ZAMBIA DECEMBER 2007 ECONOMIC ROUNDUP

UNCLAS SECTION 01 OF 02 LUSAKA 000022 SIPDIS DEPARTMENT FOR AF/S AND EB/CBA - DENNIS WINSTEAD COMMERCE FOR 4510/ITA/IEP/ANESA/OA SIPDIS E.O. 12958: N/A TAGS: ECON EINV BEXP EAIR ZA SUBJECT: ZAMBIA DECEMBER 2007 ECONOMIC ROUNDUP ¶1. SUMMARY -- INFLATION RISES SLIGHTLY IN DECEMBER -- ELECTRICITY RATES WILL INCREASE IN 2008 -- COMMUCATIONS AUTHORITY TO MONITOR QUALITY -- AUSTRALIAN COMPANY BEGINS BIO-DIESEL PRODUCTION -- ZAMBIA FAILS TO MEET ANNUAL COPPER PRODUCTION TARGET -- MANUFACTURING SECTOR RECORDS GROWTH IN 2007 -- ZAMBIA'S DOMESTIC CREDIT INCREASES BY 15 PERCENT -------------- Inflation Rises Slightly in December -------------- ¶2. According to the Central Statistical Office's (CSO's) Consumer Price Index, Zambia's year-on-year inflation rate was 8.9 percent in December 2007 (up slightly from 8.7 percent in November). The CSO attributed the slight increase to rising food prices. Although by the close of the year, the GRZ failed to achieve its objective of five percent annual inflation, as outlined in the 2007 national budget, it managed to contain inflationary pressure caused by escalating fuel prices. At its 2007 peak (in March),the year-on-year inflation rate reached 12.7 percent. Central Bank Governor Caleb Fundanga attributed Zambia's success in maintaining single-digit inflation to "prudent monetary and fiscal policies." Fundanga also pointed to Zambia's "increased food supply," referring presumably to Zambia's increased agricultural production in 2007. Comment: The GRZ's failure to spend its 2007 budget allocations fully, due to inefficient financial management procedures, may also have been an unintended source of fiscal discipline and counter-inflationary pressure. End Comment. -------------- Electricity Rates Will Increase in 2008 -------------- ¶3. Zambia's Energy Regulation Board (ERB) authorized the state-owned power utility company, ZESCO, to increase its electricity rates by as much as 65 percent over the next three years. The new rates, which vary according to end-user category, went into effect on January 1 and will provide the company with additional funding for capital investments and infrastructural improvements. ERB Chairman Sikota Wina publicly advised ZESCO to improve its performance in order for the new rates to remain effective in 2009 and 2010. ZESCO is currently negotiating rate increases with Copperbelt Energy Corporation (CEC),a private company that supplies much of Zambia's mining sector with power. Until both parties reach an agreement, the mining companies will not be affected by the rate increases. The Zambia Association of Manufacturers cautioned that the new rates will increase production costs and commodity prices, even though the tariffs for commercial users will increase by a mere 1.3 percent in ¶2008. The Zambia National Farmers Union, however, described the new commercial rate as "a fair deal." -------------- Communications Authority to Monitor Quality -------------- ¶4. In response to public demand, the Communications Authority of Zambia installed equipment to monitor the service quality and billing accuracy of information and communication technology companies in Zambia. A Spanish company, Ibys, installed the hardware at a cost of K4 billion (USD 1 million). The equipment will also evaluate the reliability of Internet and data services. The equipment is expected to become fully operational in January ¶2008. -------------- -- Australian Company Begins Bio-Diesel Production -------------- -- ¶5. In December, an Australian company, Oval Biofuels Limited, began producing bio-diesel fuel from soya beans through a "toll treatment" process. The company, which was formed in 2006 by directors of Australian mining companies such as Albidon and African Energy Resources, produces 3000 liters per day at its Lusaka refinery. The company will distribute much of the fuel through Total Zambia. Oval Biofuels will also begin producing bio-diesel from jatropha seeds, when the jatropha plant becomes commercially available. The GRZ, however, is concerned about jatropha's alleged negative effects on the environment and possible impact on food security (if jatropha cultivation crowds out important food crops),and has been cautious about promoting the farming of jatropha. Oval Biofuels has multiple outgrower schemes for jatropha in Lusaka, Southern, Western, and Central Provinces. -------------- -------------- Zambia Fails to Meet Annual Copper Production Targets -------------- -------------- LUSAKA 00000022 002 OF 002 ¶6. Central Bank Governor Caleb Fundanga announced that heavy rainfalls in 2007 would prevent Zambia from reaching its annual copper production target of 670,000 tons. He warned that the rains in early 2008 could cause additional flooding and further reductions in output. According to Central Bank data, the copper mines produced 456,893 tons of finished copper by November 2007, compared to 457,730 tons in the same period in 2006. Fundanga advised the Government to diversify its economy, and warned of possible disruptions by cross-border mining, referring to export bans and other moves that affected Zambian processing of copper extracted in the Democratic Republic of Congo. -------------- Manufacturing Sector Records Growth in 2007 -------------- ¶7. Zambia Association of Manufacturers Chairman Dev Babbar said that in 2007 the manufacturing sector recorded positive growth in about eighteen sub-sectors, including agro-industry, food processing, and cement. He pointed to important investments, including a USD 200 million investment by Zambia Sugar Plc to boost sugar production--from its current level of 250,000 tons--to 450,000 tons in 2008. He also noted a USD 120 million investment by Lafarge Zambia to increase cement production. ?The construction industry has grown tremendously over the past few years, which has led to increased demand of cement on the local and international markets," said Babbar. -------------- --- Zambia's Domestic Credit Increases by 15 percent -------------- --- ¶8. Preliminary data released by the Central Bank indicates that domestic borrowing went up by 15 percent in 2007 due to increased commercial lending. Central Bank Governor Fundanga identified agriculture and manufacturing as the largest sectoral sources of commercial borrowing and noted a sharp decrease in commercial loans to the GRZ, which declined by over 39 percent. He also observed that interest rates continue to decline, reaching an average of 24.3 percent in November 2007 (down from 27.9 percent in December 2006). Fundanga suggested that ?the drop in lending rates follows the generally lower government securities yield rates and inflation over the past few years.? KOPLOVSKY