1 1 Bank of Zambia MEDIA BRIEFING BY CALEB M. FUNDANGA GOVERNOR BANK OF ZAMBIA 24 TH MARCH, 2009

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Bank of Zambia

MEDIA BRIEFING

BY

CALEB M. FUNDANGA

GOVERNOR

BANK OF ZAMBIA

24TH MARCH, 2009

INTRODUCTION

• This brief reviews monetary policy outcomes.

• Other economic and financial sector developments in Q4 2008, and first two months of 2009.

• In conclusion, an inflation outlook for Q2 2009 is provided.

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1.0 MONETARY POLICY

• In Q4 2008, monetary policy focus was macroeconomic stability and achieving 7.0% end-year inflation target.

• In first two months of 2009, monetary policy focused on consolidating macroeconomic stability and achieving end-year inflation target of 10.0%.

By containing growth of liquidity in banking system within projected path.

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2.0 INFLATION

• Annual inflation rose to 16.6% in December 2008 due to increase in food and non-food inflation reflecting:

Low supply of maize and cereals coupled with high production costs of processed food items.

Pass-through effects of Kwacha exchange rate depreciation.

• However, annual inflation slowed down to 16.0% in January 2009 and further to 14.0% in February 2009.

Mainly due to a decline in food inflation owing to Food Reserve Agency subsidies and stable fuel prices.

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2.0 INFLATION (cont’d) Bank of Zambia

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3.0 MONEY SUPPLY & DOMESTIC CREDIT

• Money supply (M3) growth rose by 22.1% at end Dec 2008 (17.3%, Sept 2008) due to expansion in both net domestic assets (NDA) and net foreign assets (NFA).

• M3 grew by 25.2% in Feb 2009 from 22.2% in Jan 2009 mainly due to a rise in NFA.

• Annual growth in total domestic credit increased to 34.0% (21.8%, Sept 2008) owing to net lending to Government. .

• By Feb 2009, domestic credit rose to 40.2% (40.1%, Jan 2009).

• Personal loans continued to account for highest share of total credit at 27.2% (28.7%, Q3) followed by agriculture at 15.4% (17.7%, Q3).

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4.0 INTEREST RATES

Yield Rates On Government Securities

• Weighted average yield rate on Treasury bills (WATBR) increased to 17.1% (13.9% in September 2008).

• WATBR stood at 16.9% in February 2009.

• Weighted average yield rate on bonds rose to 16.7% (15.3% in September 2008) and further to 18.7% in February 2009.

Commercial Bank Interest Rates

• Weighted average lending base rate rose to 20.8% (19.6% in September 2008).

• These rates remained relatively unchanged between January and February 2009 (WALBR, 20.9% and DR, 5.1%) .

• 30-day deposit rate for over K20 million remained at 5.1%.

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5.0 FOREIGN EXCHANGE MARKET

• Between September 2008 and February 2009, Kwacha depreciated against most major foreign currencies;

against US dollar by 57.0%; against pound sterling by 26.0%; andAgainst South African Rand by 32.0%.

• Depreciation of the Kwacha was largely due to the effects of the ongoing global financial crisis.

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5.0 FOREIGN EXCHANGE MARKET (cont’d)

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6.0 THE GLOBAL FINANCIAL CRISIS AND ITS IMPLICATIONS

• Causes of the Sub-Prime Crisis:Poor underwriting standards for mortgage loans;

Weak regulation and supervision of banks; and

Exposure to the sub-prime security backed financial assets.

• Signs of Problem:Inability to service debt when interest rates rose.

High loan defaults, foreclosures, and decline in demand for homes.

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6.1 Implications of the Financial Crisis

• Implications on World Economies:

Banking system short of liquidity (in the interbank market);

Business scale down or closure of operations ; and

Slow down in economic growth.

• To address impact, fiscal stimulus packages are being implemented by major economies.

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6.2 Implications of the Financial Crisis on Zambia

• Effect on the Zambian Economy:

• First Round

Banking System not directly affected due to absence of toxic assets;

Banking sector stable and growing with 4 new banks licensed as well as entrants of strategic partners in existing banks

• Second Round effects felt at macro level including :

Withdrawals by foreign portfolio investors reflected in reduced participation in the government securities market and poor showing of the LuSE Index

Lower commodity prices; Weakening Kwacha exchange rate; Reduced economic activity (e,g mines); Increased unemployment; and Low GDP.

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6.3 Responses to the Global FinancialCrisis in Zambia

• Government:

2009 National Budget focused on measures aimed at supporting export diversification.

Interventions in Agriculture, Manufacturing (MFEZ), Tourism and infrastructure development.

• Bank of Zambia :

BoZ issued regulation to curb off-shore Kwacha lending; Collaboration with other regulators to curb dollarization Improving information flow; and The market determined foreign exchange policy remains unchanged.

• Continued cooperation and indications of augmentation of resources by the donor community;

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7.0 BALANCE OF PAYMENTS (BoP)

• Overall BoP position-deficit of US $144.5 million in Q4 (deficit of US $120.6 million in Q3).Due to decline in current account mainly following lower export earnings.

Table 2 :Trade Data in US $ millions (f.o.b), Q3 2007-Q4 2008

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Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

Trade Bal 97.2 425.9 231.7 -224.8 -461.8

Exports 1,132.8 1,323.4 1,437.7 1,037.3 875.7

Metals 937.5 1,147.2 1,214.3 807.6 648.0

Copper 858.4 1,035.5 1,124.2 758.1 389.4

Cobalt 79.1 111.7 90.1 49.5 30.9

Non-Traditional Exports

195.2 176.3 223.4 229.7 227.7

Imports -1,055.5 -913.2 -1225.9 -1284.4 -1,126.7 14

• IMF mission in Zambia, 2nd - 10th December 2008 and 18th February – 4th March 2009: Reviewed economic performance under PRGF arrangement.

• Mission noted that economic growth was slowing due to global financial crisis.

• Broad agreement on macroeconomic outlook for 2009.

• Zambian Government and the IMF reached agreement on structural measures for 2009.

• IMF to provide substantial BoP support under PRGF arrangement.

8.0 IMPLEMENTATION OF THE

ECONOMIC PROGRAMME Bank of Zambia

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• Overall financial condition and performance of banking sector satisfactory in Q4 .

Banks had adequate capital reserves, asset quality and liquidity remained satisfactory. However, earnings performance was unsatisfactory.

• Overall financial condition and performance of banking sector at end-February, 2009 was satisfactory.

The banking sector as a whole was adequately capitalized while asset quality, earnings performance and liquidity position remained satisfactory.

9.0 DEVELOPMENTS IN

FINANCIAL SECTOR Bank of Zambia

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• The overall financial performance and condition of the NBFIs was rated fair during the period under review.

• On average, all NBFIs reported adequate regulatory capital, satisfactory earnings performance and asset quality whilst the liquidity position was rated fair.

• However, two leasing companies, one building society and one savings and Credit Company had regulatory capital deficiencies.

10.0 DEVELOPMENTS IN NON-BANK

FINANCIAL INSTITUTIONS Bank of Zambia

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11.0 INFLATION OUTLOOK FOR SECOND QUARTER 2009

• Inflationary pressures may arise from:

The proposed 66% increase in electricity tariffs to be effected in April 2009 and the negative spill over effects on the manufacturing sector;

The possible increase in water tariffs which automatically comes with higher electricity tariffs and negative effect on other service sectors; and

Pass through effects of the depreciation in the exchange rate of the Kwacha against the US dollar.

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INFLATION OUTLOOK FOR SECOND QUARTER 2009

• However these factors may be mitigated by the fall in food prices with the onset of the 2008/2009 crop harvest season.

• Bank of Zambia will continue to monitor these developments and undertake appropriate monetary policy actions to contain inflationary pressures.

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12 CONCLUSION

• Positive Signs Emerging:

Gradual Recovery of Copper Production and Prices;

Lower Inflation recorded in February; and

Narrowing trade deficit.

• Working together the nation can overcome the adverse effects of the crisis

Thank You

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