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Bank of Zambia

QUARTERLY MEDIA BRIEFING

BY

CALEB M. FUNDANGA

GOVERNOR

BANK OF ZAMBIA

1 August, 2009

INTRODUCTION

Brief assesses monetary policy implementation and outcomes; and

Other economic and financial sector developments; in Q2, 2009.

Concludes with inflation outlook for Q3, 2009.

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1.0 MONETARY POLICY

Focus: Achievement of end-year inflation target of 10%.

Maintaining Reserve Money within programmed growth path.

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2.0 INFLATION

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 .

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2.0 INFLATION (cont’d) Bank of Zambia

-1

1

3

5

7

9

11

13

15

17

19

21

23D

ec 0

4

Mar

05

Jun

Sept

Dec

05

Mar

06

Jun

Sep

Dec

06

Mar

07

Jun

07 Sep

Dec

07

Mar

08

Jun

08

Sept

-08

Dec

-08

Mar

-09

Jun

-09

(%)

Annual Inflation, Dec 04- Jun 09

Overall Food Non-food

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3.0 MONEY SUPPLY & DOMESTIC CREDIT

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).

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4.0 INTEREST RATES

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%).

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5.0 FOREIGN EXCHANGE MARKET

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.

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5.0 FOREIGN EXCHANGE MARKET (cont’d)

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5.0 FOREIGN EXCHANGE MARKET (cont’d)

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6.0 BALANCE OF PAYMENTS (BoP)

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.

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6.0 BALANCE OF PAYMENTS (cont’d)

Trade Data in US $ millions (f.o.b.), Q1 2008 - Q2 2009

Bank of Zambia

 

2008Q1

2008Q2

2008Q3

2008Q4

2008Total

2009Q1

2009Q2*

Trade Balance 421.1 235.8 -183.9 -69.8 403.2 -60.8 34.5

Exports (c.i.f) 1,318.6 1,441.8 1,206.7 909.8

4,876.9

713.9

864.1

Metals 1,147.2 1,216.2 925.6 711.7 4,000.7 575.4 706.6

Copper 1,035.5 1,126.1 856.2 666.4 3,684.2 562.9 688.6

Cobalt 111.7 90.1 69.4 45.3 316.5 12.9 18.0

NTEs 171.4 225.6 281.1 198.1 876.2 138.1 157.5

Imports c.i.f -913.2 -1,225.9 -1,416.3 -999.9 -4,555.3 -668.3 -847.6

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6.0 BALANCE OF PAYMENTS (cont’d)

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.

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6.0 BALANCE OF PAYMENTS (cont’d)

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.

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6.0 BALANCE OF PAYMENTS (cont’d)

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.

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6.0 BALANCE OF PAYMENTS (cont’d)

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.

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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.

7.0 ECONOMIC REFORM PROGRAMME

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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.

8.0 DEVELOPMENTS IN BANKING

SECTOR Bank of Zambia

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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.

9.0 DEVELOPMENTS IN NON-BANK

FINANCIAL INSTITUTIONS Bank of Zambia

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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’.

10.0 DEVELOPMENTS IN BCPS

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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.

11.0 INFLATION OUTLOOK FOR SECOND QUARTER 2009

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Thank You

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