156 – Zambia Zambia

2006 At a Glance Population (mn) 11.8 Population Growth (annual %) 1.6 Official Language English

Lac� COLLINES�

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u N n e gu I MALAWI H C a w U g n 1660 m Lilongwe External Debt (US$ mn) 500 M a S u PLAINE� Kabwe E L L 2207 m u e D a K afu T nLIUWA EN g M in PE m fw Lac� g A R nse a a ESC Lu Lac�Chiuta Malombe

Mongu Lac� Chilwa fue External Debt/GDP (%) Ka e 4.2 bèz Lusaka Z am Lac de Cahora Bassa Mt MULANJE C A R P S E M E BlantyreS E N T D U h Z Z Tete i A r PLAINES� M B E Z E am e SILOWANA bè O N A Z z M tsM V U RA D a e A m bèze Lac Kariba i CPI Inflation (annual %) 8.4 n a K y w n a u n H do

Chinhoyi e Livingstone Mazowe r Katima Mulilo� ti i Tundazi� h ia Z bèze 1433 m n C am A K � m Harare w U G c a C uá ua n d Kasane N

O ka o A Exports of goods and services (% of GDP) 30.2 v Marondera a n Y g o N Serra� I DEPRESSION� Gorongosa� s 1856 m DELTA DE� t DE MABABE ZIMBABWE M L'OKAVANGO Mutare G

w Chimoio

BOTSWANA a Gweru Gross Official Reserves (US$ bn) 0.558 i

Monte Binga� Masvingo 2436 m BeiraOCEAN� International Reserves (months of imports) 2.1 ZAMBIE Bulawayo PACIFIQUE GEOATLAS - Copyright1998 Graphi-Ogre UNDP HDI RANKING 165 0 km 100 200 300 400 km Source: AfDB, IMF, UNCTAD, UNDP, UN Population Division

1. Overview of Financial System for privatization in 2006, alone controls 24% of the The central purpose of the Bank of Zambia (BoZ) retail banking market. In February 2004, the Bank of is to propose the formulation and implementation of Zambia, the central bank, announced that it would monetary policies to ensure price and financial system lead the formation of a credit reference bureau, stability. The Bank of Zambia licences, regulates and which will provide commercial banks with information supervises commercial banks, the non-bank financial on borrowers. There is no formal deposit insurance sector and micro-finance institutions. system in Zambia. Zambia’s insurance sector made moves toward Bank and Non-Bank Financial Sector privatization in 2003 with the restructuring of Zambia’s financial sector is relatively small and is the Zambia State Insurance Company and the dominated by banking. The sector, however, has emergence of five private insurance firms. However, one of the most liberal banking regimes in southern the privatization efforts for the state-owned insurance Africa. Recent developments have included the drive corporation have temporarily stalled. to privatize many sub-sectors of the financial sector. Zambia’s banking sector consisted of 12 operational Capital Markets commercial banks as at December 2006, including The capital market remains very small. The Lusaka several foreign-controlled banks. Concentration Stock Exchange (LuSE) opened in 1993, and there is high, with the five largest banks controlling the were 14 companies listed under its main index as at bulk of assets in the system. The Zambia National the end of 2006, with a combined market capitalization Commercial Bank, Zambia’s only state bank and the of USD 3.25 bn. However, trading volumes remain country’s largest domestic bank, which was slated limited, with the three largest listed firms dominating

Z Zambia – 157 the Exchange activity. The secondary market for the LuSE in August 1995. This was followed by the bonds has also grown, though activity is still low. launch of an 18-month bond in September 1998 and There are no restrictions on foreign investment in the then a 2-year bond in October 2000. In September stock exchange. 2005, the Government issued a 5-year bond making it the longest-dated government bond in Zambia 2. Fixed Income Markets to date. Government Securities As of the first quarter of 2007, there has been a trend The Bank of Zambia issues treasury bills and toward big volumes on the supply side to enable the government bonds on behalf of the Government, on a Government to raise sufficient funds to refinance competitive (tender) and non-competitive (off-tender) maturing bonds. However, despite the Government’s basis. Presently, the treasury bills that are issued eagerness to issue more treasury bonds, it has only weekly have four maturity buckets: 28-, 91-, 182- and been able to raise part (65% on average) of the 273-day. Both individuals and corporate institutions amount it planned to raise from bond and treasury bill are permitted to participate in the primary auctions auctions respectively. If this trend continues, it would for government bonds. Bonds are issued at 4-6 week likely lead to an increasing yield environment. intervals, with maturity categories of 12-, 18-, 24- and 60-months. Zambia Government Yield Curve (Dec 2006)

Treasury bill auctions were introduced in 1993. 15.00 Bids for up to ZMK 20 mn must be made in a non- % 10.00 competitive and fixed-price format. The fixed price is calculated as the weighted average price of the 5.00 91 day 182 day 1 yr 2 yr 3 yr 5 yr successful competitive bids. A 1-year bond was Source: Bank of Zambia introduced in January 1995 and was first listed on

Non-Central Government Issuance

On the back of the yield curve established by the government, several corporates from various sectors including the banking and energy sector have succesfully tapped the capital market.

Outstanding corporate bond issues in Zambia

Amount Issue Tenor Company Name Industry Coupon Offered (1) Year (yrs) Lunsemfwa Hydro Power Not publicly available/ Electricity 35,000 2004 6 Company(2) disclosed Barclays Bank Zambia 91-day T Bill + 1.25% (step Banking 30,000 2003 12 unsecured floating rate notes up to 2.00 after 5 yrs) 1. Data in ZMK mn 2. Equivalent of USD 7 mn

Clearing and Settlement The exchange operates an electronic clearing and settlement process, with trade-for-trade netting and settlement three days after the trade (T+3). There is also an electronic depositary facility operated by LuSE Central Share Depository (CSD). Investors intending to transact in a listed security are required to trade via the LuSE. The Securities and Exchange Commission of Zambia regulates the sector. 158 – Zambia

3. Foreign Exchange 4. Derivatives

The Zambian Kwacha (ZMK) is an independent free- There are limited derivative contracts in foreign floating currency. Interventions in the foreign exchange exchange and these are mostly short-term in nature market by the Bank of Zambia are primarily aimed at i.e. up to twelve month tenor. smoothing out short-term fluctuations in the market, and meeting the targets for the programmed gross 5. Participation of Foreign Investors international reserves. The successful introduction of and Issuers an inter-bank market for foreign exchange in July 2003 There are no restrictions on foreign investor was considered an important step towards improving participation in the listed securities on the LuSE and the efficiency of the markets. foreigners may invest on the stock exchange on similar In 2004, the Zambian Kwacha was generally stable terms as Zambians. Foreign investors are, however, against the US dollar but it appreciated in real required to open a share-dealing account with one effective terms by about 8%, following, (i) an increase of the authorised brokers before they start dealing in in copper export earnings, which was boosted by securities. There is no limit on foreign ownership. higher copper prices and metals output, (ii) growth of non-metal exports that exceeded expectations 6. Investment Taxation and, (iii) a subsequent increase in gross international Under the current legislation, the income earned reserves. on Treasury Bills is subject to 15% withholding tax. Exchange rate dynamics in 2005 were largely driven However, interest income earned on bonds is not by reduced debt service and increased balance of subject to tax under the same legislation. There is also payments support inflows, as Zambia reached the no capital gains tax as well as nil property transfer tax Enhanced HIPC completion point. The Kwacha on local shares. Listed companies are taxed at 30% appreciated to ZMK 3,387.55 / 1 USD compared and there is a 10% withholding tax on dividends. to its level of ZMK 4,597.43 / 1 USD in December Zambia has treaties with Canada, Denmark, Finland, 2004. It continued to appreciate, reaching a level of France, Germany, India, Italy, Japan, Kenya, the ZMK 2,975 / 1 USD in May 2006. The impressive Netherlands, and Norway. appreciation of the Kwacha is due to an increased supply of foreign exchange that is attributed to the improved performance of the export sector, prudent fiscal management and lower debt service payments. It has since softened and traded at ZMK 4,428 / 1 USD as of 31 December 2006.

ZMK Per Unit of USD (Year End)

5000

4500

4000

3500 2001 2002 2003 2004 2005 2006 Source: Bloomberg

Z Zambia – 159

7. Key Contacts

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