrate to rise towards the upper end of the target range and remain at levels of around\n6 per cent between the second and fourth quarters of 2007, before declining gradually\nto reach approximately 5,4 per cent by the end of the forecast period. \nA number of factors pose a risk to future outcomes. Strong household consumption\nexpenditure, supported by higher asset prices and increased credit extension to the\nprivate sector, remains one of the primary risk factors which threaten higher inflation. The\nlagged impact of the most recent interest rate changes will however need to be\nmonitored in this regard. Recent developments in food prices and in the exchange rate\nmight also pose a risk to the inflation outlook. The impact of the latter depends on the\nextent of the pass-through from the depreciation since early May to consumer prices,\nand on developments on the current account of the balance of payments, in\ninternational commodity prices, and in the response to the general tightening of\nmonetary policy globally. Finally, although oil prices have receded recently, the MPC\nconsiders the risk to inflation from this source still to be on the upside. \nInflation-targeting central banks communicate regularly with the public on monetary\npolicy issues in an attempt to make monetary policy transparent. In this regard, the\nMonetary Policy Review has since 2001 presented the Bank’s views on current and\nfuture developments in the inflation environment on a biannual basis, including the\nBank’s forecast for CPIX inflation presented in the form of a fan chart. Box 3 provides an\nevaluation of the accuracy of these projections.\nSouth African Reserve Bank\n29\nMonetary Policy Review November 2006\nPer cent\n2004\n2005\n2006\n2007\n2008\nFigure 17 CPIX forecast\n2\n3\n4\n5\n6\n7\n8\n9\n10\nNote: The fan chart uses confidence bands to depict varying degrees of certainty.\nThe darkest band of the fan chart covers the most likely 10 per cent of\nprobable outcomes foreseen for CPIX inflation, including the central\nprojection. Each successive band, shaded slightly lighter and added on\neither side of the central band, adds a further 10 per cent to the probability\nuntil the whole shaded area depicts a 90 per cent confidence interval (see\nBox 4 “Understanding the fan chart” on p. 27 of the March 2001 Monetary\nPolicy Review).\n1\nEhlers, R and Smal, M M.\n2006. The accuracy of the South\nAfrican Reserve Bank inflation\nforecast. Report prepared for the\nMonetary Policy Committee of\nthe South African Reserve Bank,\nPretoria. April. \n2\nThe core model is a\nsimultaneous equation macro-\neconometric model consisting of\n24 stochastic equations and\nseveral identities. A benefit of the\ncore model is that it allows the\nBank to address uncertainty\nwithin a well-defined conceptual\nframework, and examine the key\nrisks associated with any forecast\nin a quantitative sense.\n3\nThe ARIMA model is an\nAuto Regressive Integrated\nMoving Average model based on\nthe historical properties of the\nseries.\n4\nIn the disaggregated inflation\nmodel the main components of\nthe CPIX index are forecasted\nindividually and then aggregated\nwith the appropriate weights to\ncalculate the forecast for CPIX.\n5\nNaïve models include\nautoregressive models such as\nan AR(1) model and random walk\nmodels.\n6\nThe Reuters Survey is\npublished monthly and contains\nforecasts of several\nmacroeconomic variables over a\nrelatively long time span. The\nforecasters consist of economists\nfrom major investment banks,\ncorporations, consulting firms,\nand academic institutions, using\ndifferent methods and models\n(unknown to the authors of this\narticle) to produce their forecasts.\nOn average, the survey contains\n22 forecasts each month, and\nmany of the forecasters have\nparticipated in the survey for\nseveral years. This survey thus\nprovides a useful set of forecasts\nfor benchmarking the Bank’s\nperformance over time.\n30\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nBox 3 The relative accuracy of the South African Reserve Bank inflation\nforecasts1\nForecasters regularly examine their forecast performance in order to improve their forecast capacity,\nmodels and modelling techniques and to examine their understanding of the workings of the\neconomy. This is also an appropriate exercise for central banks since monetary policy is in essence\nforward-looking and models and forecasts play an important role in the policy formulation process.\nForecasts are not expected to be fully accurate, given the complexity and ever-changing nature of\nthe economy as well as a constant procession of unforeseen events. It is also true that in some\ninstances one cannot predict with any accuracy the outcome of certain variables (e.g. stock market\nprice developments or exchange rate movements).\nIn this note, the accuracy of the forecasts for CPIX inflation when using the Bank’s core model2,\nARIMA model3 and disaggregated inflation model4, is compared with two alternative forecasts,\nnamely a naïve forecast5 and the Reuters Consensus Forecast.6\nA forecast is conditional on the information that is available at the time it is prepared. In addition, a\ncomplete set of reliable data may not be available in time for the preparation of the forecasts for the\nMPC. Instead there will be a large amount of partial information and an important task for forecasting\nstaff is to “fill in” the gaps. Data are also often subject to measurement error and revision, which at\ntimes could be substantial, and a model can be a useful device for assessing whether a particular\nrevision needs to be treated with caution.\nAlthough the forecast plays a prominent role, it is important to stress that there is no mechanical\nrelationship between the forecast and the final monetary policy decision, i.e. it does not dictate the\npolicy decision. The final decision by the MPC has to be a professional judgement based not only on\nthe forecast but also on the analysis of a substantial amount of other information provided to the MPC. \nThe forecast accuracy analysis presented here is based on both the mean (i.e. average) value of the\nforecast errors and its variance or standard deviation (as measured by the root mean squared error).\nThe mean value of the forecast errors is used not only as a measure of accuracy, but also to give\nan indication of bias, i.e. systematic over or underestimation. \nA comparison of the average forecast errors of the Bank’s models and the Reuters Survey over the\nperiod May 2003 to December 2005 is presented in Figure B3.1. It is clear that all the forecasts have\n4\n3\n2\nQuarters ahead\n1\n0\n0,2\n0,4\n0,6\n0,8\n1,0\n1,2\n1,4\nFigure B3.1 \nAverage forecast error\nCore model\nReuters Consensus Forecast\nARIMA model\nDisaggregated inflation model\nSource: South African Reserve Bank and Reuters\nSouth African Reserve Bank\n31\nMonetary Policy Review November 2006\naverage errors which are positive and therefore biased, indicating that both the Bank and the\nReuters participants, on average, overestimated the actual outcome of CPIX inflation over all four\nthe forecast horizons, i.e. one-quarter-ahead to four-quarter-ahead forecasts. \nWhen comparing the root mean square errors over the different forecasting horizons as shown in\nFigure B3.2, it is evident that, on average, the forecasts by the Bank’s models outperform those of\nthe Reuters Consensus Forecast in most instances. The exception is the four-quarter-ahead\nforecast by both the ARIMA and disaggregated inflation models, although the differences are\nmarginal. However, the result relating to the ARIMA and the disaggregated inflation model was\nexpected since both these models are by nature designed for forecasting over the short term, and\nare therefore less reliable over the medium to longer term. It also becomes evident that both the\nforecast errors of the Bank’s models and the Reuters Survey increase over the forecast horizon,\nwhich is to be expected since uncertainty increases over time. \nWhen a naïve model is used as a benchmark for the average errors, Theil’s U-statistic7 indicates that\nall three of the Bank’s models and the Reuters Consensus Forecast outperform a naïve AR(1) model\nquite convincingly by remaining well below the threshold value of one over all four forecast horizons.\nThe Bank’s forecasting performance can be compared with those of the 22 individual other\nforecasting agencies included in the Reuters Consensus Forecast.8 The results show that the\nforecast prepared by the Bank’s core model performs consistently better over the one, two and\nthree-quarter-ahead forecast period and is in the fourth position over the four-quarter-ahead\nforecasting period. Comparisons of the inflation forecast errors across the different horizons reveal\nthat, on average, no other forecasting agency has consistently produced more accurate inflation\nforecasts than the Bank in the period May 2003 to December 2005. Furthermore, the analysis\nshows that the Reuters Consensus Forecast performs generally better when compared to most\nindividual forecasters.\nThe Bank’s inflation forecasting performance may also be compared to that of other central banks\nand international agencies that publish inflation accuracy reports. When the average one-year-\nahead inflation forecasting errors of these countries are viewed relative to their respective variances\nas a measure of accuracy, the Bank’s forecasting performance compares well with that of reputable\nagencies.\n4\n3\n2\n1\n0\n0,2\n0,4\n0,6\n0,8\n1,0\n1,2\n1,4\nFigure B3.2 \nRoot mean square error\nCore model\nReuters Consensus Forecast\nARIMA model\nDisaggregated inflation model\nSource: South African Reserve Bank and Reuters\nQuarters ahead\n7\nThis statistic is defined as\nthe ratio of the RMSE of the\nforecast and the naïve model.\n8\nThe Reuters Consensus\nForecast is treated in this\ninstance as a forecasting entity\nin its own right. It is therefore\nnot the average of the forecast\nerrors of all the participants in\nthe Reuters Survey. \n32\nMonetary Policy Review November 2006\nSouth African Reserve Bank\nSouth African Reserve Bank\nAssessment and conclusion\nThe past few months has seen a deterioration in the inflation outlook. On the\ninternational front, some respite has been seen from the higher international oil prices\nwhich have moderated in recent weeks. However, the vulnerability of the oil prices to\ngeopolitical events, the continued strong demand for oil and the tight supply conditions\npoint to a market with upside risk. World inflation appears to be under control particularly\nin the wake of the global monetary tightening. Despite the higher world interest rates,\nhowever, global growth is expected to remain strong.\nDomestically, consumer demand pressures and the exchange rate appear to pose the\nmajor risks to the inflation outlook. Recent exchange rate developments were in part a\nreaction to the deficit on the current account of the balance of payments, but they also\nform a part of the macroeconomic adjustment process. In order for the exchange rate\nto play its part in the adjustment process it is important that the exchange rate changes\nare not simply offset by higher inflation. Monetary policy vigilance is therefore required.\nFuture monetary policy responses will be guided in part by the reaction of demand to\nthe current levels of interest rates. It is still too early to assess the effectiveness of\nprevious monetary policy actions on consumer demand and these developments will be\nclosely watched. To date the MPC has chosen to move interest rates at a moderate\npace in order to minimise the impact on the production side of the economy. The focus\nof the Monetary Policy Committee remains on the inflation target, and it will continue to\nstrive to maintain CPIX inflation within the 3-to-6-per-cent target range.", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/mprnov2006.pdf"}

clean/cb_requests/3050a00a8985163048d1779a29c0d1ba.json

@@ -0,0 +1 @@
+{"doc_id": "3050a00a8985163048d1779a29c0d1ba", "text": "CENTRAL BANK OF KENYA\nOPENING REMARKS\nBY\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCENTRAL BANK OF KENYA\nDURING THE\nEAST AFRICAN LEGISLATIVE ASSEMBLY WORKSHOP ON THE\nEAST AFRICAN MONETARY UNION\nHilton Hotel, Nairobi\n4th March 2010\n\nHonorable Chairperson of Communication, Trade and\nInvestment Committee of East African Legislative Assembly,\nHon. Dahilo;\nRepresentative of the Clerk of EALA, Mr. Enock Musiime;\nHonorable Members of Parliament from EALA;\nHonorable Members of Parliament from Kenya, Uganda,\nTanzania, Burundi, Rwanda;\nDirector of Planning and Infrastructure, EAC Secretariat, Mr.\nPhillip Wambugu and other officials from the EAC Secretariat;\nSenior Government Officials from the EAC;\nDistinguished Delegates;\nLadies and Gentlemen:\n• I am privileged by this invitation to participate in this important\nWorkshop on the East African Monetary Union being held here in\nNairobi. On behalf of the Central Bank of Kenya and on my own\nbehalf, I welcome you all to Nairobi, Kenya.\n• Honorable Members of EALA and EAC National Assemblies, this\nworkshop comes at a time when East Africans are anxious to\nappreciate the benefits from the East African Community Common\nMarket. The protocol on its establishment was signed in November\n2009. The EAC Common Market will ensure free movement of factors\nof people, services and capital across the five Partner States. Under\nthe common market, goods will be freely traded when the region\nattains the status of a fully fledged Customs Union.\n• As the Honorable members are aware, the EAC Common Market\nProtocol has provisions that will guide elimination of capital\nrestrictions that continue to impede free flow of capital among the\nEAC Countries. The cardinal principal of free movement of capital\nties with the next level of integration that is the East African\nMonetary Union.\n2\n\n• In line with the regional integration as stipulated in the Treaty\nprovision, the 6th Extraordinary Summit of EAC Heads of State held\nin Arusha, Tanzania on 20th August 2007 underscored the need to\nmove expeditiously towards establishing a Monetary Union by 2012.\n• Following that Summit Directive, Governors of EAC Central Banks\nmet in Kampala, Uganda in January 2008 to map out a strategic\nframework for fast tracking the establishment of an East African\nMonetary Union by 2012.\n• The meeting of Governors of Central Banks in Kampala decided on a\ncomprehensive study of the East African Monetary Union whose\nmajor objectives were:\ni) To take stock of the current state of preparedness of the EAC Partner\nStates for a Monetary Union. Among these was the economic\nconvergence of member states;\nii) To make proposals on the institutional framework and structure of\nthe proposed East African Monetary Union;\niii) To design a model protocol for the East African Monetary Union that\nwould form the basis for the Monetary Union negotiations among the\nEAC Partner States;\niv) To propose an institutional framework for the East African Monetary\nInstitute which would precede and spearhead the creation of an East\nAfrican Central Bank; and\nv) To propose a mechanism for the monitoring and enforcement of the\nmacroeconomic convergence criteria among the EAC Partner States.\n• Honourable members, the Monetary Affairs Committee (MAC), that\ncomprises Governors of EAC Central Banks considered the terms of\nreference for the Study that were approved by the Council of\nMinisters. The Monetary Affairs Committee through the EAC\nSecretariat engaged the services of the European Central Bank in\n2009 to carry out the study through an internationally competitive\nbidding process.\n3\n\n• As you may be aware Honorable members, the Draft Final Report of\nthe study on the establishment of the Monetary Union among the\nEAC Partner States was validated in a workshop held in Kampala,\nUganda in January 2010. Subsequently, and after incorporating the\ncomments of the validation workshop the Final Report was submitted\nand considered by the Joint Session of the Monetary Affairs\nCommittee, Fiscal Affairs Committee, Capital Markets Insurance and\nPensions Committee held in Arusha on March 1, 2010. In our\nmeeting held on March 1, 2010, the EAC Central Bank Governors and\nPermanent Secretaries from the Ministries of Finance, Trade and\nEAC recommended to the Ministers of Finance that the Study report\non the establishment of the EAC Monetary Union, together with all its\nannexes be adopted as one of the working documents for the East\nAfrican Monetary Union negotiation process.\n• Honorable members, the Committee of Permanent Secretaries from\nthe Ministries of Finance and Governors of the EAC Central Banks\nconsidered a draft road map for the establishment of the East African\nMonetary Union. The Committee noted the following issues under the\ndraft road map that required detailed consideration; Legal,\nInstitutional and Regulatory Framework; Operational Issues and\nPolicy Direction on available options for establishing the East African\nCentral Bank. It was recommended that a High Level Task Force\n(HLTF) be formed to negotiate the East African Monetary Union\nProtocol and review the draft road map.\n• The meeting recommended to kick start the process towards an East\nAfrican Monetary Union by Commencing negotiations on the\ncomprehensive protocol on the establishment of the East African\nMonetary Union. This protocol also features the Statute of the East\nAfrican Monetary Institute and the East African Central Bank. The\nproposed Institute will carry out the preparatory work that will guide\n4\n\nthe region towards formation of an East African Monetary Union and\nits supporting institutions.\n• In order to give this process the necessary institutional momentum,\nour meeting recommended that a sectoral Council of Ministers\nresponsible for Finance be formed to spearhead the East African\nMonetary Union process and proposed their terms of reference. This\nSectoral Council of Ministers of Finance will provide policy guidance\non the negotiations of the East African Monetary Union process.\n• I note from the programme of this workshop that members will be\ntaken through the presentations on the prerequisites for the\nestablishment of the East African Monetary Union; Legal and\nInstitutional Framework for East African Monetary Union;\nPreparatory work for the establishment of a single currency and at the\nend of each presentation, there are plenary discussions. The\nrecommendations that will come from the discussions in this\nworkshop will inform the negotiation process.\n• I wish to remind honorable members that one of the benefits of a\nmonetary union is to reduce the costs and risks of doing business\nacross the national boundaries. Most of these costs are transactions\nrelated. With a single currency, the costs of having to transact in\ndifferent currencies and the risk of adverse exchange rate movements\nthat could impede intra-regional trade within the EAC Community\nwill be removed.\n• Secondly, as banks continue covering the region, they will spread the\nfinancial services for traders but also bring all regulators on a\ncommon platform. A Monetary Union will make this more efficient.\n• Honorable members of Parliament, the gradual convergence of all the\nEast African economies is critical while moving to a Monetary Union.\nFiscal policy and fiscal rules are the most critical and crucial for\neconomic convergence, and perhaps even more importantly, for the\ncredibility and sustainability of the Monetary Union. Monetary Policy\n5\n\nwill be driven by other decisions like exchange rate policy and\nreserves as well. One recent development, for example in Kenya is\ninflation measurement. Inflation will determine the direction of\nmonetary policy in any country. But for EAC members, we have to\ncompare ourselves when we use a common methodology. There are\nmany such challenges and the central banks in the region are ready to\ntackle them in totality to develop more convergence.\n• Honorable members, as I conclude, I see enormous opportunities for\nEast Africans as we move ahead. As East Africans, we need to tap and\nconsolidate these opportunities. Certainly the way ahead will bring\nabout legal and legislative reforms that need to be embraced in the\nroad to a single currency.\n• I thank You Honorable Chair for your kind attention and wish you\nfruitful deliberations over the next two days of your meeting.\n6", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/RemarksEALAWorkshopEACMonetaryUnion.pdf"}

clean/cb_requests/32abb8a0adc58bd2ff29c97b8f07e21d.json

@@ -0,0 +1 @@
+{"doc_id": "32abb8a0adc58bd2ff29c97b8f07e21d", "text": "Click to edit Master subtitle style\nMonetary Policy Review\nApril 2020\nHaving monetary policy \nspace, and using it\n1\n“A good banker will have accumulated \nin ordinary times the reserve he is to \nmake use of in extraordinary times.”\nWalter Bagehot, Lombard Street, 1873\n2\nOverview\n•\nCOVID-19 biggest shock to global \neconomy since Lehman Brothers’ \nbankruptcy\n•\nSA economy likely to contract this year, by \nat least 2%\n•\nMonetary policy has space to respond, \ngiven lower inflation\n•\nStronger recovery needs “bridging” and \nlonger-run fixes\n3\nSharp decline in global growth forecasts\n-4\n-2\n0\n2\n4\n6\n8\n2005\n2006\n2007\n2008\n2009\n2010\n2011\n2012\n2013\n2014\n2015\n2016\n2017\n2018\n2019\n2020\n2021\n2022\ny/y, (%)\nEvolution of trading partner growth forecasts\nPrevious MPR\nMar 2020 forecast\nLatest forecast\nSource: SARB\n4\nMassive spike in volatility and flight to dollars\n0\n10\n20\n30\n40\n50\n60\n70\n80\n90\n2008\n2009\n2010\n2011\n2012\n2013\n2014\n2015\n2016\n2017\n2018\n2019\n2020\nIndex\nVIX\nSource: Bloomberg\n800\n900\n1000\n1100\n1200\n1300\n1400\n2008\n2009\n2010\n2011\n2012\n2013\n2014\n2015\n2016\n2017\n2018\n2019\n2020\nIndex\nBloomberg Dollar Index\nSource: Bloomberg\n5\nMajor central banks cutting interest rates, \nexpanding balance sheets\n0.0\n0.5\n1.0\n1.5\n2016\n2017\n2018\n2019\n2020\n2021\n2022\n%\nG3 interest rates\nSource: SARB. G3 – weighted US, euro area, Japan\n* Dotted line indicates forecasts\nGFC\nQE1\nQE2\nQE3\nCOVID-19\nApril 1: US$ \n5.8 trillion\n0\n1000\n2000\n3000\n4000\n5000\n6000\n7000\n2006\n2008\n2010\n2012\n2014\n2016\n2018\n2020\nUS$ billions\nUS Fed Balance Sheet\nSource: FRED, St Louis Fed\n6\nSudden stop in capital flows to emerging markets\n-100\n-50\n0\n50\n100\n150\n2005\n2008\n2011\n2014\n2017\n2020ytd\nCumulative US$ (billions)\nEM portfolio flows\nEquity Flows\nDebt Flows\nTotal Flows\nSources: IIF and SARB\n7\nEM policy space more available now…\n-175\n-150\n-125\n-100\n-75\n-50\n-25\n0\nTurkey\nSouth Africa\nPeru\nCzech Rep.\nMexico\nIndia\nBrazil\nChile\nIndonesia\nColombia\nPoland\nThailand\nRussia\nMalaysia\nTaiwan\nChina\nChanges since 31 Jan (basis points)\nEM policy rates\nSources: Haver and SARB\n2.0\n2.5\n3.0\n3.5\n4.0\n4.5\n5.0\n5.5\ny/y (%)\nEmerging market inflation\nSources: Haver and SARB\n* Unweighted average of Brazil, Chile, China, Colombia, India, Indonesia, Malaysia, Mexico, \nPeru, Philippines, Russia, South Africa and Thailand \n8\nSA inflation also lower, near the middle of the target\n4.6\n1\n2\n3\n4\n5\n6\n7\n2012\n2013\n2014\n2015\n2016\n2017\n2018\n2019\n2020\ny/y (%)\nHeadline inflation\nSources: Stats SA and SARB\n3-6% inflation target range\nMidpoint\n9\nExpectations better anchored, closer to 4.5% \n1\n2\n3\n4\n5\n6\n7\n2016\n2017\n2018\n2019\n2020\n2021\n2022\ny/y (%)\nTwo-year-ahead inflation expectations, with forecast\nSources: BER and SARB\nMidpoint of inflation target range\n* Dotted lines indicate blended forecasts\n10\nCollapse in world oil prices lowers inflation further\n20\n30\n40\n50\n60\n70\n80\n2017\n2018\n2019\n2020\n2021\n2022\nUS$ per barrel\nEvolution of crude oil forecasts\nActual\nPrevious MPR\nMar 2020 forecast\nLatest forecast\nSource: SARB\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\n25\n30\n2017\n2018\n2019\n2020\n2021\n2022\ny/y, (%)\nEvolution of petrol inflation forecasts\nActual\nPrevious MPR\nMar 2020 forecast\nLatest forecast\nSource: SARB\n11\nWeak demand also disinflationary\n-5\n-4\n-3\n-2\n-1\n0\n1\n2010Q1\n2012Q1\n2014Q1\n2016Q1\n2018Q1\n2020Q1\n2022Q1\n% of potential\nOutput gap\nPrevious MPR\nMarch 2020 forecast\n12\nExchange rate depreciation adds to inflation…\n11.5\n12.5\n13.5\n14.5\n15.5\n16.5\n17.5\n2016\n2017\n2018\n2019\n2020\n2021\n2022\nR/US$ Exchange rate\nActual\nPrevious MPR\nMar 2020 forecast\nLatest forecast\nSource: SARB\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n2017\n2018\n2019\n2020\n2021\n2022\n%\nReal effective exchange rate gap\nPrevious MPR\nMar 2020 forecast\nLatest forecast\nSource: SARB\nValues <0 imply undervaluations\n13\nBut pass-through to inflation now lower… \n0\n5\n10\n15\n20\nRands per dollar\n2015/16\n2008\n1998\n2001\n21.86\n13.50\n12.00\n7.00\n5.25\n0\n10\n20\nPolicy rate\n2020\n14\nImport prices also deflating… not all about pass-through\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\n2015\n2016\n2017\n2018\n2019\ny/y (%)\nImport and consumer prices,\nmatched items\nCPI components\nMatching UVI components\nSource: SARB\n3.7%\n-1.3%\nCPI items\nMatched UVI items\nAverage price change, 2015-2019\n15\nInflation likely in the bottom half of target this year, but stable\n2\n3\n4\n5\n6\n7\n2016\n2017\n2018\n2019\n2020\n2021\n2022\n% change over 4 quarters\nTargeted inflation forecast*\n* The shaded bands show confidence intervals of 10%, 30%, 50% and 70%.\n----- 3–6% inflation target range\nSources: Stats SA and SARB\n4\n59\n33\n4\n0\n10\n20\n30\n40\n50\n60\n70\n80\n<3%\n3% < 4.5%\n4.5% < 6%\n> 6%\nProbability (%)\nHeadline inflation (y/y %)\nInflation forecast probabilities\n92% probability of 3-6% inflation\nSource: SARB\n16\nSA economy expected to contract in 2020\n1983: -1.8\n1992: -2.1\n2009:\n-1.5\n-4.0\n-2.0\n0.0\n2.0\n4.0\n6.0\n8.0\ny/y (%)\nReal GDP growth, y/y\n6 per. Mov. Avg. (Real GDP\ngrowth, q/q SAAR)\n17\nDirect effects of shutdown detract from annual growth\n-2.6\n-3\n-2.5\n-2\n-1.5\n-1\n-0.5\n0\n% points\nDirect costs of 21 day shutdown on 2020 growth\nCommunity\nFinance\nTransport\nTrade\nConstruction\nElectricityGasWater\nManufacturing\nMining\nAgriculture\nGDP\n18\nPartial rebound post-shutdown, but offset by job losses, \nbusiness failures\n0\n1,000\n2,000\n3,000\n4,000\n5,000\n6,000\n7,000\n2005\n2008\n2011\n2014\n2017\n2020\nNo. of companies\nExpected business insolvencies\nSources: Stats SA and SARB\n±1,600 more \nbusinesses \ninsolvent in 2020\n19\n-5.0\n-4.0\n-3.0\n-2.0\n-1.0\n0.0\n1.0\n2.0\n3.0\n4.0\n5.0\n6.0\n2005 2007 2009 2011 2013 2015 2017 2019 2021\ny/y (%)\nExpected employment growth \n(formal sector)\nSources: Stats SA and SARB\n±370,000 \nformal \nsector \njobs lost \nin 2020\nThe economy was in recession before COVID-19\n-2.4\n0.0\n-2.7\n-0.5\n-0.8\n-1.4\n-4\n-3\n-2\n-1\n0\n1\n2\n3\n4\n5\n2014-Q1\n2014-Q2\n2014-Q3\n2014-Q4\n2015-Q1\n2015-Q2\n2015-Q3\n2015-Q4\n2016-Q1\n2016-Q2\n2016-Q3\n2016-Q4\n2017-Q1\n2017-Q2\n2017-Q3\n2017-Q4\n2018-Q1\n2018-Q2\n2018-Q3\n2018-Q4\n2019-Q1\n2019-Q2\n2019-Q3\n2019-Q4\nQ/q SAAR (%)\nReal GDP growth, q/q SAAR\n20\nPast decade the worst for growth on record\n90\n100\n110\n120\n130\n140\n150\n160\n170\n180\n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\nIndices: first quarter of decade = 100\nYear\nReal GDP levels\n1960s\n1970s\n1980s\n1990s\n2000s\n2010s\nSources: Stats SA and SARB\n21\nElectricity shortages became more acute\n-6\n-4\n-2\n0\n2\n4\n6\n2012\n2013\n2014\n2015\n2016\n2017\n2018\n2019\ny/y (%)\nGDP growth\nMining+Manufacturing\nRest of GDP\nElectricity, etc\nPrevious \ntrough in EAF\n66.9%\n60\n62\n64\n66\n68\n70\n72\n74\n76\n78\n80\n2012 2013 2014 2015 2016 2017 2018 2019\n%\nElectricity availability factor\nLowest EAF \non record\n22\nAlso a difficult year for agriculture \n-30\n-20\n-10\n0\n10\n20\n30\nSummer: 2018/19\nWinter:\n2019\nSummer: 2019/20\nAnnual % change\nAgricultural crop estimates*\nWhite maize\nYellow maize\nOther\nWheat\nMalting barley\nTotal\n* Based on tons\nSource: DAFF\n23\nGrowth outlook uncertain into 2021 & 2022\n700000\n720000\n740000\n760000\n780000\n800000\n820000\n840000\n860000\n2017\n2018\n2019\n2020\n2021\n2022\nRmillion\nReal GDP\nJan 2020 forecast\nMarch 2020 forecast\nLatest forecast\nSource: SARB\n24\nDespite hyper-extended fiscal position\n2020/21: \n>10%?\n-10\n-8\n-6\n-4\n-2\n0\n2\n4\n% of GDP\nBudget balance\nSources: Mauro et al., National Treasury\n25\nLong-term lending cost rising\n-1.0\n-0.5\n0.0\n0.5\n1.0\n1.5\n2.0\n2.5\n2015\n2016\n2017\n2018\n2019\n2020\n%\nTerm premium on SA 10-year bond\nSources: Bloomberg and SARB\n26\n1.0\n1.5\n2.0\n2.5\n3.0\n3.5\n4.0\n4.5\n5.0\n5.5\n6.0\n6.0\n6.5\n7.0\n7.5\n8.0\n8.5\n9.0\n9.5\n10.0\n10.5\n11.0\n2015\n2016\n2017\n2018\n2019\n2020\n2015\n2016\n2017\n2018\n2019\n2020\nSA ten-year bond yields\nSource: Haver. *Real yields deflated using BER 5-yr inflation expectations \nEM risk generally up, but SA higher\n-50\n50\n150\n250\n350\n450\n550\n650\n750\n2014\n2015\n2016\n2017\n2018\n2019\n2020\nIndex\nSouth African EMBI+ spread\nSA EMBI+ spread\nDomestic portion\nSources: Bloomberg and SARB\n27\nThis chart shows a decomposition of the SA EMBI+ spread, a measure of sovereign SA risk, into its general (blue) and \nidiosyncratic (red) drivers. General drivers are common to emerging markets; the idiosyncratic ones are SA-specific. \nYield curve now very steep… weakening policy impact\n0\n100\n200\n300\n400\n500\n600\n2015\n2016\n2017\n2018\n2019\n2020\nBasis points\nSpread: 2-year versus 30-year bond\nSource: Bloomberg \n28\nRepo rate down to 5.25%, lowest rate since 2014\n0\n2\n4\n6\n8\n10\n12\n14\n16\n2000\n2004\n2008\n2012\n2016\n2020\n%\nRepurchase rate\nSource: SARB\n29\nPrivate sector credit from banks\nR billions\nCorporations\nHouseholds\nTotal\nStock of debt:\nFeb 2020\nR 1,795.6\nR 1,744.7\nR 3,540.3\nImplied financing costs:\nFeb 2020*\nR 159.5\nR 155.0\nR 314.5\nImplied financing costs:\nMar 2020**\nR 143.2\nR 139.1\nR 282.3\nSavings from March 2020 cut p/a\nR 16.4\nR 15.9\nR 32.3\nShare of GDP\n0.32%\n0.31%\n0.62%\n*Assumes simple interest loan at prime\n**Assumes capital increases in new loans offset repayments of existing loans\nNote: All figures are seasonally adjusted and denominated in R billion, unless otherwise specified\n…frees up cash for households and businesses, less impact on \ngrowth\n30\nLiquidity supporting financial market functioning\n8\n9\n10\n11\n12\n13\n14\n02\n05\n08\n11\n14\n17\n20\n23\n26\n29\n%\nMarch 2020\nSelected government bond yields\nR2030\nR2048\nSource: Bloomberg \nChanges in liquidity strategy announced\n31\nConclusions\n• COVID-19 a major shock to already weak economy\n• Monetary policy space opened, despite currency weakness\n• Ease the cost of adjustment, “bridging” to recovery\n• Broader reforms crucial for improving growth\n32", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Forecast/MPF-presentation-April-2020.pdf"}

clean/cb_requests/35c80ace0f075b6e8ca5d9513cb3741c.json

@@ -0,0 +1 @@
+{"doc_id": "35c80ace0f075b6e8ca5d9513cb3741c", "text": "QPM forecast summary table January 2023 MPC Press report\nSummary tables of quarterly projection model projections\nSummary of selected forecast results\n* Figures below the forecast in parentheses represents the previous MPC forecast\n1. Selected forecast results (quarterly)\nPercentage change\n(year-on-year)\nActual\nForecast\n1\n2\n3\n4\n2021\n1\n2\n3\n4\n2022\n1\n2\n3\n4\n2023\n1\n2\n3\n4\n2024\n1\n2\n3\n4\n2025\nSteady state\n1.\nHeadline CPI\n3.1\n4.9\n4.9\n5.5\n4.5\n5.7\n6.6\n7.6\n7.4\n6.9\n6.5\n5.9\n4.9\n4.6\n5.4\n5.1\n4.9\n4.6\n4.5\n4.8\n4.5\n4.5\n4.5\n4.5\n4.5\n4.5\n(3.1)\n(4.9)\n(4.9)\n(5.5)\n(4.5)\n(5.7)\n(6.6)\n(7.6)\n(6.8)\n(6.7)\n(6.8)\n(6.0)\n(4.4)\n(4.7)\n(5.4)\n(4.6)\n(4.5)\n(4.4)\n(4.4)\n(4.5)\n(4.5)\n(4.4)\n(4.5)\n(4.5)\n(4.5)\n2.\nCore CPI\n2.8\n3.1\n3.1\n3.3\n3.1\n3.6\n4.1\n4.6\n5.0\n4.3\n5.1\n5.4\n5.2\n5.0\n5.2\n5.0\n4.9\n4.6\n4.4\n4.7\n4.4\n4.4\n4.5\n4.5\n4.5\n4.5\n(2.8)\n(3.1)\n(3.1)\n(3.3)\n(3.1)\n(3.6)\n(4.1)\n(4.6)\n(4.8)\n(4.3)\n(5.4)\n(5.7)\n(5.5)\n(5.3)\n(5.5)\n(5.1)\n(4.9)\n(4.7)\n(4.5)\n(4.8)\n(4.5)\n(4.5)\n(4.5)\n(4.5)\n(4.5)\n2. Selected forecast results (annual)\nPercentage changes\n(unless otherwise indicated)\nActual\nForecast\n2019\n2020\n2021\n2022\n2023\n2024\n2025\nSteady state\n1.\nGDP growth\n0.3%\n-6.3%\n4.9%\n2.5%\n0.3%\n0.7%\n1.0%\n2.5%\n(0.3%)\n(-6.3%)\n(4.9%)\n(1.8%)\n(1.1%)\n(1.4%)\n(1.5%)\n2.\nOutput gap\n0.0%\n-3.5%\n-2.0%\n-0.3%\n0.1%\n0.1%\n0.1%\n0.0%\n(0.0%)\n(-3.5%)\n(-2.0%)\n(-0.6%)\n(0.0%)\n(0.2%)\n(0.1%)\n3.\nNominal effective exchange rate\n-7.0%\n-12.8%\n9.9%\n-2.5%\n-3.2%\n-1.5%\n0.4%\n2.5%\n(-7.0%)\n(-12.8%)\n(9.9%)\n(-2.9%)\n(-4.8%)\n(0.9%)\n(0.8%)\n4.\nReal effective exchange rate\n-4.5%\n-10.6%\n11.1%\n-3.2%\n-1.9%\n1.3%\n3.0%\n0.0%\n(-4.5%)\n(-10.6%)\n(11.1%)\n(-3.7%)\n(-3.6%)\n(3.2%)\n(3.3%)\n5.\nReal exchange rate gap\n-1.3%\n-10.9%\n0.0%\n-3.1%\n-4.9%\n-3.5%\n-0.6%\n0.0%\n(-1.3%)\n(-10.9%)\n(0.0%)\n(-3.6%)\n(-7.1%)\n(-4.0%)\n(-0.8%)\n6.\nRepurchase rate (end of period)\n6.50%\n3.50%\n3.61%\n6.54%\n7.08%\n6.91%\n6.89%\n7.00%\n(6.50%)\n(3.50%)\n(3.61%)\n(6.30%)\n(6.55%)\n(6.71%)\n(6.83%)\n7.\nCurrent account balance\n-2.6%\n2.0%\n3.7%\n-0.7%\n-1.7%\n-1.8%\n-1.8%\n(ratio to GDP)\n(-2.6%)\n(2.0%)\n(3.7%)\n(-0.2%)\n(-1.5%)\n(-1.9%)\n(-2.1%)\nNotes \nA. Nominal effective exchange rate: This is based on the bilateral exchange rates of our three largest trading partners (euro area, United States and Japan). The bilateral exchange rates are weighted by export trade weights.\nA. Nominal effective exchange rate: This is based on the bilateral exchange rates of our three largest trading partners (euro area, United States and Japan). The bilateral exchange rates are weighted by export trade weights.\nB. Nominal exchange rate steady state: This is estimated using the Purchasing Power Parity (PPP) condition, which links the depreciation of the nominal exchange rate to the inflation differential between SA and abroad. Given that the REER depreciation is zero at steady state, the nominal exchange rate will \ntherefore depreciate by 2.5% per year in steady state, reflecting the inflation (target) differential between domestic (4.5%) and foreign (2.0%) inflation.\nB. Nominal exchange rate steady state: This is estimated using the Purchasing Power Parity (PPP) condition, which links the depreciation of the nominal exchange rate to the inflation differential between SA and abroad. Given that the REER depreciation is zero at steady state, the nominal exchange rate will \nC. Real effective exchange rate: This is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the trade weighted CPI of euro area, United States and Japan).\nC. Real effective exchange rate: This is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the trade weighted CPI of euro area, United States and Japan).\nD. Real exchange rate gap: The gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation of the currency, and vice versa.\nD. Real exchange rate gap: The gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation of the currency, and vice versa.\nE. Repurchase rate: End of period refers to the average repo rate for the last quarter of the year. The nominal repo rate steady state is calculated as the sum of SA inflation target (4.5%) and the steady state neutral real interest rate (2.5%).\nE. Repurchase rate: End of period refers to the average repo rate for the last quarter of the year. The nominal repo rate steady state is calculated as the sum of SA inflation target (4.5%) and the steady state neutral real interest rate (2.5%).\nF. Steady state: This is the long run value in the model. While model equilibriums can have different values over the medium term, as conditions change, all equilibriums eventually reach a steady state, where they stabilise. For more details on the estimation of steady states, see Botha, De Jager, Ruch and \nSteinbarg (2017) - South African Reserve Bank Working Paper Series No. WP/17/01.\nF. Steady state: This is the long run value in the model. While model equilibriums can have different values over the medium term, as conditions change, all equilibriums eventually reach a steady state, where they stabilise. For more details on the estimation of steady states, see Botha, De Jager, Ruch and \nG. Current account balance as a percentage of GDP: Forecast is obtained from the SARB's Core macroeconometric model.\nG. Current account balance as a percentage of GDP: Forecast is obtained from the SARB's Core macroeconometric model.", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Forecast/Forecast January 2023.pdf"}

clean/cb_requests/35ca7659e1be0050efd55de559e1d6c5.json

@@ -0,0 +1 @@
+{"doc_id": "35ca7659e1be0050efd55de559e1d6c5", "text": "QPM forecast summary table March 2022 MPC Press report\nSummary tables of quarterly projection model projections\nSummary of selected forecast results\n* Figures below the forecast in parentheses represents the previous MPC forecast\n1. Selected forecast results (quarterly)\nPercentage change\n(year-on-year)\nActual\nForecast\n1\n2\n3\n4\n2021\n1\n2\n3\n4\n2022\n1\n2\n3\n4\n2023\n1\n2\n3\n4\n2024\n1.\nHeadline CPI\n3.1\n4.8\n4.9\n5.5\n4.5\n5.8\n6.2\n5.7\n5.4\n5.8\n4.7\n4.3\n4.5\n4.7\n4.6\n4.8\n4.7\n4.6\n4.5\n4.6\n(3.1)\n(4.8)\n(4.9)\n(5.5)\n(4.5)\n(5.6)\n(5.0)\n(4.7)\n(4.3)\n(4.9)\n(4.1)\n(4.5)\n(4.5)\n(4.6)\n(4.5)\n(4.6)\n(4.6)\n(4.5)\n(4.5)\n(4.5)\n2.\nCore CPI\n2.8\n3.1\n3.1\n3.3\n3.1\n3.7\n4.0\n4.3\n4.6\n4.2\n4.9\n5.0\n5.1\n5.1\n5.0\n4.9\n4.8\n4.7\n4.6\n4.7\n(2.8)\n(3.1)\n(3.1)\n(3.3)\n(3.1)\n(3.7)\n(3.8)\n(3.8)\n(4.0)\n(3.8)\n(4.1)\n(4.3)\n(4.5)\n(4.5)\n(4.4)\n(4.5)\n(4.5)\n(4.4)\n(4.4)\n(4.5)\n2. Selected forecast results (annual)\nPercentage changes\n(unless otherwise indicated)\nActual\nForecast\n2019\n2020\n2021\n2022\n2023\n2024\n1.\nGDP growth\n0.1%\n-6.4%\n4.9%\n2.0%\n1.9%\n1.9%\n(0.1%)\n(-6.4%)\n(4.8%)\n(1.7%)\n(1.8%)\n(2.0%)\n2.\nOutput gap\n-0.3\n-4.0\n-2.4\n-1.3\n-0.3\n0.5\n(-0.3)\n(-4.0)\n(-2.6)\n(-1.7)\n(-0.7)\n(0.1)\n3.\nNominal effective exchange rate\n-7.0%\n-12.8%\n10.1%\n-2.0%\n-2.3%\n-0.9%\n(-7.0%)\n(-12.8%)\n(10.5%)\n(-4.0%)\n(-3.9%)\n(-1.4%)\n4.\nReal effective exchange rate\n-4.5%\n-10.6%\n11.4%\n-2.0%\n-0.9%\n1.3%\n(-4.5%)\n(-10.6%)\n(12.0%)\n(-2.5%)\n(-1.3%)\n(1.4%)\n5.\nReal exchange rate gap\n-1.3\n-10.8\n0.3\n-1.6\n-2.4\n-1.1\n(-1.3)\n(-10.8)\n(0.8)\n(-1.5)\n(-2.8)\n(-1.4)\n6.\nRepurchase rate (end of period)\n6.50\n3.50\n3.61\n5.06\n6.10\n6.68\n(6.50)\n(3.50)\n(3.61)\n(4.91)\n(5.84)\n(6.55)\n7.\nCurrent account balance\n-2.6\n2.0\n3.7\n3.0\n1.6\n0.8\n(ratio to GDP) **\n(-2.6)\n(2.0)\n(3.8)\n(0.4)\n(-0.2)\n(-0.6)\nNotes\n1. Nominal effective exchange rate: is based on the bilateral exchange rates of our three largest trading partners (euro area, United States and Japan). The bilateral exchange rates are weighted by export trade weights.\n2. Real effective exchange rate: is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the trade weighted CPI of euro area, United States and Japan).\n3. Real exchange rate gap: The gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation of the currency, and vice versa.\n4. ** Current account balance as a percentage of GDP: forecast obtained from the SARB's Core macroeconometric model.", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Forecast/Forecast March 2022.pdf"}

clean/cb_requests/36380c1321e8b97192083b98660c973f.json

@@ -0,0 +1 @@
+{"doc_id": "36380c1321e8b97192083b98660c973f", "text": "QPM forecast summary table September 2022 MPC Press report\nSummary tables of quarterly projection model projections\nSummary of selected forecast results\n* Figures below the forecast in parentheses represents the previous MPC forecast\n1. Selected forecast results (quarterly)\nPercentage change\n(year-on-year)\nActual\nForecast\n1\n2\n3\n4\n2021\n1\n2\n3\n4\n2022\n1\n2\n3\n4\n2023\n1\n2\n3\n4\n2024\n1.\nHeadline CPI\n3.1\n4.9\n4.9\n5.5\n4.5\n5.7\n6.5\n7.4\n6.6\n6.5\n6.4\n5.8\n4.4\n4.7\n5.3\n4.7\n4.6\n4.6\n4.5\n4.6\n(3.1)\n(4.9)\n(4.9)\n(5.5)\n(4.5)\n(5.7)\n(6.5)\n(7.0)\n(7.0)\n(6.5)\n(6.8)\n(5.9)\n(5.2)\n(5.0)\n(5.7)\n(4.8)\n(4.8)\n(4.7)\n(4.5)\n(4.7)\n2.\nCore CPI\n2.8\n3.1\n3.1\n3.3\n3.1\n3.6\n4.1\n4.5\n5.0\n4.3\n5.4\n5.5\n5.3\n5.2\n5.4\n5.0\n4.9\n4.7\n4.5\n4.8\n(2.8)\n(3.1)\n(3.1)\n(3.3)\n(3.1)\n(3.6)\n(4.1)\n(4.4)\n(5.0)\n(4.3)\n(5.5)\n(5.7)\n(5.6)\n(5.4)\n(5.6)\n(5.2)\n(5.0)\n(4.8)\n(4.6)\n(4.9)\n2. Selected forecast results (annual)\nPercentage changes\n(unless otherwise indicated)\nActual\nForecast\n2019\n2020\n2021\n2022\n2023\n2024\n1.\nGDP growth\n0.3%\n-6.3%\n4.9%\n1.9%\n1.4%\n1.7%\n(0.3%)\n(-6.3%)\n(4.9%)\n(2.0%)\n(1.3%)\n(1.5%)\n2.\nOutput gap\n0.0\n-3.5\n-2.0\n-0.6\n0.0\n0.6\n(0.0)\n(-3.5)\n(-2.0)\n(-0.5)\n(0.0)\n(0.4)\n3.\nNominal effective exchange rate\n-7.0%\n-12.8%\n9.9%\n-2.3%\n-4.0%\n-0.4%\n(-7.0%)\n(-12.8%)\n(9.9%)\n(-2.0%)\n(-4.0%)\n(-1.7%)\n4.\nReal effective exchange rate\n-4.5%\n-10.6%\n11.1%\n-2.8%\n-2.3%\n2.0%\n(-4.5%)\n(-10.6%)\n(11.1%)\n(-2.4%)\n(-1.5%)\n(0.9%)\n5.\nReal exchange rate gap\n-1.3\n-10.9\n0.0\n-2.7\n-5.0\n-3.0\n(-1.3)\n(-10.9)\n(0.0)\n(-2.2)\n(-3.7)\n(-2.8)\n6.\nRepurchase rate (end of period)\n6.50\n3.50\n3.61\n5.60\n6.36\n6.76\n(6.50)\n(3.50)\n(3.61)\n(5.61)\n(6.45)\n(6.78)\n7.\nCurrent account balance\n-2.6\n2.0\n3.7\n0.2\n-1.0\n-1.6\n(ratio to GDP) **\n(-2.6)\n(2.0)\n(3.7)\n(2.0)\n(0.4)\n(-0.4)\nNotes\n1. Nominal effective exchange rate: is based on the bilateral exchange rates of our three largest trading partners (euro area, United States and Japan). The bilateral exchange rates are weighted by export trade weights.\n2. Real effective exchange rate: is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the trade weighted CPI of euro area, United States and Japan).\n3. Real exchange rate gap: The gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation of the currency, and vice versa.\n4. ** Current account balance as a percentage of GDP: forecast obtained from the SARB's Core macroeconometric model.\n5. Repurchase rate : End of period refers to the average repo rate for the last quater of the year.", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Forecast/Forecast September 2022 (1).pdf"}

clean/cb_requests/37e7840002f626abda80176af7db216c.json

@@ -0,0 +1 @@
+{"doc_id": "37e7840002f626abda80176af7db216c", "text": "CENTRAL BANK OF KENYA\nINTRODUCTORY REMARKS\nbbyy\nPROF. NJUGUNA NDUNG’U\nGOVERNOR\nCCEENNTTRRAALL BBAANNKK OOFF KKEENNYYAA\ndduurriinngg tthhee\nSECOND SCENARIO BUILDING WORKSHOP ON\nTHE FUTURE OF FINANCIAL SERVICE DELIVERY IN KENYA\nCrowne Plaza Hotel, Upper Hill\nFriday, April 16, 2010\n\nChief Executives of Commercial Banks here present;\nDistinguished Guests;\nColleagues;\nLadies and Gentlemen;\nI am honoured this morning to be addressing this distinguished gathering. Allow\nme therefore at the outset to thank you for accepting our invitation to attend this\nsecond scenarios building workshop on the future of financial service delivery in\nKenya. I am deeply convinced that our deliberations today will go a long way in\nshaping the future of our financial industry as was the case with the first workshop\nheld last year.\nLadies and Gentlemen: This year, Nairobi Scenario II Workshop comes at a\ntime when a number of countries around the world are increasingly pursuing the\ndevelopment of branchless banking policy frameworks. This indicates branchless\nbanking is receiving increasing international attention and capturing the\nimagination of a wide array of players and international bodies. In particular, as\npart of its commitment to financial inclusion, the G-20 has established the Access\nThrough Innovation (ATI) subgroup of the Financial Inclusion Experts Group.\nLadies and Gentlemen: Kenya’s financial inclusion agenda is premised on its\ncurrent development blueprint, Vision 2030. Under this Vision, Kenya aspires to\nbe a middle income country by 2030 and the financial sector is expected to\nmobilize substantial financial resources required to realize this Vision. In addition,\nsavings rate are targeted to increase to 32.0 percent within the period. For this to\nhappen, financial reach, inclusion, and deepening to increase financial\ninstruments will need to take place. The Central Bank on its part will have to\nfoster stability and accessibility of the Kenyan financial system. In this regard, we\nwill continuously implement reforms to:-\n• Strengthen the banking sector through an enhanced legal and regulatory\nframework including scaling up minimum capital requirements.\n• Address structural rigidities that impact adversely on the cost of financial\nservices. Some of these we need to learn from you and then we can improve the\nenvironment for you.\n2\n\n• Enhance efficiency and safety of payment and settlement systems through use\nof innovative internet and mobile based solutions. As it were, reliable and\nefficient payment systems increase both the effectiveness of monetary policy\nand minimize payment system risks.\nLadies and Gentlemen: In order to accomplish the tenets of branchless\nbanking across the globe, we need to unanimously come up with minimum\nbenchmarks to guide its application and regulation. These may include: the need\nfor creation of enabling environments for private sector initiatives to thrive;\ncontinuous private-public sector dialogue to facilitate formulation of innovative\npolicy solutions; and balancing access with stability to safeguard integrity and\nstability of the financial system.\nFurther, today’s scenario building process will benefit a lot from the lessons of the\nfour scenarios of the Scenario Building 2020 by CGAP and DFID. These are;\n(a) Existence of untapped opportunities in the environment that can be\nexploited through innovation.\n(b) The fact that opportunities are available everywhere including post-conflict\ncountries which can potentially be exploited through branchless banking.\n(c) Successful branchless banking regimes may be vulnerable to disruptions\nlike court decisions and other underlying forces which make branch-\nintensive strategies unviable. However, data-enabled phones may present\nthe best strategy to mitigate such risks.\n(d) Successful transition to a cashless society may present a big challenge to\nsuccessful mobile phone money transfer service providers, regulators, and\nthe economy.\nLadies and Gentlemen: I would like to reiterate that while the Central Bank\nwelcomes innovative products, it evaluates all such products to ensure safety and\nefficiency concerns are adequately addressed. The Central Bank has the necessary\ncapacity to properly evaluate and appraise technology driven financial services to\nensure they meet international standards and provide comprehensive consumer\nprotection.\n3\n\nFinally, may I assure you that the Central Bank will always strive to provide an\nenabling legal and regulatory framework to encourage innovations by all players\nin our financial sector in order to enhance access to financial services. In this\nregard, we will continue to work with stakeholders as we are doing today to put in\nplace an enabling environment for business to thrive.\nWith these remarks, Ladies and Gentlemen, it is now my pleasant duty to declare\nthis workshop open.\n4", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke//images/docs/speeches/2010/Governor%27s%20Remarks%20at%202nd%20Scenario%20Building%20Workshop_2.pdf"}

clean/cb_requests/387a3591fbd6b57f7c6411f9e4ef9ca3.json

@@ -0,0 +1 @@
+{"doc_id": "387a3591fbd6b57f7c6411f9e4ef9ca3", "text": "1 \n \nFinancial Stability Report 30 June 2014 \nPurpose of the Report \nThe Financial Stability Report focuses on an analysis of the current status and potential risks \nof the financial system and an overall assessment of its stability. The main purpose of the \npublication is to strengthen financial system stability and promote the mitigation of systemic \nrisks, by stimulating market participants' evaluation of the wide range of risk factors in the \nfinancial sector in the context of the ever changing domestic, regional and global \nenvironment. This report is also prepared as part of the Multidisciplinary Financial Stability \nCommittee’s mandate to facilitate periodic assessment of the state of financial stability in the \ncountry. This is the maiden Financial Stability Report, prepared as at 30 June 2014. The \nreport shall continue to be published yearly. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n2 \n \nFinancial Stability Report 30 June 2014 \nTABLE OF CONTENTS \nList of Tables ........................................................................................................................ 3 \nList of Figures ....................................................................................................................... 4 \nFOREWORD ......................................................................................................................... 5 \nCHAPTER 1: ESSENCE OF FINANCIAL STABILITY & ROLE OF FINANCIAL \nSECTOR REGULATORS ..................................................................................................... 7 \n1.1. \nEssence of Financial Stability ............................................................................... 7 \n1.2. \nRole of Financial Sector Regulators in Promoting Financial Stability ............ 7 \n1.3 \nKey financial stability segments and variables ................................................... 8 \n1.4 \nOverview of Factors Affecting Financial Sector Stability in Zimbabwe.......... 9 \nCHAPTER 2: MACROECONOMIC ENVIRONMENT AND POTENTIAL RISK \nFACTORS............................................................................................................................ 10 \n2.1 \nIntroduction ......................................................................................................... 10 \n2.2 \nGlobal Macroeconomic Developments .............................................................. 11 \n2.3 \nRegional Economic Developments ..................................................................... 13 \n2.4 \nDomestic Economic Developments .................................................................... 14 \nCHAPTER 3: FINANCIAL SECTOR PERFORMANCE AND RESILIENCE ................ 22 \n3.1 \nIntroduction ......................................................................................................... 22 \n3.2 \nBanking Sector..................................................................................................... 22 \n3.3 \nCapital Market .................................................................................................... 30 \n3.4 \nMarket Turnover................................................................................................. 31 \n3.5 \nInsurance Sector .................................................................................................. 33 \n3.6 \nFinancial Infrastructure ..................................................................................... 40 \nCHAPTER 4: MEASURES TO ENHANCE FINANCIAL STABILITY AND OUTLOOK\n.............................................................................................................................................. 44 \n4.1 \nIntroduction ......................................................................................................... 44 \n4.2 \nMulti-Disciplinary Financial Stability Committee ........................................... 44 \n4.3 \nSystemic Crisis Framework................................................................................ 44 \n4.4 \nMinimum Capital Requirements ....................................................................... 45 \n4.5 \nProposed Amendments to Banking and Insurance Laws ................................ 45 \n4.6 \nResolution of Non-Preforming Loans ................................................................ 46 \n4.8 \nFinancial Stability Outlook ................................................................................ 47 \n4.9 \nConclusion ............................................................................................................ 48 \n \n \n \n \n \n \n3 \n \nFinancial Stability Report 30 June 2014 \nList of Tables \nTable 1: Global GDP Growth rates (%) ............................................................................... 13 \nTable 2: Growth Rates for Sub-Saharan Countries (%) ....................................................... 14 \nTable 3: Capital Ratios, December 2009 – June 2014 ......................................................... 23 \nTable 4: Composition of bank profits ($ millions) .............................................................. 24 \nTable 5: Number of Registered Regulated Entities ............................................................. 33 \nTable 6: Insurance Industry Assets per Class of Business ................................................... 34 \nTable 7: Capital Positions as at 30 June 2014...................................................................... 36 \nTable 8: Minimum Capital Requirements............................................................................ 38 \nTable 9: Financial Market Infrastructure Participants ......................................................... 40 \n \n \n \n4 \n \nFinancial Stability Report 30 June 2014 \nList of Figures \nFigure 1: Real GDP Growth Rate (%) ................................................................................. 15 \nFigure 2: Merchandise Trade (2008-2013) .......................................................................... 17 \nFigure 3: Balance of Payments (US$M) .............................................................................. 18 \nFigure 4: Inflation Developments ........................................................................................ 19 \nFigure 5: Banking Sector Deposits: 2009 - 2014 ................................................................. 25 \nFigure 6: Average Spread between Lending and Deposit Rates .......................................... 26 \nFigure 7: Non-Performing Loans Dec 2009 – June 2014 .................................................... 28 \nFigure 8: Factors affecting credit quality ............................................................................. 28 \nFigure 9: Total Banking Sector Loans Dec 2009 – June 2014 ............................................ 29 \nFigure 10: Sectoral Distribution of Credit as at 30 June 2014 ............................................. 30 \nFigure 11: ZSE Index Trend ................................................................................................ 32 \nFigure 12: Percentage of Business Reinsured by Life and Non-life Companies ................. 35 \nFigure 13: Asset Structure of the Insurance and Pensions Industry as at 31 Dec 2013 ...... 37 \nFigure 14: RTGS System Values for 2009 to 2013 ............................................................. 41 \nFigure 15: Growth in Payment System Access Points......................................................... 42 \nFigure 16: Payment Systems Access Devices ..................................................................... 42 \n \n \n \n5 \n \nFinancial Stability Report 30 June 2014 \nFOREWORD \n1. \nFinancial stability is an important economic policy objective in many jurisdictions. The \nglobal financial and economic crisis of 2007 - 2009 has drawn increased attention on \nthe need for rigorous on-going financial stability assessments. \n2. \nIn this regard and consistent with our mandate to promote financial stability and \ntransparency to markets, the Reserve Bank, in collaboration with other financial sector \nregulators, is publishing this inaugural Financial Stability Report. \n3. \nThe Financial Stability Report (FSR) highlights risks faced by the financial sector in \nZimbabwe, traces the sources and channels of financial distress, notes the pressures \narising from constraints which may arise in the economy, and discusses the way \nforward from a policy perspective. \n4. \nThere are several complex interactions and interdependences among the different \nelements of the financial system and the real economy. \n5. \nFSR provides an assessment of risks to financial stability by focusing on a small \nnumber of key indicators which could enable policy makers and financial system \nparticipants to: (a) better monitor the degree of financial stability, (b) anticipate the \nsources and causes of financial stress to the system and (c) communicate more \neffectively the impact of such conditions. \n6. \nThe current report is set in a global environment where the international financial \nsystem is showing strong signs of convergence to stability. In most developed \neconomies such as the USA and the EU, banking institutions have returned to \nprofitability after surviving shocks from the global financial and economic crises. \n7. \nFor Sub-Saharan Africa, central banks are closely monitoring developments regarding \nthe planned gradual exit from quantitative easing by the Federal Reserve as it has the \npotential to reverse capital flows to the region with ramification on liquidity. \n8. \nFurther, the reversal in capital flows is likely to be exacerbated by the anticipated \nbalance sheet consolidations by some corporate companies in developed countries that \nbenefited from quantitative easing. \n9. \nRisks to financial stability in Zimbabwe remain high owing to structural rigidities in \nthe economy. On its part, the Reserve Bank has played a pivotal role in boosting the \n \n \n6 \n \nFinancial Stability Report 30 June 2014 \nresilience of individual banking institutions and the banking system by increasing the \nsector’s capitalization requirements and credit risk provisioning levels. \n10. The Bank has also put in place various frameworks to facilitate early identification of \nvulnerabilities in the financial system and prompt remedial and corrective action. \n11. The Reserve Bank has also announced plans to resume the Lender of Last Resort \nFacility and to resolve the sticky issue of non-availability of acceptable collateral to \naccess the fund through the use of treasury bills. \n12. Meanwhile, the Deposit Protection Corporation, the Insurance and Pensions \nCommission and the Securities and Exchange Commission have also instituted a wide \nspectrum measures to promote the stability of the financial sector. \n13. It is in this vein that it is envisaged that the implementation of such measures will lead \nto greater stability in the financial system in Zimbabwe. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n7 \n \nFinancial Stability Report 30 June 2014 \nCHAPTER 1: ESSENCE OF FINANCIAL STABILITY & ROLE OF \nFINANCIAL SECTOR REGULATORS \n \n1.1. Essence of Financial Stability \n1.1.1. A strong financial system plays a critical role in enabling growth and reducing \nvulnerability to crises. This mitigates the likelihood of disruptions in the financial \nintermediation process that are severe enough to significantly impair the allocation \nof savings to profitable investment opportunities. \n1.1.2. Financial stability is an essential requirement not only for monetary stability, but also \nfor healthy development of the economy. \n1.1.3. Financial stability refers to a condition in which the financial system – which \ncomprises financial institutions, financial markets and market infrastructures – \nis capable of facilitating real economic activities smoothly and unraveling \nfinancial imbalances arising from shocks. \n1.1.4. Meanwhile, financial instability entails heavy costs for an economy since the \nvolatility of price variables in the financial markets increases economic risks and \nfinancial institutions or corporations may even go bankrupt. In addition, economic \ndevelopment can be limited and the efficiency of resource allocation is reduced. \n1.1.5. Over the last five years, the Zimbabwean economy has experienced economic growth \nas well as periods of economic slowdown. Against this backdrop, the government \nand financial sector regulators place significant emphasis on financial stability when \nimplementing their policies. \n1.2. Role of Financial Sector Regulators in Promoting Financial Stability \n1.2.1. Empirical results confirm that strong linkages exist between financial stability and \neconomic growth. In particular, the financial crises experienced all over the world \ndemonstrate beyond doubt that a sound financial system is essential for economic \nprosperity as well as social welfare and national security. \n1.2.2. In Zimbabwe, following the introduction of the multicurrency system, there has been \na renewed emphasis on financial sector stability as one of the pre-requisites for the \npromotion and achievement of economic growth and development. \n \n \n8 \n \nFinancial Stability Report 30 June 2014 \n1.2.3. This regulatory emphasis comes at a time when a number of banks are already faced \nwith financial challenges caused by macroeconomic difficulties and other institution \nspecific challenges. \n1.2.4. Problems in the financial sector have had profound effects on other sectors of the \neconomy as banks occupy a pivotal role in the economic process of the country. \n1.2.5. Given this, the Reserve Bank has sharpened its approaches and techniques for \nidentifying and monitoring potential risk factors in the financial sector, to prevent \nthem from causing financial system unrest. \n1.2.6. In view of the multifaceted and multi-dimensional nature of financial stability, a \nMultidisciplinary Financial Stability Committee was established in 2012 \nincorporating all financial sector regulatory agencies. The committee is a forum for \npromoting financial stability, exchanging of ideas and making policy \nrecommendations on financial sector stability. \n1.3 Key financial stability segments and variables \n1.3.1 The financial sector regulators use a number of quantitative measures to assess \nfinancial stability including the set of Financial Soundness Indicators developed by \nthe IMF in 2006 and other monitoring variables which focus on market pressures, \nexternal vulnerability and banking system vulnerability. The focus of the financial \nstability assessment is outlined in Box 1. \nBox 1: Financial stability segments \na) The real sector is described by GDP growth, the fiscal position of the government and \ninflation. GDP growth reflects the ability of the economy to create wealth and its risk of \noverheating. The fiscal position of the government mirrors its ability to find financing for its \nexpenses above its revenue (and the associated vulnerability of the country to the unavailability \nof financing). Inflation may indicate structural problems in the economy. \nb) The corporate sector’s riskiness is assessed by its leverage and expense ratios, its net foreign \nexchange exposure to equity and the number of applications for protection against creditors. \nc) The household sector’s health can be gauged through its net assets (assets minus liabilities) \nand net disposable income (earnings minus consumption minus debt service and principal \npayments). Net assets and net disposable earnings can measure households’ ability to weather \n(unexpected) downturns. \nd) The conditions in the external sector are reflected by real exchange rates, foreign exchange \nreserves, the current account, capital flows and maturity/currency mismatches. These variables \n \n \n9 \n \nFinancial Stability Report 30 June 2014 \ncan be reflective of sudden changes in the direction of capital inflows, of loss of export \ncompetitiveness, and of the sustainability of the foreign financing of domestic debt. \ne) The financial sector is characterised by monetary aggregates, real interest rates, risk measures \nfor the banking sector, banks’ capital and liquidity ratios, the quality of their loan book, \nstandalone credit ratings and the concentration/systemic focus of their lending activities. These \nproxies can be reflective of conditions in the banking or financial sector and, if a crisis occurs, \nthey can gauge the cost of such a crisis to the real economy. \nf) Variables relevant to describe conditions on financial markets include equity indices, corporate \nspreads, liquidity premia and volatility. High levels of risk spreads can indicate a loss of \ninvestors’ risk appetite and possibly financing problems for the rest of the economy. Liquidity \ndisruptions may be a materialisation of the market’s ability to efficiently allocate surplus funds \nto investment opportunities within the economy. \n1.3.2 The regulators use several sectoral variables individually and in combination to \nanalyze the stability of financial institutions, markets and the overall financial system. \n1.4 Overview of Factors Affecting Financial Sector Stability in Zimbabwe \n1.4.1 Notwithstanding significant progress made in stabilizing the economy through \nadoption of the multicurrency system the following factors have presented challenges \nto financial stability: \na) Dollarization has imposed financial constraints on the government and \neconomic agents - as monetization of deficits is not possible; \nb) Low consumer confidence in the financial sector thereby affecting attainment \nof critical mass in the sector. \nc) The loss of monetary policy autonomy has meant limited counter-cyclical \nmonetary policy; and \nd) There is limited Reserve Bank capacity to provide liquidity assurance through \nthe lender of last resort function. \n \n \n \n \n \n \n \n10 \n \nFinancial Stability Report 30 June 2014 \nCHAPTER 2: MACROECONOMIC ENVIRONMENT AND \nPOTENTIAL RISK FACTORS \n2.1 Introduction \n2.1.1 Sources of shocks and their transmission mechanisms have become diversified and \ncomplex, influenced by the strengthening of linkages between domestic and global \nfinancial markets, and between financial markets and financial institutions. \n2.1.2 The country registered positive growth rates of 5.4% (2009), 11.4% (2010), 11.9% \n(2011) and 10.6% (2012). The growth rate is, however, estimated to have slowed \ndown to 4.5% in 2013 and is projected to maintain positive growth rates in the outlook \nperiod. Inflation which is a major threat to financial stability has also hovered well \nbelow 5% which is lower than the regional average. \n2.1.3 Of particular concern, however, is the country’s current account deficit of about $3.43 \nbillion as at 31 December 2013, representing 25.4% of GDP. Export performance \ndeteriorated over the year by 3%, owing to the decline in mineral and manufacturing \nexports. In addition, the country continues to absorb a disproportionately high level \nof imports mainly comprising of finished goods. \n2.1.4 The major consumer of Zimbabwean exports is South Africa which consumes about \n55.9%, followed by Mozambique and China. \n2.1.5 The prolonged but receding Euro zone debt crisis has had the effect of reducing \ndemand for commodities owing to fiscal consolidations currently being undertaken \nby most EU governments. This will weaken profitability of exporting firms resulting \nin their constrained capacity to repay borrowings from the financial sector. \n2.1.6 In some cases, this has propagated to households, as firms undertook their own \nbalance sheet consolidations to ensure survival which may include employee \nretrenchments. \n2.1.7 The retrenchment, if widespread, can result in increased defaults in banking \ninstitutions’ retail portfolios and insurance companies’ policies and rentals. \n \n \n11 \n \nFinancial Stability Report 30 June 2014 \n2.1.8 Threats arising from the global economy are therefore significant. \n2.1.9 The absence of robust credit reference services has heightened the possibility of an \nunsustainable household debt. Banking institutions have tried to mitigate this by \nrestricting consumer loans to individuals who receive their salaries through them. \n2.1.10 The absence of an active money market has led investors to scramble for the safe \nassets on the properties market. This has seen a sustainable increase in property prices \nand rentals since the advent of the multicurrency system. The attractive returns \ncurrently obtainable on the properties market coupled with depressed new properties \ndevelopments has presented scope for a property bubble. The bubble, is however, \ncurrently being countered by the liquidity challenges facing the economy. \n2.2 Global Macroeconomic Developments \n2.2.1 The global financial system moved toward a path of greater financial stability in 2013 \nand the first half of 2014, amid gradual strengthening of economic recovery in some \nadvanced economies. However, economic activity in emerging market economies \nslowed leading to a slight moderation in overall global economic growth. \n2.2.2 Against this background, the global economy is estimated to have moderated from a \ngrowth of 3.2% in 2012, to 2.9% in 2013, on account of shocks that hit the \ninternational economy. First, was the ratcheting up of financial stress in the Euro area. \nSecond, domestic demand in many economies in Asia and Latin America (notably \nBrazil, China, and India) slowed owing to weaker external demand from Europe but \nalso due to domestic factors. \n2.2.3 The U.S. economy remained at the center of global events. Private demand remained \nstrong but fiscal consolidation weighed down on economic activity. As such, the US \neconomy grew by 1.6% in 2013, largely reflecting a prolonged budget sequester. \nHowever, market and liquidity risks remained elevated amid the expectations of \nreduced monetary accommodation as this prompted further global market \nadjustments and exposed the global economy to systemic financial vulnerabilities. \n \n \n12 \n \nFinancial Stability Report 30 June 2014 \n2.2.4 The euro area contracted by 0.4% in 2013, compared to a contraction of 0.6 % in \n2012. The euro area continued to face lingering challenges emanating from the \nunfinished business of restoring financial stability and credit transmission as well as \nreducing the corporate debt overhang. \n2.2.5 Emerging market economies, however, are estimated to have grown by 4.5% in 2013, \ndown from 4.9% in 2012, as a result of tighter global financial conditions. Bond \nmarkets were more sensitive to changes in accommodative monetary policies in \nadvanced economies because foreign investors crowded into local markets. \nMoreover, the emerging market fundamentals weakened in recent years, after a \nprotracted interval of credit expansion and rising corporate leverage. \n2.2.6 Growth in the Middle East and North Africa is estimated at 2.2% in 2013, largely on \naccount of lower oil production. \n2.2.7 The IMF projected a growth of 3.2% in 2014, driven largely by the advanced \neconomies. The impulse to global growth is expected to come mainly from the United \nStates, where activity will move into higher gear as fiscal consolidation eases and \nmonetary conditions stay supportive. \n2.2.8 Table 1 below shows the International Monetary Fund (IMF) Global GDP Growth \nrates for the period 2011 to 2014. \n \n \n \n13 \n \nFinancial Stability Report 30 June 2014 \nTable 1: Global GDP Growth rates (%) \n \n2011 \n2012 \n2013 \n(Estimate) \n2014 \n(Projection) \nGlobal growth \n3.9 \n3.2 \n3.0 \n3.6 \nAdvanced Economies \n1.7 \n1.5 \n1.3 \n2.2 \nUnited States \n1.8 \n2.8 \n1.9 \n2.8 \nEuro zone \n1.5 \n-0.6 \n-0.5 \n1.2 \nUnited Kingdom \n1.1 \n0.2 \n1.8 \n2.9 \nJapan \n-0.6 \n2.0 \n1.5 \n1.4 \nEmerging and \nDeveloping Economies \n6.2 \n4.9 \n4.7 \n4.9 \nChina \n9.3 \n7.7 \n7.7 \n7.5 \nIndia \n6.3 \n3.2 \n3.8 \n5.1 \nRussia \n4.3 \n3.4 \n1.3 \n1.3 \nBrazil \n2.0 \n0.9 \n2.3 \n1.8 \nSub-Saharan Africa \n5.5 \n4.9 \n4.9 \n5.4 \nSouth Africa \n3.5 \n2.5 \n1.9 \n2.3 \nWorld Trade Volume \n6.1 \n2.7 \n3.0 \n4.3 \nSource: World Economic Outlook, April 2014 \n2.3 Regional Economic Developments \n2.3.1 Sub-Saharan Africa is estimated to have maintained a 4.9% growth rate in 2013, on \nthe back of continued strong domestic demand in most of the region. Growing trade \nties with Asia are envisaged to play a major role in the region’s recovery, primarily \nthrough commodity markets. Growth was particularly strong in oil exporting and \nlow income countries. However, tightening capacity constraints, falling commodity \nprices, less policy support, and slowing credit weighed down on economic activity \n2.3.2 Angola benefited from a recovery in oil production. High oil prices underpinned \nstrong growth in Nigeria, notwithstanding temporary downdrafts from security \nproblems in the north and oil theft. In Ethiopia, declining coffee prices and supply \nbottlenecks slowed growth slightly from a very high level. However, South Africa’s \ngrowth slowed further, in large part due to tense industrial relations, anemic private \ninvestment, and weaker consumption growth, the latter affected by slowing \ndisposable income growth and weakening consumer confidence. \n2.3.3 Estimated growth rates for sub-Saharan Africa are indicated in table 2. \n \n \n \n14 \n \nFinancial Stability Report 30 June 2014 \nTable 2: Growth Rates for Sub-Saharan Countries (%) \n \n2011 \n \n2012 \n \n2013 \n(Estimate) \n2014 \n(Projection) \nSub-Saharan Africa \n5.5 \n4.9 \n4.9 \n5.4 \nOil Exporters \n6.3 \n6.3 \n5.8 \n6.7 \nMiddle-Income Countries \n3.5 \n3.8 \n3.0 \n3.4 \nLow-Income Countries \n6.5 \n4.9 \n6.5 \n6.8 \nSource: World Economic Outlook, April 2014 \n \n2.3.4 Spillovers from sluggish external demand, reversal of capital flows, and declines in \ncommodity prices are, however, expected to pose downside risks to growth prospects \nin many countries in the region. \n2.3.5 Further, the region remains vulnerable to downturns in the growth projectile of \ndeveloped countries and to external shocks such as sharp increase in food and fuel \nprices. These price shocks are likely to lead to higher inflation and deteriorating \ncurrent account deficits in a number of fuel importing countries. \n \n2.4 Domestic Economic Developments \n2.4.1 The Zimbabwean economy has been on an upward growth trajectory since the \nadoption of the multiple currency regime in 2009, registering growth rates of 5.4% \nin 2009, 11.4% in 2010, 11.9% in 2011 and 10.6% in 2012. The growth rate is, \nhowever, estimated to have slowed down to 4.5% in 2013. \n \n \n \n \n \n \n \n \n \n \n \n \n \n15 \n \nFinancial Stability Report 30 June 2014 \nFigure 1: Real GDP Growth Rate (%) \n \nSource: ZIMSTAT, Ministry of Finance and Reserve Bank \n* Estimate ** Projected \n2.4.2 Economic performance remains fragile, on account of the various challenges the \neconomy is facing, notably supply side bottlenecks, liquidity shortages, lack of long \nterm financing, competition from cheap imports, and the slow pace of recovery in the \nadvanced economies. \n2.4.3 Furthermore, the slow recovery in global economic activity continued to weigh down \nthe economic growth prospects in emerging and developing economies, through trade \nand financial channels, with negative spillover effects on commodity dependent \ncountries like Zimbabwe. \n2.4.4 The economy is projected to further decelerate to a growth rate of 3.1% in 2014. As \nsuch the economy is vulnerable to adverse developments with respect to default \nconditions in light of the projected slowdown in economic growth. The favourable \neconomic policies announced in the new economic blue print, ZimAsset are, \nhowever, expected to encourage these sectoral investments. \n2.4.5 The possibility of a poor rainy season as well as the expected softening of \ninternational commodity mineral prices may pose downside risks to the agriculture \nand mining sectors, with adverse impact on the whole economy. \n-14.8\n5.4\n11.4\n11.9\n10.6\n4.5\n3.1\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n2008\n2009\n2010\n2011\n2012\n2013*\n2014**\nReal GDP Growth Rate (%)\nReal GDP Growth Rate (%)\n \n \n16 \n \nFinancial Stability Report 30 June 2014 \n2.4.6 Risks to the attainment of the 2014 economic growth rates emanate from the \nfollowing: \n \nbudget pressures, particularly from employment costs and lack of fiscal space; \n \nlow Foreign Direct Investment. \n \nslow progress on the debt resolution and the re-engagement process; and \n \nslow recovery in the global economy. \nDefault Conditions… \n2.4.7 The sluggish rate of economic growth combined with company closures and low \ndisposable incomes will affect aggregate demand in the economy and resultantly \nconstrain the ability of borrowers to meet their loan obligations. \n2.4.8 Furthermore, the weak performance of the economy will undoubtedly have an impact \non employment levels as companies are likely to streamline operations and lay off \nworkers in the process. The impact of such a development is anticipated to heighten \ncredit risk in the banking sector in view of the level of concentration of loans to \nindividuals at 25% as at 30 June 2014. \n2.4.9 Improvement of default conditions in the financial sector is also dependent on the \nimprovement of liquidity conditions in the economy, general improvement in \ndisposable incomes and an increase in aggregate demand for locally produced goods. \nIn the absence of significant FDI inflows and offshore credit lines, liquidity \nconditions are likely to remain largely constrained. \n2.4.10 The envisaged recapitalisation of the central bank is a key component to the \nimprovement of liquidity conditions as it will enable the central bank to fulfill its \nlender of last resort function, thereby easing liquidity bottlenecks in the financial \nsystem. \n2.4.11 An improvement in default conditions will therefore require a multi-pronged \napproach which will address macro and microeconomic challenges that are giving \nrise to heightened default conditions. \n \n \n17 \n \nFinancial Stability Report 30 June 2014 \na) External Sector Developments \nBalance of Payments Developments \n2.4.12 The country’s external sector position continued to be under considerable pressure \nowing to supply gaps in the economy which have seen the economy relying heavily \non imported products, against subdued export performance. \n2.4.13 The situation has been compounded by continued industrial capacity underutilization, \ncost of production, and closure of some companies due to loss of competitiveness. \n2.4.14 Moreover, weakening international commodity prices, coupled with the slow-down \nin domestic economic activity, on account of tight liquidity conditions, continue to \nhamstring export growth. \n \nMerchandise Trade Developments \n2.4.15 The recurrent mismatch between exports and imports has continued to weigh heavily \non the trade and current accounts of the balance of payments. \n2.4.16 Imports declined by 11.3% from US$7.56 billion in 2011 to US$6.71 billion in 2012, \nreflecting weak aggregate demand in the economy and a slow-down in economic \nactivity. The major declines were recorded in the importation of motor vehicles, \nchemicals, crude materials and machinery. \nFigure 2: Merchandise Trade (2008-2013) \n \nSource: Reserve Bank and ZIMSTAT \n \n1660\n1613\n3244\n4416\n3808\n3694\n2630\n3213\n5162\n7562\n6710\n6808\n0\n2000\n4000\n6000\n8000\n2008\n2009\n2010\n2011\n2012\n2013\n Exports f.o.b\n Imports f.o.b\n \n \n18 \n \nFinancial Stability Report 30 June 2014 \n2.4.17 Despite the retreat in merchandise trade in 2012, export and imports deteriorated \nmarginally to US$3.8 billion and US$6.8 billion in 2013. Nonetheless, export \nperformance remains outweighed by the import bill on account of persistent capacity \ngaps that has occasioned import dependence in the economy \nCurrent Account Developments \n2.4.18 In concomitance with merchandise trade developments, the current account deficit is \nestimated to have widened from US$3.04 billion in 2012 to US$3.43 billion in 2013. \nResultantly, the current account deficit of 24.4% and 25.4% of GDP for 2012 and \n2013, respectively remains high by international standards. Within the auspices of \nSADC regional integration agenda, the country is expected to achieve a current \naccount deficit of less than 9% of GDP. \n2.4.19 On the other hand, the capital account registered a surplus of US$1.72 billion in 2012 \nand is estimated to have further increased to US$2.72 billion in 2013. The capital \naccount surplus, however, continued to be driven mainly by debt creating short term \nand long term capital flows whilst foreign direct and portfolio investments have \nremained subdued. \n \nReflecting developments on both the current and capital account, the overall balance \nof payments position improved from a deficit of US$435.3 million in 2012 to a deficit \nof US$348.4 million in 2013. \n \nFigure 3: Balance of Payments (US$M) \nSource: Reserve Bank and ZIMSTAT \n-775.3\n-1224.1\n-1878.5\n-3385.6\n-3042.4\n-3432.2\n272.7\n586.9\n586.7\n1633.4\n1721.8\n2723.4\n-4000.0\n-3000.0\n-2000.0\n-1000.0\n0.0\n1000.0\n2000.0\n3000.0\n4000.0\n2008\n2009\n2010\n2011\n2012\n2013\nUS$ Millions\nCurrent Account\nCapital Account\nOverall Balance\n \n \n19 \n \nFinancial Stability Report 30 June 2014 \n \n2.4.20 The weak external sector position, coupled with lack of balance of payments support \nwill further worsen the liquidity situation obtaining in the economy. This will in turn \nconstrain credit creation to the productive sectors of the economy, thus further \ncurtailing economic growth in 2014. \n2.4.21 Against the background of a difficult external position, the country’s external debt \nstock stood at US$7.8 billion on account of the capitalization of interest charges by \nthe country’s creditors and additional offshore credit lines secured by the private \nsector. \n2.4.22 Overall, the economy is estimated to have grown by 3.4% in 2013, largely driven by \nmining (6.5%), electricity and water (4.2%), transport and communication (3.4%), \ndistribution, hotels and restaurants (3.4%), finance and insurance (2.6%), and \nmanufacturing (1.5%). \nb) Inflation Developments \n2.4.23 The country’s headline inflation generally followed a downward trend in 2013, easing \nfrom 3.02% in February 2013, to 0.54% in November 2013. Annual average inflation \nfor 2014 is projected at -0.05%. \nFigure 4: Inflation Developments \n \n \n-2\n-1\n0\n1\n2\n3\n4\n5\n6\n15-Jan\nApr-11\nJul-11\nOct-11\nJan-12\nApr-12\nJul-12\nOct-12\nJan-13\nApr-13\nJul-13\nOct-13\n(%)\nSource: ZIMSTAT, June 2014\nAnnual Inflation Profile (%)\n \n \n20 \n \nFinancial Stability Report 30 June 2014 \n2.4.24 The combined effect of stable international oil and food prices, the depreciation of \nthe South African rand against the US dollar and the tight liquidity led to the \ndeceleration in inflation in 2013. The bulk of the country’s imports of finished goods \ncome from South Africa. \n2.4.25 In the outlook period, inflation is expected to remain subdued, underpinned by \nanticipated stable international oil prices as well as a weakening South African rand. \nc) Public Sector Developments \nGovernment Revenue \n2.4.26 Total government revenue increased to US$3.74 billion in 2013, from US$3.45 \nbillion in 2012, largely benefiting from improved compliance with regards to tax \npayments. \n2.4.27 Tax revenue, which generally accounts for around 90% of total government revenue, \nincreased from US$3.28 billion in 2012, to US$3.41 billion in 2013, spurred by \nstrong performance in Value Added Tax (VAT), income tax and excise duty. Non tax \nrevenue collections increased to US$326.9 million in 2013, from US$172.9 million \nin 2012, benefiting from renewal of operating licences by telecommunication \ncompanies. \n2.4.28 In 2014, total revenue is projected at US$4.12 billion, driven by increases in both tax \nrevenue (US$3.824 billion) and non-tax revenue (US$296 million). \nGovernment Expenditure \n2.4.29 Total government expenditure is projected at US$4.12 billion in 2014, up from the \nUS$3.99 billion in 2013. Current expenditures are, however, expected to decline to \nUS$3.36 billion in 2014, from US$3.52 billion in 2013. In line with cash budgeting, \ncapital expenditure remains subdued as it generally reflects residual revenues after \npaying for current expenditure outlays. \n \n \n21 \n \nFinancial Stability Report 30 June 2014 \n2.4.30 The economy’s budget balance worsened to a deficit of 1.8% of GDP in 2013, from \na deficit of 1.3% in 2012. The deficit is expected to be financed from domestic \nsources as well as accumulation of domestic arrears. \nd) Household Sector Developments \n2.4.31 Unemployment level is estimated to have increased from about 10.7% in 2011 to \nabout 11% in 2012. In 2013, unemployment is to remain close to 11%. Household \nspending patterns and ability to borrow and repay loans have been adversely affected \nby the tight liquidity conditions prevailing in the economy. \n2.4.32 The Zimbabwe Vulnerability Assessment Committee predicted that 16.9% of the \npopulation will be food insecure in 2013, thus unable to access sufficient food \nparticularly during the peak hunger period stretching from January to March 2014. \nThis compares unfavourably with 2012 consumption year, in which about 11.5% of \nthe population was food insecure. \n2.4.33 The increase in food insecurity levels is attributed to the unfavourable weather \nconditions, the high cost of agricultural inputs and the rising food prices as agents \npredict another poor agricultural season. \n2.4.34 Household indebtedness has reduced disposable incomes of most households, a \ndevelopment which has negatively affected aggregate demand hence economic \nactivity. \n \n \n \n \n \n \n \n \n \n \n \n22 \n \nFinancial Stability Report 30 June 2014 \nCHAPTER 3: FINANCIAL SECTOR PERFORMANCE AND \nRESILIENCE \n3.1 \nIntroduction \n3.1.1 The banking system remains generally stable except a few institutions of low \nsystemic importance that are facing isolated challenges. However, the increasing \nlevel of non-performing loans continues to threaten the solvency, profitability and \nliquidity of the banking sector. Bank lending is growing at a decreasing pace. Credit \ngrowth has been funded largely through retail deposit growth over recent times. \n3.1.2 The general insurance sector continues to be largely stable and to demonstrate ability \nto cover claims in the ordinary course of business. \n3.1.3 Payment and settlement systems have continued to operate satisfactorily, with key \nsystems processing payments effectively, and exhibiting a high degree of availability. \n3.1.4 Banking institutions continued to command the largest portion of total financial \nsector assets in the country, followed by the insurance sector. \n \n3.2 \nBanking Sector \n3.2.1 The Zimbabwean banking system comprised 14 operating commercial banks, 4 \nbuilding societies, a merchant bank and a savings bank as at 30 June 2014. The market \nshare of commercial banks in terms of assets stood at 82.42% as at 30 June 2014. \nBuilding societies, on the other hand follow a mortgage finance business model, with \na market share of 14.88% as at 30 June 2014. The savings bank is owned by the \ngovernment and its market share amounted to 1.46% as at 30 June 2014. \nSolvency Conditions… \n3.2.2 The banking sector’s average capital adequacy ratio decreased from 19.33% as at 31 \nDecember 2013 to 18.56% as at 30 June 2014, which is marginally above the \nminimum regulatory requirement of 12%. The sector recorded an average leverage \nratio of 4.1%, which was below the minimum threshold of 6%. \n3.2.3 The core capital ratio for the sector has also been on a downward trajectory \ndecreasing from 26.08% in December 2009 to 15.65% at the end of June 2014. The \ndecline in tier 1 ratio is largely due to an increase in risk taking activities such as \n \n \n23 \n \nFinancial Stability Report 30 June 2014 \nlending and prudential filters on capital elements that were instituted as well as losses \nposted by some banking institutions. \n3.2.4 A third of the operating banking institutions had capital positions below the \nprescribed minimum requirements largely due to persistent losses and high levels of \nprovisions to cover rising NPLs. \n3.2.5 Banking institutions with marginal capitalization are more susceptible to the liquidity \nchallenges as they lack sufficient buffer to absorb exogenous and endogenous shocks. \nTable 3 shows the trend in banking sector capital since 2009. \nTable 3: Capital Ratios, December 2009 – June 2014 \n Capital Adequacy \nDec-09 \nDec-10 \nDec-11 \nDec-12 \nDec-13 \nJun-14 \nRegulatory capital to risk-weighted assets \n27.26 \n27.34 \n14.67 \n17.62 \n19.33 \n18.56 \nPercentage of banks greater or equal to 12 \npercent \n100.0 \n87.5 \n88.9 \n88.9 \n88.9 \n81.3 \nPercentage of banks below 12 and above 6 \npercent minimum \n0.0 \n0.0 \n0.0 \n11.1 \n5.6 \n0.0 \nPercentage of banks below 6 percent \nminimum \n0.0 \n12.5 \n11.1 \n0.0 \n5.6 \n18.8 \n Capital to assets \n12.0 \n9.4 \n9.3 \n6.6 \n9.2 \n4.9 \n \n3.2.6 The decrease in banking sector CAR is largely attributed to increases in risk weighted \nassets as banking sector loan portfolios continued on the upward trend over the last \nfew years. \n3.2.7 Meanwhile the total risk weighted assets (RWA) for the sector have been increasing \nsteadily over the years mainly driven by lending activities. The trend in RWA has, \nhowever, been punctuated by a marginal decrease as banking institutions were forced \nto curtail their lending activities due to the liquidity challenges experienced in the last \nquarter of 2013. \n3.2.8 While credit related RWA account for the bulk of RWA, some $945.76 million worth \nof RWA stem from operational risk. Market risk RWA are low due to lower activities \non banks’ trading books. \n \n \n24 \n \nFinancial Stability Report 30 June 2014 \n3.2.9 The capital ratios and RWA are calculated according to the Basel I capital rules for \ncredit risk, while Basel II rules are used for market and credit risks. The banking \nsector is in the monitoring phase of Basel II implementation and the Reserve Bank is \nassessing the stability of banks’ Basel II systems to ensure a smooth transition into \nthe revised capital framework. \nEarnings Conditions… \n3.2.10 The banking sector’s retained earnings have swung upwards from $4.90 million as at \n30 June 2013 to $26.56 million for the half year ended 30 June 2014. \n3.2.11 However, out of the twenty operating banking institutions eight banking institutions \nrecorded losses amounting to $32 million for the first half year ended 30 June 2014 \nreflecting the significant build up in loan loss provisions and write offs as well as \nhigh operating expenses such as staff benefits and occupancy costs against the \nbackground of subdued revenues. \n3.2.12 Return on equity increased from 0.30 % to 2.72% over the same period, while Return \non assets (ROA) was 0.49%, up from 0.12% in June 2013. The structural \nprofitability1of banks, representing their capacity to create long term sustainable \nprofits declined marginally to 2.93%, compared to 3.03% in June 2013. \n3.2.13 The contribution of non-interest income to total income has remained relatively stable \naround 32% over the past 18 months as depicted in the table below: \nTable 4: Composition of bank profits ($ millions) \n \nDec 2009 \nDec 2010 \nDec 2011 \nDec 2012 \nDec 2013 \nJun 2014 \nInterest income \n58.97 \n226.96 \n451.55 \n556.83 \n640.52 \n317.42 \nFee income \n113.00 \n235.62 \n249.74 \n321.12 \n302.92 \n189 \nProvisions \n11.20 \n17.65 \n64.61 \n114.15 \n115.32 \n42.16 \nNet income \n10.33 \n34.34 \n86.01 \n70.33 \n4.46 \n26.56 \n \n1 (interest income + fee income - operating expenses ) / total assets \n \n \n25 \n \nFinancial Stability Report 30 June 2014 \n \nBank liquidity and funding conditions… \n3.2.14 The total banking sector deposits have been on an upward trend, growing from \n$705.76 million as at 30 June 2009 to $4.96 billion in June 2014. The growth partially \nreflects the increase in economic activity as well as the sluggish performance of the \nstock market leading to strong inflows of deposits. \n3.2.15 The banking sector has largely mobilized short-term deposits, which are transitory \nand volatile in nature reflecting low confidence and disposable incomes. Short term \ndeposits constituted 86.29% of the deposits in the banking sector as at 30 June 2014. \nFigure 5: Banking Sector Deposits: 2009 - 2014 \n \n \n \n3.2.16 The tenure of deposits makes it difficult for banks to refinance long-term assets and \nexposes banks to liquidity risk. \n3.2.17 The short-term lending phenomenon has created asset quality vulnerabilities due to \nmismatches between short-term funding and the credit requirements of medium to \nlong-term projects. An illiquid market has also increased the cost of credit and \nheightens default probabilities among borrowers. \n1,363.67\n2567.61\n3376.34\n4410.92\n4728.07\n4956.86\n373.44\n194.44\n260.64\n269.25\n299.77\n273.35\n792.61\n1406.79\n1880.70\n2367.17\n2177.29\n2391.06\n0\n400\n800\n1200\n1600\n2000\n2400\n2800\n3200\n3600\n4000\n4400\n4800\n5200\n5600\nTotal Deposits ($M)\nTime Deposits ($M)\nDemand Deposits ($M)\n \n \n26 \n \nFinancial Stability Report 30 June 2014 \n3.2.18 The country’s macroeconomic liquidity challenges also emanate from the high \nexternal debt, absence of an operational lender of last resort, high current account \ndeficit which is draining liquidity from the local economy and perceived country risk \nwhich is impeding banking institutions’ ability to secure offshore funding under \nfavourable terms. \n3.2.19 The interest spread between deposit rates and lending rates has remained wide at \n4.38% as at 30 June 2014 mainly reflecting the illiquidity in the market, as indicated \nin the figure below. \nFigure 6: Average Spread between Lending and Deposit Rates \n \n3.2.20 Further, the currently obtaining interest rate regime has in part contributed to the high \nproduction costs of local products and at times resulting in local firms defaulting on \nloans as they fail to break even (interest rate risk induced default). \nImpact of Interest Rate Environment… \n3.2.21 Interest rate risk is generally low mainly due to the current structure of banks’ \nbalance sheets that are heavily influenced by subdued market activity and limited \ntradable securities. This has resulted in the sector’s exposure to interest rate risk \nmainly emanating from the banking book with major repricing assets being loans and \nadvances. \n0.00\n1.00\n2.00\n3.00\n4.00\n5.00\n6.00\n7.00\n8.00\n9.00\n10.00\nJan-11\nMar-11\nMay-11\nJul-11\nSep-11\nNov-11\nJan-12\nMar-12\nMay-12\nJul-12\nSep-12\nNov-12\nJan-13\nMar-13\nMay-13\nJul-13\nSep-13\nNov-13\nJan-14\nMar-14\nMay-14\nSource: Reserve Bank \n \n \n27 \n \nFinancial Stability Report 30 June 2014 \n3.2.22 A review of quarterly stress testing results highlighted that banking institutions are \neffectively monitoring their exposure to interest rate risk in the banking book and \nhave various limits on repricing gaps with respect to capital. \n3.2.23 The sector had a liability sensitive book as at 30 June 2014. If there is a parallel shift \nin the yield curve by 300 basis points the sector would lose $24.06 million \nrepresenting 2.48% of the sector’s total capital as at 30 June 2014. \n3.2.24 However, the interest rate environment is expected to remain unchanged over the \nshort-term. \n \nLoans and Credit risk \n3.2.25 The banking sector has witnessed significant deterioration in asset quality as the non-\nperforming loans to total loans ratio increased from 15.92% as at 31 December 2013 \nto 18.49% as at 30 June 2014. \n3.2.26 The growth in credit over the last five years resulted in a build-up of credit risk as \nevidenced by corresponding growth in risk weighted assets. \n3.2.27 The banking sector has faced heightened exposure to default risk over the last three \nyears, as reflected by the ratio of non-performing loans to total loans which rose from \n7.55% as at December 2011 to 18.49% as at 30 June 2014. \n3.2.28 Despite the relative briskness of deposit inflows, banks have adopted conservative \nlending approach owing to concerns about the increasing credit risk of borrowers \nwith the slowdown in the real economy and the buildup in household debt. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n28 \n \nFinancial Stability Report 30 June 2014 \nFigure 7: Non-Performing Loans Dec 2009 – June 2014 \n1.80%\n10.95%\n7.55%\n13.46%\n15.92%\n18.49%\n0.00%\n2.00%\n4.00%\n6.00%\n8.00%\n10.00%\n12.00%\n14.00%\n16.00%\n18.00%\n20.00%\nDec 09\nDec 10\nDec 11\nDec 12\nDec 13\nJune 14\n \n3.2.29 The deteriorating credit quality can be attributed to key macroeconomic and \nmicroeconomic factors in the operating environment as detailed in the diagram \nbelow: \nFigure 8: Factors affecting credit quality \n \n3.2.30 There is generally a mismatch on the credit market between tenure of available credit \nand the product cycle of most firms. Such mismatches coupled with high interest rates \nhave potential to destabilize corporate balance sheets resulting in an increase in \nNPLs. \nFactors \naffecting \ncredit \nquality\nLow capacity \nutilisation in \nindustry\nLimited FDI \nand offshore \ncredit\nDepressed \naggregate \ndemand\nTight domestic \nliquidity\nVolatile and \ntransitory \ndeposits\nCorporate \ngovernance \nand risk \nmanagement \nweaknesses\nNon-\nfunctional \nLOR\n \n \n29 \n \nFinancial Stability Report 30 June 2014 \n3.2.31 Going forward, the banking sector will benefit from the establishment of a robust \ncredit reference system which is expected to promote effective credit risk \nmanagement. \n Figure 9: Total Banking Sector Loans Dec 2009 – June 2014 \n \n3.2.32 The banking sector reported total loans and advances amounting to $3.81 billion as \nat 30 June 2014, as indicated in Figure 7 below. The top five banks had loans \namounting to $2.15 billion or 56.5% of total banking sector loans and advances. \n3.2.33 There has been a notable stagnation in the loans and advances growth rate since \nDecember 2012 reflecting a combination of subdued economic activities and cautious \nlending approach taken by some banks against the background of deteriorating credit \nquality and possible adjustments to balance sheet structures in light of the need to \nmeet the Reserve Bank’s revised capital requirements. \n \n \n \n \n \n \n0.69 \n1.56 \n2.76 \n3.56 \n3.74 \n3.81\n -\n 0.50\n 1.00\n 1.50\n 2.00\n 2.50\n 3.00\n 3.50\n 4.00\n 4.50\n2009\n2010\n2011\n2012\n2013\nJun-14\nFigures in (billions) \n \n \n30 \n \nFinancial Stability Report 30 June 2014 \nFigure 10: Sectoral Distribution of Credit as at 30 June 2014 \n \n \n3.2.34 The major beneficiaries of domestic credit are corporate entities. Lending to \ncorporations and state enterprises was 75.30% of the banking sector loans while \nlending to individuals and household sector, which is predominantly consumptive, \nwas 24.7%. \n3.2.35 Meanwhile, financing of other productive sectors such as mining, construction and \ntransport has been adversely affected by the absence of long term asset and leasing \nfinance from banking institutions, given the transitory nature of deposits. \n3.3 Capital Market \n3.3.1 The Zimbabwe Stock Exchange (ZSE) had 67 listed companies as at 30 June 2014. \nActivity on the bourse, however, remained largely subdued due to illiquidity in the \neconomy. \n3.3.2 For the period 2009 to 2011 the bourse had three new listings, one initial public \noffering and two reverse listings. \nAgriculture\n15.60%\nConstruction\n3.80%\nCommunication\n7.10%\nManufacturing\n13.70%\nFinancial Firms\n2.00%\nMining\n4.20%\nServices\n17.60%\nTransport\n2.80%\nIndividuals \n24.70%\nDistribution\n8.50%\n \n \n31 \n \nFinancial Stability Report 30 June 2014 \n3.3.3 Market capitalisation rose from $3.8 billion at the end of 2009 and peaked at $6 \nbillion in July 2013, before retreating to $4.9 billion as at 30 June 2014. \n3.3.4 The downward trend is reflective of low investor confidence in the economy and \ngeneral liquidity challenges. \n3.3.5 The global financial conditions have recently become tighter following the US \nFederal Reserve tapering exercise of its bond purchase on expectations of full \nrecovery of the US economy. This has prompted a slowdown and in certain instances \na reversal of private portfolio investments into emerging markets. Europe’s regional \ndebt restructuring exercise of its corporate sector remains incomplete. Some \nemerging markets (Brazil, Indonesia, India and Turkey) and some parts of the African \nregion (including Zimbabwe) have also suffered from a debt burdened corporate \nsector hence the need for tighter asset quality reviews. The global economy therefore \nremains fragile. \n3.3.6 The country’s weak macroeconomic environment makes it costly for companies to \nsource capital on the international market given higher inherent sovereign risk \nattached to the country by foreign investors. The persistent liquidity crunch is \nthreatening most players’ viability hence the recent experience of delistings and \nsuspensions, unsuccessful capital raising exercises and increased non compliancy to \nset rules and regulations. \n3.3.7 Meanwhile, globalization is changing the operating and regulatory environment with \nstrong demands for modern market infrastructure, diversified investment products, \nmore liquid markets and sustainable business practices in order for a market to remain \ncompetitive. \n3.4 Market Turnover \n3.4.1 In line with the performance recovery in the second quarter of 2014, there was \nimprovement in trading activity on the stock market. Market turnover volume \nincreased by 22.9% to 837,523,059 shares in the quarter up to June 2014, from \n681,599,364 shares in the previous quarter. In addition, market turnover value also \n \n \n32 \n \nFinancial Stability Report 30 June 2014 \nincreased by 3% from $112.5 million in the first quarter to US$115.9 million as at 30 \nJune 2014. Despite a decline in foreign purchases in the second quarter of 2014, \nforeign investor participation in the bourse remained strong, contributing about 60% \nof trade value, against a background of Government’s intention to review the \nIndigenization Policy. During the quarter under review, net foreign purchases were \nUS$3.1 million, compared to US$29.5 million the previous quarter. \n3.4.2 The industrial and mining indices for the period to 30 June 2014 are indicated in \nFigure 11 below. \nFigure 11: ZSE Index Trend \n \n \n \nRegulatory Initiatives in the Capital Market \n3.4.3 The Securities and Exchange Commission has facilitated a review of the ZSE Listings \nRules in line with the changing operating and regulatory environment for purposes \nof harmonization and alignment with best practice. \n3.4.4 The Commission maintains its regulatory cooperation with peer regulators both \nlocally and beyond borders for information sharing purposes. Memorandum of \nUnderstanding have been signed with the Public Accountants and Auditors Board, \n0\n25\n50\n75\n100\n125\n150\n175\n200\n225\n250\n275\n300\n325\n19-Feb-09\n15-May-09\n8-Aug-09\n1-Nov-09\n25-Jan-10\n20-Apr-10\n14-Jul-10\n7-Oct-10\n31-Dec-10\n26-Mar-11\n19-Jun-11\n12-Sep-11\n6-Dec-11\n29-Feb-12\n24-May-12\n17-Aug-12\n10-Nov-12\n3-Feb-13\n29-Apr-13\n23-Jul-13\n16-Oct-13\n9-Jan-14\n4-Apr-14\n28-Jun-14\nIndustrial Index\nMining Index\n \n \n33 \n \nFinancial Stability Report 30 June 2014 \nReserve Bank of Zimbabwe, Insurance and Pensions Commission and Committee of \nInsurance, Securities and Non-Banking Financial Authorities. \nMeasures to enhance Capital Market stability \n3.4.5 The capital market is going through technological transformation through the \nautomation of the ZSE trading platform and the establishment of a dematerialized \nenvironment. The upgrading of market infrastructure is aimed at reducing transaction \ncosts, increasing transparency and improving efficiency. \n3.4.6 The Government and the ZSE signed a Memorandum of Understanding (MoU) in \nJuly 2014 on the demutualisation of the exchange as part of efforts towards \nstrengthening the ZSE’s institutional framework. \n3.4.7 The Insurance and Pensions Commission (IPEC) thrives to attain membership to \ninternational standards setting bodies for alignment with best practice and \ncooperation with peer regulators for information sharing purposes. \n3.4.8 Overall, there is need to build a consistent policy framework coupled with a robust \nregulatory framework while putting in place the ideal infrastructure which will \ncatapult the capital markets in light of a competitive global economy. \n3.5 Insurance Sector \n3.5.1 The architecture of the insurance industry is as shown below: \nTable 5: Number of Registered Regulated Entities \nType of Institution \nNumber of Registered Entities \nDec 2012 \nDec 2013 \nJun 2014 \nLife \n9 \n11 \n11 \nFuneral \n10 \n8 \n8 \nNon- Life \n28 \n29 \n25 \nLife Reinsurance \n2 \n2 \n2 \n Non-Life Reinsurance \n10 \n10 \n10 \nInsurance Brokers \n29 \n29 \n30 \nReinsurance Brokers \n3 \n3 \n3 \nTotal \n91 \n92 \n89 \n \n \n34 \n \nFinancial Stability Report 30 June 2014 \n3.5.2 The total assets of the insurance and pensions industry were $4.3 billion as at 30 June \n2014 representing 36.63% of real GDP. \n3.5.3 The insurance subsector at 30 June 2014 had a total asset base of $1,935 billion as \ndepicted in the table below. \nTable 6: Insurance Industry Assets per Class of Business \nAssets \nDec-12 ($000) \nDec-13 ($000) \n Jun-14 ($000) \nGrowth \nDec 12 - Jun 14 \nLife including funeral \nbusiness \n1,265,974 \n1,582,926 \n1,621,271 \n2.42% \nNon- Life \n145,469 \n164,264 \n177,821 \n8.25% \nLife Reinsurance \n5,578 \n6,853 \n12,926 \n88.62% \nNon-Life Reinsurance \n116,822 \n122,948 \n122,994 \n0.04% \nTotal \n1,533,843 \n1,876,991 \n1,935,012 \n3.09% \n3.5.4 As at 30 June 2014 life companies including funeral companies accounted for 84% \nof the industry’s total assets. One institution controls 73.20% of the life assurers’ \nassets and 61.33% of the insurance industry asset base. \n3.5.5 The gross premium written by the insurance sector grew by 20.63% from $418 \nmillion and to $503 million, between Dec 2012 and Dec 2013, mainly due to a huge \nuptake of funeral insurance through both funeral and life companies. \n3.5.6 Direct non-life insurers reinsure half of their business as compared to life assurers, \nwhere spread of risk through reinsurance arrangements is low at 2%. The level of \nreinsurance for the two broad classes of insurance business is shown in the graph \nbelow. \n \n \n \n \n \n \n \n \n \n \n \n \n \n35 \n \nFinancial Stability Report 30 June 2014 \n \nFigure 12: Percentage of Business Reinsured by Life and Non-life Companies \n \nCapitalisation \n3.5.7 Life assurance companies (11) had a total capital base of $244.4 million as at 30 June \n2014. The largest assurance company had $134.06 million, constituting 54.85% of \nthe subsector’s capital. The top five companies commanded a market share of the \n95.5% of the entire capital base. Only one institution had a capital base below the $2 \nmillion capital requirement. \n3.5.8 The funeral assurance companies (9) reported a total capital position of $20.5 \nmillion. Only four companies had capital positions above the required minimum of \n$1.5 million, while the combined shortfall for companies with capital deficits was \n$3.56 million. \n3.5.9 The only two life reassurance companies in the market had a total capitalization of \n$6.7 million, with one of them reporting a capital deficit against the minimum \nrequirement of $1.5 million. \n3.5.10 The aggregate capital for the 24 non-life insurance companies was $70 million as at \n30 June 2014. Eight of the institutions reported capital positions which were below \nthe minimum capital requirement of $1.5 million, with a combined shortfall of $3.67 \nmillion. The top two non-life insurers held $23.76 million or 33.9% of the total \nindustry capital while the top five held $35.49 million or 50.68%. \n3.5.11 The total capital position for the nine non-life re-insurance institutions in the sector \nwas $66.75 million as at 30 June 2014. One institution had capital below the required \n0.00%\n10.00%\n20.00%\n30.00%\n40.00%\n50.00%\n60.00%\nDec- 12\nDec-13\nJun-14\nLife\nNon-Life\n \n \n36 \n \nFinancial Stability Report 30 June 2014 \nthreshold of $1.5 million. The largest institution held 41% of the industry’s capital \nbase while the top five hold 89.3%. \n3.5.12 The table below summarises the subsector’s capital position: \nTable 7: Capital Positions as at 30 June 2014 \nInstitutions \nTotal number \nTotal Capital ($ m) \nNo. with capital deficit \nLife assurance \n11 \n244.4 \n1 \nFuneral Assurance \n9 \n20.5 \n5 \nLife reassurance \n2 \n6.7 \n1 \nNon-life insurance \n24 \n70 \n8 \nNon-life reassurance \n9 \n66.75 \n1 \n \nPensions Industry \n3.5.13 As at 30 June 2014 the pension industry had a total of 1437 pension funds with an \nestimated membership of 760,000. The pension funds comprise of a mixture of self-\nadministered and insured funds. \n3.5.14 The total assets of the pension industry were $2.74 billion as at 31 December 2013, \nrepresenting an increase of 7.94% from $2.54 billion as at 31 December 2012. \n3.5.15 During the same period, contributions increased by 3.43% from $410,765 to \n$424,847 though part of these are in arrears. \n3.5.16 The current legal framework for the insurance and pension and provident funds is \nconsidered to be outdated and has constrained timely correction of identified \npractices that are detrimental to the healthy functioning of the sector. \n3.5.17 IPEC has noted instances of weak corporate governance practices in owner managed \ninsurance entities particularly in respect of conflict of interest and related party \ntransactions which compromise the safety of the sector going forward. \n3.5.18 Another challenge in the sector relates to high costs against depressed investment \nreturns. This has sometimes led to the utilization of contributions to cover operational \nexpenses. \n \nLiquidity Constraints... \n3.5.19 The asset structure of the pensions industry as shown in the diagram below is skewed \n \n \n37 \n \nFinancial Stability Report 30 June 2014 \ntowards properties, equities and other assets, which are estimated at 88% of total \nassets. The asset portfolio is reflective of the general liquidity challenges prevailing \nin the economy. \nFigure 13: Asset Structure of the Insurance and Pensions Industry as at 31 Dec 2013 \n \n \n3.5.20 The industry’s asset structure reflects the legacy of conversion to the multi-currency \nregime that eroded all assets, which were in the money market. In addition, there are \nlimited investment options in relation to investment instruments available in the \nmarket. \n3.5.21 The low compliance level on prescribed assets depicted by a prescribed asset ratio of \n1.54% against a required ratio of 10% is mostly a reflection of non-availability of \nsuch paper on the market. In 2014, three financial bonds targeting the agricultural \nsector and SMEs have been issued with an approved prescribed asset status. \n3.5.22 The industry players through the Ministry of Finance have established the Insurance \nand Pensions Housing Fund to initially raise $45 million in prescribed assets for the \npurpose of providing housing units to low income earners. \n \nLow Pension Pay-outs... \n3.5.23 The low pensions are a legacy of the hyperinflationary period prior to 2009 and the \napproach in which pension values were determined on conversion from the use of the \nZimbabwean dollar to USD. \nProperty 38.14%\nEquities 27.67%\nCash and Money \nMarket 8.59%\nPrescribed Assets \n1.54%\nContribution & \nDebtors 4.97%\nOther Assets 19.09%\n \n \n38 \n \nFinancial Stability Report 30 June 2014 \n \nPremium and Pension Contribution Arrears … \n3.5.24 As at 31 December 2013, premium and contribution debtors amounted to $229 \nmillion. \n3.5.25 Whilst the insurance and pensions industry’s premium and contribution debtors to \ntotal assets ratio was 4.97%, the arrears position for some entities constituted a \nsignificant portion of their balance sheets, some as high as 50%. On average, \npremium debtors to total assets is 24%. High premium and contribution debtor ratios \nadversely affect entities' ability to settle claims or pay out pension benefits timely. \n3.5.26 Contribution arrears are more pronounced for public enterprises’ pension funds and \non the other hand non-life players have higher premium arrears than life entities. \n3.5.27 Arrears have generally arisen where employers deduct pension contributions from \nemployees’ salaries and fail to remit the same to the pension fund in terms of the law \nciting viability challenges under current economic challenges. \n3.5.28 The retention of these debtors on the books of the insurer technically overstates the \ncapitalisation of an insurance entity. \nMajor Regulatory Developments \n3.5.29 The Insurance and Pension Commission increased the minimum capital requirements \nin a bid to improve the capacity of underwriters to underwrite more business in 2013. \nThe revised minimum capital requirements are shown in the table below: \nTable 8: Minimum Capital Requirements \nClass of Business \nMinimum Capital Requirements \nOld \nNew effective 30 \nJune \nNon-life Insurers \n$300,000 \n$1.5 million \nNon-life Reinsurers \n$400,000 \n$1.5 million \nLife Assurance Companies \n$500,000 \n$2 million \nLife Reassurance Companies \n$500,000 \n$2 million \nFuneral Assurers \n$400,000 \n$1.5 million \n \n \n \n39 \n \nFinancial Stability Report 30 June 2014 \n3.5.30 IPEC has designed and circulated investment guidelines for life companies and self-\nadministered funds which sets minimum and maximum limits for prescribed assets, \nproperties, quoted and unquoted shares, money market and cash and other \ninvestments. The objective is to ensure improvement in regulated entities’ asset \nportfolios in line with the nature of their business. The guidelines also put a cap on \nrelated entity investments. \n3.5.31 IPEC also issued a directive requiring registration of all practicing actuaries with the \nActuarial Society of Zimbabwe. The initiative seeks to promote good order and \nensure observance of best practices, in particular the upholding of professional codes \nof conduct of actuaries. \n3.5.32 In addition, guidance was issued on the calculation of capital and other related issues \nfor short term insurers and reinsurers in order to improve the quality of assets that are \nheld as capital in terms of permanence and function of capital to act as a buffer against \nlosses. All assets which are not available to meet obligations are regarded as un-\nqualifying assets and need to be deducted from an insurer’s capital for the purpose of \ncalculating regulatory capital. \n3.5.33 During the period under review there were a number of changes in the composition \nof the insurance sector. The Commission registered one non-life insurer, one life \nassurer, four brokers and one pension fund administrator. \n3.5.34 The Commission also de-registered four non-life insurance companies due to \nsolvency challenges that manifested in failure to meet claims. These entities were \ninitially suspended and when recapitalisation efforts failed, the Commission resolved \nto cancel the licences of these insurers. \n3.5.35 Meanwhile three insurers remain suspended due to viability and insolvency \nchallenges. \n \nMicro-insurance Regulation \n3.5.36 The Commission is also developing a micro-insurance regulatory framework which \nwill be finalised after a planned survey in the third quarter of 2014. \n \n \n \n \n40 \n \nFinancial Stability Report 30 June 2014 \n \n3.6 Financial Infrastructure \n3.6.1 The country’s key payment systems have continued to operate effectively over the \npast year. The Reserve Bank is mandated to promote the smooth operation of \npayment systems mainly through oversight. \n3.6.2 The Reserve Bank administered Real Time Gross Settlement system which enables \nprompt settlement of interbank transactions remains highly reliable and exhibit safety \nand soundness. A total of 21 financial institutions were participating in the payments \nsystems as at 30 June 2014. The table below provides a summary of the participants \nin various payment streams up to 30 June 2014. \nTable 9: Financial Market Infrastructure Participants \nSystem \nParticipants \nRTGS/CSD/SWIFT \n21 \nCheque Clearing House \n16 \nZimswitch \n16 \nVisa \n6 \nMasterCard \n4 \n \n3.6.3 The RTGS system functioned smoothly during the year processing 83% of the total \nvalue of both large-value and retail payment streams in the country. The volume of \ntransactions processed in 2013 rose slightly by 4% compared to the previous year, \nreaching 2.3 million valued at $42 billion. Transactions worth $19.88 million were \nprocessed during the first half of 2014. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n41 \n \nFinancial Stability Report 30 June 2014 \n \n \nFigure 14: RTGS System Values for 2009 to 2013 \n \n3.6.4 However, RTGS delays have been experienced at some banks facing liquidity \nchallenges. \n3.6.5 Notably, the complexity and importance of the financial market infrastructures for \npayment handling has greatly increased over the last few years. \n3.6.6 The value of electronic transactions executed grew by 8% to $53 billion in 2013, up \nfrom $45.1 billion recorded in 2012. \n3.6.7 The figures below shows the growth in availability of payments access points and \naccess devices over the last few quarters. \n \n \n \n \n \n \n \n \n \n \n \n \n \n6.818\n21.727\n32.668\n38.719\n41.797\n5\n10\n15\n20\n25\n30\n35\n40\n45\n2009\n2010\n2011\n2012\n2013\nValues in US$Billions\n \n \n42 \n \nFinancial Stability Report 30 June 2014 \nFigure 15: Growth in Payment System Access Points \n \n \n \n \n \n \n \nFigure 16: Payment Systems Access Devices \n \n0\n5\n10\n15\n20\n25\nQuarter ending June\n2013\nQuarter ending\nSeptember 2013\nQuarter ending\nDecember 2013\nQuarter ending March\n2014\nQuarter ending June\n2014\nThousands\nPOS POPULATION\nATM Population\nMobile Banking Agents\n0.0\n0.5\n1.0\n1.5\n2.0\n2.5\n3.0\n3.5\n4.0\n4.5\n0\n10\n20\n30\n40\n50\n60\n70\n80\n90\n100\nQuarter ending June\n2013\nQuarter ending\nSeptember 2013\nQuarter ending\nDecember 2013\nQuarter ending\nMarch 2014\nQuarter ending June\n2014\nActive Mobile & Dr Card Users in Millions\nInternet, Cr & Prepaid Cards in Thousands\nMobile\nDr Cards\nInternet\n \n \n43 \n \nFinancial Stability Report 30 June 2014 \n \n3.6.8 The Reserve Bank has allowed both banks and non-banks to work together in the \nprovision of financial services in line with the National Payment Systems (NPS) Act. \n3.6.9 The phenomenal adoption of mobile telephones has opened up new opportunities for \nmobile banking as a way to reach out the unbanked communities. The mobile phone \npenetration rate that grew significantly from below 10% in 2006 to above 100% in \nJune 2014. \n3.6.10 Leveraging on this technology, all the banks have partnered with Mobile Network \nOperators (MNOs), to offer mobile banking services. \n3.6.11 The increase in mobile payment transactions is attributable to mobile network \noperators and other relevant stakeholders who are promoting the use of mobile \nphones as a channel for payment systems, as part of the nation’s financial inclusion \ndrive. \nMeasures to enhance financial infrastructure soundness… \n3.6.12 Cognisant of the fact that payment systems efficiency must be augmented with \npayment systems soundness in order to promote overall stability, the Reserve Bank \nenforces minimum requirements which are informed by international best practices. \n3.6.13 Payment systems providers and participants are required to implement the Principles \nof Financial Market Infrastructures and conduct self-assessments in order to identify \ngaps or areas of improvement within their establishments and ascertain appropriate \nmeasures to ensure compliance. \n3.6.14 In addition, the Bank collaborates with other regulators and various arms of the \nGovernment in the process of evaluating payment systems initiatives to reduce \nunnecessary risks in the national payment system. \n3.6.15 The average collateral lodged for the local cards and cheque payment streams \nincreased by 1% from $7.2 million in March 2012 to US$5.89 million in 2013. \n3.6.16 The collateral lodged with the Bank was considered to be adequate to cover potential \nsettlement risk in the card and cheque clearing streams. \n \n \n \n44 \n \nFinancial Stability Report 30 June 2014 \nCHAPTER 4: MEASURES TO ENHANCE FINANCIAL STABILITY \nAND OUTLOOK \n \n4.1 \nIntroduction \n4.1.1 The financial sector regulatory agencies are pursuing a number of measures to \nenhance supervisory processes and promote financial sector stability as outlined here \nunder. \n4.2 \nMulti-Disciplinary Financial Stability Committee \n4.2.1 The broad mandate of a Multidisciplinary Financial Stability Committee is to \npromote financial stability through macro-prudential oversight of the financial sector \nby promoting coordination and information exchange among authorities responsible \nfor financial sector regulation and undertaking joint strategic reviews as well as \nmanaging contingency planning for cross-sector crisis management; \n4.2.2 The institutional structures of the Multidisciplinary Financial Stability Committee \ninclude, two Sub-Committees – a Technical Committee for Financial Stability \nAssessment; and a Committee on Supervisory & Regulatory Cooperation. \n4.2.3 The financial sector supervisory agencies namely Securities Commission, Insurance \nand Pension Commission and the Reserve Bank signed a Memorandum of \nUnderstanding which covers the supervision of financial conglomerates that have \nsubsidiaries falling under the three supervisory authorities and the sharing of \ninformation among regulators. \n4.2.4 This is expected to enhance the maintenance of a robust and prudentially managed \nfinancial services sector as it allows for timely sharing of information across the \nauthorities’ jurisdictions. \n \n4.3 \nSystemic Crisis Framework \n4.3.1 The Reserve Bank has developed a framework for Contingency Planning and \nSystemic Crisis Management which outlines a set of policies, actions and processes \nnecessary for the prevention, management and containment of banking systemic \ndistress and crisis. \n \n \n45 \n \nFinancial Stability Report 30 June 2014 \n4.3.2 The key components of contingency planning and systemic crisis management \ninclude, sound institutional arrangements with explicit inter-agency coordination \nmechanisms and powers that allow for the early intervention into a problem bank to \nprevent its failure. The framework takes cognizance of crisis prevention policies in \nthe areas of regulation, supervision and financial stability monitoring as the second \nline of defence, failing which public authorities may intervene as the third line of \ndefence to mitigate the risk of economy-wide effects. \n4.3.3 The framework has been distributed to other financial sector regulators for \ncontributions and comments pending finalisation. \n \n4.4 \nMinimum Capital Requirements \n4.4.1 The minimum capital requirements have been revised to promote flexibility in the \nfinancial sector, with both large and small institutions that are strong and profitable. \n4.4.2 In the banking sector, the revision which is in line with the Banking Act, will result \nin three tiers of banks, each with a different minimum capital requirement and a \ndifferent set of allowed activities. The banks’ recapitalization plans for December \n2020, with interim targets, are to be submitted to the RBZ by end-December 2014. \n4.4.3 Further, the Reserve Bank has embarked on a gradual approach to Basel II \nimplementation that allows for a smooth transition to the new approaches. \n4.4.4 The Insurance and Pension Commission also increased the minimum capital \nrequirements in a bid to improve the capacity of underwriters to assume more risk in \nas highlighted in Chapter 3. \n4.5 \nProposed Amendments to Banking and Insurance Laws \n4.5.1 The Reserve Bank has proposed improvement to the legal and regulatory framework, \nwhich would incorporate separate insolvency regimes for dealing with failed banking \ninstitutions. \n4.5.2 The proposed amendments cover the areas of corporate governance and compliance; \ntroubled bank resolution; and prompt corrective action programme. \n \n \n46 \n \nFinancial Stability Report 30 June 2014 \n4.5.3 The Insurance and Pensions Commission is also currently reviewing the Insurance \nAct, the Pensions and Provident Funds Act as well as the Insurance and Pensions \nCommission Act. \n4.5.4 The legislation is being amended to among other things, incorporate the core \nprinciples of insurance and pension funds regulation developed by international \nstandard setting bodies namely, the International Association of Insurance \nSupervisors (IAIS) and the International Organisation of Pension Supervisors \n(IOPS). The new legislation will, inter alia provide for Medical aid societies to be \nregulated by IPEC and the establishment of a policyholder protection fund. \n4.6 \nResolution of Non-Preforming Loans \n4.6.1 The Reserve Bank plans to tackle the deteriorating quality of assets in the banking \nsystem. Given the impact of high level of non-performing loans (NPLs) on financial \nstability and economic growth, the Reserve Bank will develop a framework to \naddress the problem. \n4.6.2 The Zimbabwe Asset Management Corporation (ZAMCO), a special-purpose vehicle \n(SPV), has been established to acquire, restructure, and dispose of the NPLs while \nminimizing the impact on the budget. The authorities plan to develop the key features \nrequired to underpin a successful asset purchase strategy for ZAMCO over the next \n12 months \n4.7 \nEstablishment of a Credit Reference System \n4.7.1 ZAMCO’s operations will be complemented by the establishment of a central credit \nregistry system to address informational asymmetries in the sector. \n4.7.2 The establishment of a credit reference system will enable the warehousing of \nvaluable credit information on individuals’ and corporate entities’ borrowing history \nand their repayment patterns and promote effective credit risk management by the \nbanking institutions. \n \n \n \n \n \n47 \n \nFinancial Stability Report 30 June 2014 \n4.8 \nFinancial Stability Outlook \n4.8.1 Overall, the financial system has generally maintained stability, although \nmacroprudential conditions have worsened due mostly to economic slowdown, and \ngrowing current account deficit. \n4.8.2 The outlook for financial stability in Zimbabwe stands at a delicate balance due to \nfragilities in both domestic and global economic recovery. Global economic recovery \ncontinues to be threatened by fragilities in some advanced and emerging economies. \n4.8.3 On the domestic arena, the economy remains vulnerable to global economic \nfragilities as well as adverse developments in the mining and agriculture sector. \n4.8.4 In the medium term, financial system stability is expected to improve on account of \nan operational lender of last resort facility, recapitalisation of the Reserve Bank, \ncreation of a credit reference bureau, clean up of non-performing loans and the \npositive rebuild of confidence in the financial services sector. \n4.8.5 The banking sector continues to grapple with underlying vulnerabilities manifesting \nthrough limited credit creation, high lending rates, rising non-performing loans, and \nstructural liquidity challenges. \n4.8.6 The capital market will continue to reflect the state of the economy in the short term \nhence investors are likely to maintain a cautious investment stance awaiting the \nrecovery of the economy. In the medium term, the success of capital markets depends \non how the prevailing macroeconomic challenges are managed. Significant \nopportunities are set to arise with economic recovery. \n4.8.7 IPEC is poised to enhance its regulatory and supervisory framework in line with \ninternational best practices. \n4.8.8 Insurance tends to be elastic to income levels hence the performance of the sector \nwill also depend on the performance of the economy. Equally the pensions industry’s \n \n \n48 \n \nFinancial Stability Report 30 June 2014 \nfortunes in terms of contributions will follow the direction which the economy will \ntake. \n4.8.9 It is therefore expected that insurance business will be flat or marginally improve on \naccount of compulsory third party motor insurance and the uptake of funeral business \nas people hedge against the risk associated with death. \n \n4.9 \nConclusion \n4.9.1 The Financial Stability Report reflects the collective assessment of the \nMultidisciplinary Financial Stability Committee on risks to financial stability. The \nReport promotes awareness about the vulnerabilities in the financial system and seeks \nto inform about the resilience of the financial institutions and to encourage debate on \nissues relating to development and regulation of the financial sector. \n4.9.2 The forgoing chapters have highlighted that while the financial system remains \nrelatively stable there a number of threats to financial system stability for the next 12 \nmonths which include: \na) Rising non-performing corporate debt; \nb) High household debt; \nc) Liquidity and funding risk; \nd) Commodity price increase/decrease on the international markets \ne) Low growth in international trade \n4.9.3 Nonetheless, the policies and programmes being put in place by the Government and \nregulatory authorities have provided impetus to the positive outlook. \n \n \n \n \n \n \n \n \n49 \n \nFinancial Stability Report 30 June 2014 \nAppendix A: Financial Stability Indicators: Dec 2009 – June 2014 \n \nDec-09 \nDec-10 \nDec-11 \nDec-12 \nDec-13 \nJun-14 \nCapital Adequacy \n \n \n \n \n \n \nCapital and Reserves \n 384.56 m \n465.21 m \n568.42 m \n828.17 m \n939.19 m \n891.87 m \nRegulatory capital to RWA \n27.26 \n27.34 \n14.67 \n17.62 \n19.33 \n18.56 \nPercentage of banks greater or equal to 10 \npercent \n100.0 \n88.0 \n85.2 \n88.0 \n87.5 \n78.3 \nPercentage of banks below 10 and above 6 \npercent minimum \n0.0 \n4.0 \n0.0 \n8.0 \n0.0 \n4.4 \nPercentage of banks below 6 percent \nminimum \n0.0 \n8.0 \n14.8 \n4.0 \n12.5 \n17.4 \nCapital to assets \n16.7 \n10.5 \n8.9 \n7.9 \n8.3 \n6.7 \nAsset quality (%) \n \n \n \n \n \n \nForeign exchange loans to total loans \n2.5 \n0.96 \n1.95 \n4.85 \n4.14 \n2.68 \nPast-due loans to gross loans \n17.6 \n16.3 \n21.8 \n28.4 \n31.2 \n41.3 \nNonperforming loans \n1.8 \n4.2 \n7.5 \n13.5 \n15.9 \n18.5 \nWatch-listed loans \n15.8 \n12.1 \n14.2 \n14.9 \n15.3 \n22.8 \nProvisions as percent of past-due loans \n11.6 \n25.2 \n17.6 \n25.1 \n24.9 \n21.3 \nEarnings and profitability \n \n \n \n \n \n \nNet Income after tax \n9.49 m \n34.34m \n86.01 m \n69.23 m \n4.46 m \n26.56 m \nNet profit (before tax and extraordinary \nitems)/net income \n137.1 \n161.3 \n134.1 \n146.7 \n586.8 \n147.9 \nReturn on assets \n0.60 \n-2.02 \n2.43 \n1.64 \n0.06 \n0.49 \nReturn on equity \n2.47 \n0.57 \n15.13 \n9.17 \n0.51 \n2.72 \nExpenses/ income \n94.4 \n86.9 \n82.2 \n86.4 \n96.6 \n110.2 \nLiquidity \n \n \n \n \n \n \nLiquid assets/total assets \n38.3 \n30.1 \n26.6 \n25.1 \n27.3 \n29.9 \nLiquid assets/short-term liabilities \n52.6 \n36.7 \n31.2 \n30.1 \n34.9 \n37.4 \nLoans/deposits \n51.0 \n71.6 \n90.6 \n93.3 \n102.4 \n93.1 \nLiquid assets/total deposits \n61.7 \n48.1 \n41.3 \n40.2 \n49.4 \n51.9 \nForeign exchange liabilities/total liabilities \n4.8 \n4.0 \n1.5 \n0.9 \n0.4 \n1.1 \nExcess Reserves to Broad Money \n9.07 \n11.01 \n6.00 \n7.02 \n6.91 \n9.35 \nSensitivity to market risk \n \n \n \n \n \n \n Net foreign exchange assets (liabilities) to \nshareholders' funds \n3.3 \n5.4 \n14.2 \n32.7 \n43.4 \n48.2 \nInterest rates \n \n \n \n \n \n \nLending rate minus demand deposit rate \n14.0 \n11.0 \n20.8 \n21.0 \n19.0 \n19.2 \nCommercial banks fixed deposits (12 \nmonths)\n9.1 \n9.0 \n8.6 \n8.6 \n8.6 \n8.6 \nCommercial banks lending rate (weighted \naverage) \n7.1 \n7.5 \n18.0 \n18.0 \n18.0 \n18.0 \nSaving deposit rate \n0.0 \n0.0 \n2.1 \n3.2 \n3.2 \n3.4 \n \n \n50 \n \nFinancial Stability Report 30 June 2014 \nAppendix B: Real Sector \n \n \n \nREAL SECTOR \n2009 \n2010 \n2011 \n2012 \n2013 est \n2014 proj \nReal GDP at Market prices (US$' m) \n8,157 \n9,085 \n10,166.6 \n11,240.8 \n11,744.8 \n12,494 \nNominal GDP at Market (US$' m) \n8,157 \n9,457 \n10,956.2 \n12,472.4 \n13,490.2 \n14,594 \nGDP at Market Prices % changes \n5.4 \n11.4 \n11.9 \n10.6 \n4.5 \n3.1 \nSelected Sectoral GDP growth rates % \n \n \n \n \n \n \nAgriculture, Hunting and Fishing \n37.6 \n7.2 \n1.4 \n7.8 \n-2.6 \n23.4 \nMining and quarrying \n18.9 \n37.4 \n24.4 \n8.0 \n11.7 \n-2.1 \nManufacturing \n0.0 \n2.0 \n13.8 \n5.3 \n-0.6 \n1.7 \nFinance and Insurance \n4.5 \n8.3 \n8.3 \n28.0 \n11.3 \n 3.7 \nDistribution and Tourism \n6.5 \n8.8 \n4.3 \n4.3 \n3.9 \n4.7 \n \n \n \n \n \n \n \nPRICES \n \n \n \n \n \n \nConsumer Price Inflation (end period) % \n-7.7 \n3.2 \n4.9 \n2.9 \n0.3 \n0.10 \nConsumer price inflation (period avg) % \n \n3.1 \n3.5 \n3.7 \n1.63 \n-0.05 \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n51 \n \nFinancial Stability Report 30 June 2014 \nAppendix C: External Sector \nEXTERNAL SECTOR \n2009 \n2010 \n2011 \n2012 \n2013 est \n2014 proj \n Export growth (%) \n-2.8% \n101.1% \n36.2% \n-13.8% \n-3.0% \n-6.1% \nImport growth (%) \n22.2% \n60.7% \n46.5% \n-11.3% \n1.5% \n-7.4% \nCurrent a/c balance (US$M) \n-1,224.1 \n-1,878.5 \n-3,385.6 \n-3,042.4 \n-3,432.2 \n-3,155.4 \nCurrent a/c balance (% of GDP) \n-15.0% \n-19.9% \n-30.9% \n-24.4% \n-25.4% \n-22.5% \nCapital a/c balance (US$M) \n586.9 \n586.7 \n1,633.4 \n1,721.8 \n2,723.4 \n2,345.4 \nDirect Investment (net) (US$M) \n105.0 \n122.6 \n344.3 \n233.8 \n373.1 \n300.6 \nPortfolio Investment (net) (US$M) \n67 \n63.09 \n10.0 \n99.2 \n114.2 \n \n96.3 \nTotal External Debt (US$M) \n5,686.8 \n8,682.6 \n8,083.3 \n7,957.4 \n7,832.5 \n* \nDebt Service ratio (%) \n16.6 \n7.74 \n9.19 \n12.18 \n13.10 \n* \nGross Offical Reserves (US$M) - at \n100% \n365.8 \n477.3 \n427.2 \n425.0 \n331.4 \n349.5 \nImport cover (months) at 100% \n1.2 \n1.0 \n0.6 \n0.7 \n0.5 \n0.6 \nTotal External Payments Arrears \n(US$M) \n5,686.8 \n7,049.7 \n7,357.1 \n6,802.0 \n8,320.0 \n* \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n52 \n \nFinancial Stability Report 30 June 2014 \nAppendix D: Monetary Sector \nMONETARY SECTOR \n2009 \n2010 \n2011 \n2012 \n2013 est \n2014 proj \nBroad Money M3 (US$ '000) \n1,381,247.2 \n2,223,719 \n3,100,401 \n3,886,672 \n3,932,325 \n 4,322,076 \n \n \n \n \n \n \n \nDomestic Credit (US$ '000) \n723,948.1 \n1,596,103 \n2,798,127 \n3,788,469 \n4,068,698 \n 4,959,415 \nCredit to Private Sector (US$ '000) \n700,309.9 \n1,682,515 \n2,755,037 \n3,560,693 \n3,650,055 \n 3,726,670 \nCredit to Parastatals (US$ '000) \n25,498.0 \n22,908 \n44,924 \n51,717 \n60,645 \n 70,325 \nCredit to Government (US$ '000) \n(1859.75) \n(109319.21) \n(1834.85) \n176,058 \n357,997 \n 437,473 \n \n \n \n \n \n \n \nLong Term Deposits (US$ '000) \n86,159.6 \n197,242 \n302,842 \n562,249 \n722,509 \n 847,331 \nSavings (US$ '000) \n140,971.9 \n286,035 \n318,371 \n488,518 \n548,031 \n 557,866 \nShort Term Deposits (US$ '000) \n121,609.9 \n448,843 \n634,162 \n746,511 \n701,805 \n 796,398 \nDemand Deposits (US$ '000) \n1,032,505.9 \n1,291,599 \n1,845,027 \n2,089,394 \n1,959,980 \n 2,120,481 \n \n \n \n \n \n \n \nNominal Minimum Lending Rate \n(%) \n 1.23 \n 1.26 \n 15 \n 10 \n6.0 \n6.0 \nNominal Maximum Lending Rate \n(%) \n72* \n 58* \n 32 \n 35 \n35.0 \n35.0 \nIndividual Average Weighted 30-\ndays Lending Rate (%) \n \n \n \n 15.08 \n14.03 \n14.33 \nCoporate Average Weighted 30-\ndays Lending Rate (%) \n \n \n \n10.00 \n9.35 \n9.90 \n* penalty rates \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n53 \n \nFinancial Stability Report 30 June 2014 \nAppendix E: Public Finances \n \n \nGovernment Accounts (US$ m) \n2009 \n2010 \n2011 \n2012 \n2013 est \n2014 \nproj \nRevenue excluding grants \n882.56 \n2198.00 \n2,921.00 \n3,496.00 \n3,741.00 \n3,850.00 \nRevenue including grants \n933.64 \n2198.00 \n2,921.00 \n3,496.00 \n3,741.00 \n3,850.00 \nCapital expenditure and net lending \n46.00 \n594.00 \n552.00 \n355.00 \n396.06 \n492.00 \nRecurrent Expenditure \n920.00 \n1634.00 \n2,629.00 \n3,303.00 \n3,519.69 \n3,358.00 \nTotal expenditure and net lending \n966.00 \n2228.00 \n3,181.00 \n3,658.00 \n3,987.40 \n4,120.00 \nBalance excluding grants \n-83 \n-30 \n-260.00 \n-162.00 \n-246.40 \n-270.00 \nBalance including grants \n-32 \n-30 \n-260.00 \n-162.00 \n-246.40 \n-270.00 \n \n \n \n \n \n \n \n(% of GDP) \n2009 \n2010 \n2011 \n2012 \n2013 est \n2014 \nproj \nRevenue excluding grants \n15.0 \n28.2 \n26.7 \n28.0 \n27.7 \n28.0 \nRevenue including grants \n15.8 \n28.2 \n26.7 \n28.0 \n27.7 \n 28.0 \nCapital expenditure and net lending \n0.8 \n5.0 \n5.0 \n2.8 \n2.9 \n 2.8 \nTotal expenditure and net lending \n7.7 \n17.9 \n25.5 \n29.3 \n29.6 \n 28.8 \nDeficit excluding grants \n-0.7 \n-0.2 \n-2.1 \n-1.3 \n-1.8 \n -0.73 \nDeficit including grants \n0.2 \n2.8 \n-2.4 \n-1.3 \n-1.8 \n -0.73 \n \n \n \n \n \n \n \n \n \n54 \n \nFinancial Stability Report 30 June 2014 \nAppendix F: Stock Market Indices \nSTOCK MARKET INDICES \n2009 \n2010 \n2011 \n2012 \n2013 \nJune 2014 \nIndustrial Index (Points) \n152.0 \n151.3 \n146 \n152.4 \n201.04 \n187.44 \nMining Index (Points) \n185.5 \n200.4 \n101 \n65.1 \n46 \n82 \nGrand Market Capitalisation \n(US$m) \n3,310.6 \n3,868.1 \n3,689.7 \n3,964 \n5,203 \n4,959", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Financial_Stability_Reports/financial-stability-report-june-2014.pdf"}