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Bank of Zambia

FIRST QUARTER 2010 MEDIA BRIEFING

BY

CALEB M. FUNDANGA

Governor BANK OF ZAMBIA

Presented at the Bank of Zambia 13 May, 2010

INTRODUCTION

This brief reviews monetary policy outcomes; Other economic and financial sector developments in Q1

2010; and

Concludes with an inflation outlook for Q2 2010.

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1.0 MONETARY POLICY

• Monetary policy focus in Q1 2010

• Macroeconomic stability and achieving end-year inflation target of 8%.

By containing growth of liquidity in banking system within

projected path.

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2.0 INFLATION

• Annual inflation rose to 10.2% in March 2010 (Dec 09: 9.9 %) mainly due to:

Rise in food prices (breakfast and roller meal, rice, millet beef products, dried kapenta and fresh vegetables).

Despite a fall in inflation rates for clothing and recreation, medical care; and furniture and household goods sub-groups.

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2.0 INFLATION Bank of Zambia

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3.0 MONEY SUPPLY & DOMESTIC CREDIT

• Broad money (M3), comprehensively defined to include foreign currency deposits, grew by 5.5% in the first quarter of 2010 up from 4.1% recorded at end-December 2009.

• Largely due to the 16.4% expansion in net foreign assets (NFA), with NDA contracting by 0.6%.

• On an annual basis M3 growth rose to 14.2% in March from 8.3% in December, 2009, with NFA and NDA rising by 7.1% and 19.3%, respectively.

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• On a quarterly basis, domestic credit growth was 2.1%, during the first quarter of the year, compared to a contraction of 2.7% in Q4, 2009.

• Credit to Government continued to drive NDA growth with the Net Claims on Government rising by 17.8%.

• However, on an annual basis, domestic credit growth slowed to 9.8% in March 2010 from 15.2% in December 2009. This was driven by a decline in credit growth to the private sector of 13.8%.

• Personal loans continued to account for the highest share of loans and advances at 27.7% (22.1%, fourth quarter 2009) followed by agriculture at 20.0% (19.3%, fourth quarter 2009).

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3.0 MONEY SUPPLY & DOMESTIC CREDIT (cont)

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4.0 INTEREST RATES

Yield Rates On Government Securities

• The composite yield rate for Treasury bills ended the quarter at 3.7%, down from 9.5% recorded at the end of 2009.

• The weighted average yield rate for Government bonds fell to 10.3%, 6.0 percentage points lower than the end December 2009 closing rate.

• The fall in yield rates was due to high levels of liquidity in the banking sector.

Commercial Banks Interest Rates The weighted average lending base rate and the average lending rate hardly

changed at 22.5% (22.7%) and 29.0% (29.2%), respectively. Average savings rate for amounts above K100,000 and 30-day deposit rate

remained unchanged at 4.7% and 5.6%.

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5.0 FOREIGN EXCHANGE MARKET

• During the quarter, the Kwacha appreciated against major currencies mainly due to the sustained rise in copper prices.

• The Kwacha appreciated by 0.8%, 6.8% and 5.3% against the US

dollar, Euro and Pound Sterling. Against the South African rand the Kwacha gained by 1.1%.

• The volume of foreign exchange traded in the market marginally declined. Commercial banks’ sales to the market decreased to US$850.2 million from US$855.3 million while purchases amounted to US$930.2 million, down from US$1,059.2 million.

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5.0 FOREIGN EXCHANGE MARKET

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6.0 REAL SECTOR INDICATORS

Overall performance of the real sector was mixed: Mining, copper output at 174,725.12 mt during the quarter was

3% lower than 180,188.17 mt of copper produced in Q4 of 2009. However, the output was 2.2% higher than 170,948.19 mt produced in the first quarter of 2009.

Cobalt output increased by 3.4% to 1,960.72 mt from 1,896.24 mt in the previous quarter.

Manufacturing, Output of cement, beer, soft drinks and milk declined mainly on account of seasonal factors.

Investment Pledges, total investment pledges stood at US $1.4 billion compared to US $452.0 million in the fourth quarter. When fully executed, these pledges are expected to generate 5,943 jobs.

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• Preliminary data show that Zambia recorded an overall balance of payments (BoP) deficit of US $81.4 million during the first quarter of 2010 compared with a surplus of US $18.2 million recorded the previous quarter.

• This was on account of unfavourable performance in the financial and capital account.

7.0 BALANCE OF PAYMENTS (BoP) Bank of Zambia

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7.0 BALANCE OF PAYMENTS (cont’d)

During the quarter under review, the capital and financial account surplus narrowed to US $117.6 million from US $196.1 million recorded the previous quarter.

This was attributed to a decline in capital transfers , direct investment , portfolio investment and other investments.

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7.0 BALANCE OF PAYMENTS (cont’d)

However, merchandise trade surplus improved to US $368.5 million in the first quarter 2010 from US $272.2 million recorded in Q4 of 2009 due to an increase in merchandise exports earnings.

Copper export earnings, at US $1,274.7 million, were 19.5% higher than US $1,067.1 million recorded during the previous quarter:

Reflecting a rise in the realised price of copper by 10.8% to US $6,665.59 from US $6,013.37 per tonne the previous quarter.

Similarly, copper export volumes, increased by 7.8% to 191,229.77 metric tons (mt) from 177,457.68 mt recorded during the last quarter of 2009.

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7.0 BALANCE OF PAYMENTS (cont’d)

Similarly, cobalt export earnings grew by 32.2% to US $78.0 million in the first quarter of 2010 from US $59.0 million realised the previous quarter.

This was largely a result of the 28.0% rise in the realised price to US $18.19 per pound from US $14.21 per pound recorded the previous quarter.

Cobalt export volumes increased by 3.2% to 1,943.52 mt during the first quarter of 2010 from 1,882.44 mt, the previous quarter.

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7.0 BALANCE OF PAYMENTS (cont’d)

During the first quarter of 2010, non-traditional exports (NTEs) declined by 11.0% to US $258.4 million from the US $290.5 million realised in the previous quarter;

Largely due to a fall in export earnings from cane sugar, burley tobacco, cotton lint, fresh flowers, fruits and vegetables, gemstones, maize, cement and petroleum products

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7.0 BALANCE OF PAYMENTS (cont’d)

Table 2 :Trade Data in US $ millions (f.o.b), Q1 2009 – Q1 2010

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2009Q1

2009Q2

2009Q3

2009Q4

2010Q1*

Trade Bal-99.0 -12.2 341.9 272.2 368.5

Exports658.3 899.7 1,321.0 1,416.6 1,611.1

Metals510.1 691.7 1,015.2 1,126.1 1,352.7

Copper 497.5 666.8 947.8 1067.1 1,274.7

Cobalt12.6 24.9 67.4 59.0 78.0

Non-Metals

148.2 208.0 305.8 290.5 258.4

Imports-757.3 -911.9 -979.1 -1,144.4 -1,242.6

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• An IMF mission visited Zambia between 18th February and 2nd March 2010:

The mission reached preliminary agreement with the Zambian Authorities on the 2010 Macroeconomic framework and structural measures;

Total disbursed poverty reduction budget support (PRBS) in

the first quarter of 2010 amounted to US $66.3 million against a projection of US $128.5 million and

Payments to various creditors, excluding IMF debt service,

amounted to US $10.6 million.

All quantitative benchmarks, except the unencumbered international reserves benchmark at end-March 2010 were observed.

8.0 IMPLEMENTATION OF THE ECONOMIC PROGRAMME

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• The overall financial condition and performance of the banking sector was satisfactory in the first quarter 2010.

The banking sector was adequately capitalized and the

liquidity position remained satisfactory;

There was a modest improvement in the asset quality and earnings performance compared to the previous quarter.

• The overall financial performance and condition of the NBFIs was rated fair.

Leasing and finance companies, MFIs and bureaux de change had adequate regulatory capital, fair asset quality and liquidity position.

9.0 DEVELOPMENTS IN FINANCIAL SECTOR

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The total volume of cheques returned unpaid on account of insufficiently funded accounts decreased by 15% to 5,287 cheques (Qtr 4 2009: 6,247 cheques).

The value of these cheques decreased by 16% to K39.83 billion (Qtr 4 2009: K47.49 billion).

The public is reminded that bouncing cheques is a criminal offence under the National Payment System Act.

10.0 DEVELOPMENTS IN BCPS

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The annual inflation rate is expected to slow down during the second quarter of 2010,

largely due to an increase in the supply of fresh food items with the onset of the 2009/2010 crop harvest period.

11.0 INFLATION OUTLOOK FOR SECOND QUARTER 2010

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THANK YOU

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