Bank of Zambia

1. Bank of Zambia QUARTERLY MEDIA BRIEFING BY CALEB M. FUNDANGA GOVERNOR BANK OF ZAMBIA 1 August, 2009 1

2. INTRODUCTION Bank of Zambia • Brief assesses monetary policy implementation and outcomes; and • Other economic and financial sector developments; in Q2, 2009. • Concludes with inflation outlook for Q3, 2009.

3. 1.0 MONETARY POLICY Bank of Zambia • Focus: Achievement of end-year inflation target of 10%. • Maintaining Reserve Money within programmed growth path.

4. 2.0 INFLATION Bank of Zambia • Annual overall inflation was 14.4% in June 2009 (13.1%, end-March 2009), due to rise in both food and non-food inflation: • Food: Discontinuation of supply of Government subsidised maize by FRA to millers; and • Non-Food: Pass-through effects of depreciation of the Kwacha against global currencies .

5. 2.0 INFLATION (cont’d) Bank of Zambia

6. 3.0 MONEY SUPPLY & DOMESTIC CREDIT Bank of Zambia • Annual M3 growth slowed down to 20.5% June 2009 (26.8%, March 2009) due to fall in NDA (19.0%) and increase in NFA (74.1%). • Annual domestic credit growth was 39.2% (52.7%, March 2009); growth owing to net lending to Government (141.5% increase). • Sectoral distribution of credit: • Personal loans category, highest recipient at 24.9% of total loans (23.8%, Q1 2009), followed by agriculture 17.5% (16.9%, Q1); manufacturing 11.1% (10.8%, Q1).

7. 4.0 INTEREST RATES BankofZambia • Yield Rates On Government Securities increase • Weighted Average Treasury Bill Rate rose to 16.9% (16.7%, March 2009). • Weighted average yield rate on bonds rose to 18.8% (18.4%, March 2009). • Commercial Banks Nominal Interest Rates rise • All nominal rates rose, except Average Savings Rate at 4.8%; • Weighted average lending base rate rose to 22.4% (20.9%, March); • Average Lending Rate rose to 28.9% (27.0%) ; and • 30-day deposit rate remained stable at 5.6% (5.1%).

8. 5.0 FOREIGN EXCHANGE MARKET BankofZambia • The Kwacha marginally appreciated by 1% against the US$ (9.3% depreciation, Q1) due to; • Reduced demand, especially from foreign financial institutions; • Global economic recovery weakens risk aversion • Improved sentiments following increased forex earnings; • Rising international copper prices since beginning of 2009.

9. 5.0 FOREIGN EXCHANGE MARKET (cont’d) BankofZambia

10. 5.0 FOREIGN EXCHANGE MARKET (cont’d) BankofZambia

11. 6.0 BALANCE OF PAYMENTS (BoP) Bank of Zambia • Overall BoP - surplus of US $24.9 million recorded in Q2 (deficit of US $147.7 million, Q1): • Due to improved performance in current account. • Largely explained by surplus in trade balance of US $34.5 million in Q2 (US $60.8 million deficit, Q1) ; • Increase in export earnings. • Other contributions to current account improvement were net income payments and net current transfers.

12. 6.0 BALANCE OF PAYMENTS (cont’d) Bank of Zambia Trade Data in US $ millions (f.o.b.), Q1 2008 - Q2 2009

13. 6.0 BALANCE OF PAYMENTS (cont’d) Bank of Zambia • Merchandise export earnings increased by 21.0% to US US $ 864.1 million: • Copper export earnings, at US $688.6 million, were 22.3% higher than US $562.9 million; • 19.4% rise in realised copper price to US $4,045.66 per mt from US $3,389.42 per mt; • Volumes increased by 2.2% to 170,218.93 mt.

14. 6.0 BALANCE OF PAYMENTS (cont’d) Bank of Zambia • Cobalt export earnings recorded a 39.2% increase to US $18.0 million in the second quarter of 2009; • Realised cobalt price rose to US $12.97 per pound from US $5.03 per pound. • Cobalt export volumes declined by 46.0% to 628.51 mt.

15. 6.0 BALANCE OF PAYMENTS (cont’d) Bank of Zambia • NTEs at US $157.5 million were 14.0% higher than US $138.1 million realised in Q1: • Increased earnings from copper wire, cane sugar, cotton yarn, fruits and vegetables, gemstones, petroleum products and electricity.

16. 6.0 BALANCE OF PAYMENTS (cont’d) Bank of Zambia • Merchandise imports also rose by 26.8% to US $847.6 million (US $668.3 million, Q1): • Higher import bills of food items, petroleum products, fertiliser, iron and steel products, industrial boilers and equipment, and electrical machinery and equipment.

17. 7.0 ECONOMIC REFORM PROGRAMME Bank of Zambia • The IMF completed 1st and 2nd reviews under PRGF arrangement in Q2: • The Executive Board approved US $256.4 million financial support to Zambia; • A total of US $162.2 million was disbursed in the period under review; and • All quantitative benchmarks were met at end-June and the structural benchmarks were generally on track.

18. 8.0 DEVELOPMENTS IN BANKING SECTOR Bank of Zambia • Overall financial performance and condition of the banking sector was satisfactory in Q2; • Banks fundamentally sound; but • An increase in non-performing loans to 10.4% of total assets from 8.8% at end March.

19. 9.0 DEVELOPMENTS IN NON-BANK FINANCIAL INSTITUTIONS Bank of Zambia • Overall financial performance and condition of NBFIs was rated fair during the Q2: • Adequate regulatory capital and asset quality for leasing companies and bureaux de change; • 2 leasing finance companies, 1 building society and 1 credit and savings institution had regulatory capital deficiencies.

20. 10.0 DEVELOPMENTS IN BCPS Bank of Zambia • Volume of unpaid cheques declined by 11% to 5,568 cheques (quarter 1: 6,264); • Value increased by 24% to K57 billion (quarter 1: K46 billion). • The BoZ would like to urge the Media to educate the public on the consequences of ‘bouncing cheques’.

21. 11.0 INFLATION OUTLOOK FOR SECOND QUARTER 2009 Bank of Zambia • Inflationary pressures expected to emanate from: • High production costs due to current power shortages and recently approved increase in electricity tariffs; and • Higher international crude oil prices if sustained. • Offsetting factors: • Reduction in food inflation due to ongoing crop marketing season; •  Continued stability in the exchange rate. • BoZ to continue to employ indirect instruments for monetary operations, • Prudent fiscal operations necessary.

22. Thank You