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Bank of Zambia

THIRD QUARTER 2009 MEDIA BRIEFING

BY

CALEB M. FUNDANGA

Governor BANK OF ZAMBIA

Presented at the Bank of Zambia 10th November, 2009

INTRODUCTION

This brief reviews monetary policy outcomes; Other economic and financial sector developments in Q3

2009, and

In conclusion, we provide an inflation outlook for Q4 2009.

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1.0 MONETARY POLICY

• In Q3 2009, monetary policy focus:

• Macroeconomic stability and achieving revised end-year inflation target of 12% (revised from 10%).

By containing growth of liquidity in banking system within projected

path.

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2.0 INFLATION

• Annual inflation declined to 13.0% in September (June 2009, 14.4%) then further to 12.3% in October mainly due to:

Fall in food prices (mealie meal, white plain flour, Mpulungu dried kapenta, and vegetables).

Decline in air fares for the Lusaka/London route and rates for accommodation for bed & continental breakfast due to relative strengthening of Kwacha.

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2.0 INFLATION Bank of Zambia

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3.0 MONEY SUPPLY & DOMESTIC CREDIT

• Money supply growth slowed down further to 19.8% (20.6%, end-June 2009) due to fall in the (NDA).

• Annual growth in total domestic credit slowed down to 41.7% (43.3%, end-June 2009).

• Personal loans continued to account for highest share at 21.0% (25.9%, second quarter 2009) followed by agriculture at 16.3% (16.2%, second quarter 2009)

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4.0 INTEREST RATES

Yield Rates On Government Securities

• Weighted average yield rates on Treasury bills declined to 17.5% in September 2009 (18.8% in June 2009).

• However, the weighted average yield rate on bonds rose to 19.1% (18.9% in June 2009).

Commercial Banks Interest Rates Average lending rate rose to 29.7% (June 2009, 28.9%) Average savings rate for amounts above K100,000 remained unchanged at

4.7%.

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5.0 FOREIGN EXCHANGE MARKET

• Kwacha appreciated against major currencies mainly due to:

Increased foreign exchange inflows, stemming mainly from continued higher copper prices;

Positive sentiments in the economy; and • Kwacha appreciated by 7.7% gain against the US dollar, the largest rate of

appreciation since the beginning of the year.

• BoZ participated in the forex market, with lower net sales of US $8.0 million in the third quarter (net sales of US $48.0 million in second quarter).

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FOREIGN EXCHANGE MARKET (cont)Bank of Zambia

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6.0 REAL SECTOR• During the third quarter, positive growth was recorded in the following

sectors:

Mining, as reflected in increased copper and cobalt production by 3.9% and 65.1% respectively.

Manufacturing, supported by increased output of cement, clear beer, soft drinks, and milk by 30.4%, 11%, 15.4% and 14.9%, respectively.

Tourism, as international arrivals at the country’s four international airports increased to 102,918 passengers from 88,066 passengers in the second quarter of 2009.

• In addition, total investment pledges stood at US $622.8 million compared to US $567.2 million in the second quarter. When fully executed, these pledges are expected to generate 5,594 jobs.

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6.0 REAL SECTOR

Projections by CSO indicate GDP growth forecast at 6.3% for 2009, primarily driven by increased output in the mining, construction and agricultural sectors as follows:

Mining is projected to grow by 21.4%;

Construction by 15.5%; and

Agriculture by 7.1% (Maize output rose by 26.7% to 1.9 million mt from 1.5 million mt in 2008).

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• Overall BoP position improved to a surplus of US $645.5 million in third quarter (surplus of US $24.9 million in second quarter).

• This was due to the improvement in both the current (export earnings rose by 45.7%) and, the capital and financial accounts.

• The capital and financial account surplus had a large increase to US $532.0 million from US $129.7 million recorded the previous quarter.

7.0 BALANCE OF PAYMENTS (BoP) Bank of Zambia

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7.0 BALANCE OF PAYMENTS (BoP)

• The increase in the capital and financial account was mainly attributed to a receipt of an SDR allocation of US $627.3 million from the IMF and an increase in capital transfers to US $65.0 million compared to US $41.4 million in the previous quarter.

• The improvement in the current and the capital and financial accounts resulted in an increase in international reserves (IR) to US $1,788.9 million in September 2009 from US $1,171.17 million in June 2009.

• As a result, IR are expected to rise to about 5 months of import cover by the end of 2009. This level of reserves has not been attained in the last 38 years.

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7.0 BALANCE OF PAYMENTS (BoP)

Table 2 :Trade Data in US $ millions (f.o.b), Q3 2008-Q3 2009

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2008Q3

2008Q4

2009Q1

2009Q2

2009Q3 (Est.)

Trade Bal-183.9 -68.6 18.3 78.6 415.0

Exports1,206.7 910.0 684.6 873.2 1,272.2

Metals925.6 712.0 543.5 675.1 1,003.5

Copper 856.2 666.7 531.0 656.8 968.2

Cobalt69.4 45.3 12.6 18.3 35.3

Non-Metals281.1 198.1 141.0 198.1 268.7

Imports-1,416.3 -999.0 -681.5 -820.4 -881.6

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• An IMF mission visited Zambia between 31st August and 4th September

2009: The mission participated in the preparation of the MTEF and agreed

the 2010 Budget principles with the Zambian authorities; The Framework emphasised on spending on priority capital projects

and social sectors while remaining consistent with macroeconomic stability; and

Continued efforts in revenue collection was key to ensuring

feasibility of the 2010 budget.

All end-June benchmarks and end- September 2009 indicative targets were observed.

8.0 IMPLEMENTATION OF THE ECONOMIC PROGRAMME

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• Overall financial condition and performance of banking sector was satisfactory in the third quarter 2009.

Banks were adequately capitalised and sector’s liquidity remained

satisfactory. However, the asset quality and earnings performance continued to

deteriorate even though the non-performing loans were adequately provided for.

• 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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10.0 DEVELOPMENTS IN BANKING, CURRENCY AND PAYMENT SYSTEMS

• The BOZ has continued to designate Payment System Businesses with a total of twenty three (23) licenses issued.

• The number of Point of Sale terminals on the market increased by 8% to 833 terminals while the number of ATMs increased by 7% to 406 machines in Q4 from 382 machines in Q2

Members of the public who travel out of the country are encouraged to use Visa debit cards for payment of bills or drawing cash from ATMs, which are now widely available in many countries.

• The Bank encourages members of the public to take advantage of these payment methods as they are more convenient and safer than cash.

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10.0 DEVELOPMENTS IN BANKING, CURRENCY AND PAYMENT SYSTEMS

• The total volume of cheques returned unpaid on account of insufficiently funded accounts decreased by 8% while the value decreased by 28%.

• We wish to reiterate that bouncing a cheque is a criminal offence under the National Payment System Act.

• Members of public should ensure that they have sufficiently funded accounts whenever they issue cheques to avoid facing criminal charges.

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10.0 DEVELOPMENTS IN BANKING CURRENCY AND PAYMENT SYSTEMS

The BOZ continues to implement its “Clean Note Policy”.

Members of the public are encouraged to surrender unfit notes in exchange for fit ones.

The Bank is further appealing to the public to continue handling currency carefully as printing of new bank notes is costly.

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• The Minister of Finance and National Planning Announced the 2010 National Budget on October 9, 2009.

• Govt maintained thrust of 2009 budget of diversifying the economy, reducing the cost of doing business and harnessing full capacity of land and people.

• 2010 Macroeconomic objectives are to:

exceed 5% GDP growth; reduce end-year inflation to 8.0% ;and limit domestic borrowing to 2.0% of GDP.

11. NATIONAL BUDGET -2010

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Inflationary pressures may emanate from: Price increases on manufactured goods in response to the upward

adjustments in electricity tariffs in the month of August 2009; and Seasonal increase in prices of beef and beef products. Further, the broader risk to the achievement of the end-year inflation

target is the likely increase in the domestic fuel pump prices.

However, inflationary pressures would be moderated by:

Expected stability in prices of mealie-meal and fresh vegetables, resulting from increased supply on the market; and

Relative stability in the exchange rate of the Kwacha against major foreign currencies.

BoZ will continue to undertake appropriate monetary policy actions to contain inflationary pressures.

End-year projection of 12.0% is well within reach and inflation may well trend down further towards the original 10.0% target.

12.0 INFLATION OUTLOOK FOR FOURTH QUARTER 2009

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