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Bank of Zambia

THIRD QUARTER 2008 MEDIA BRIEFING

BY

DR CALEB M. FUNDANGA

Governor

BANK OF ZAMBIA

Presented at the Bank of Zambia

19th November, 2008

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INTRODUCTION

This brief reviews monetary policy outcomes; and

Other economic and financial sector developments in Q3 2008.

In conclusion, an inflation outlook for Q4 2008 is provided.

Bank of Zambia

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1.0 MONETARY POLICY

• In Q3 2008, monetary policy focus:

• Macroeconomic stability and achieving end-year inflation target.

By containing growth of liquidity in banking

system within projected path.

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2.0 INFLATION

• Annual inflation rose to 14.2% in September then further to 15.2% in October due to: Rise in domestic fuel prices, transport costs and pass-through effects of

Kwacha exchange rate depreciation. Low supply of grains, cereals and high production costs of processed food

items.

Bank of Zambia

Chart 1 : Annual Inflation Dec 04- Oct 08

-113579

11131517192123

Dec 0

4

Mar

05 Jun

Sept

Dec 0

5

Mar

06 Jun

Sep

Dec 0

6

Mar

07

Jun 0

7 Sep

Dec 0

7

Mar

08

Jun 0

8

Sept

08

Oct 0

8

(%)

Overall Food Non-food

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3.0 MONEY SUPPLY & DOMESTIC CREDIT

• Money supply growth slowed down to 17.3% (26.7%, end-June 2008) due to lower growth in net foreign assets.

• Annual growth in total domestic credit slowed down to 19.5% (28.3%, June 2008).

• Personal loans continued to account for highest share at 28.7% (29.4%, Q2) followed by agriculture at 17.7% (15.7%, Q2)

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4.0 INTEREST RATES

Yield Rates On Government Securities

• Weighted average yield rate on Treasury bills increased to 14.0% in September 2008 (13.5% in June 2008).

• Weighted average yield rate on bonds declined to 15.3% (15.7% in June 2008).

Commercial Bank Interest Rates

• Average lending rate rose to 25.7% (24.6% in June 2008).• 30-day deposit rate for over K20 million and average

savings rate for amounts above K100,000 remained unchanged at 5.0% and 4.8%, respectively.

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5.0 FOREIGN EXCHANGE MARKET

• High volatility and weakening of Kwacha due to:

Political uncertainty; Global financial crisis; and Fall in copper prices.

• Kwacha depreciated against US dollar by 8.8% (appreciation of 11.5% in June 2008) but appreciated against pound sterling by 0.7% (appreciated by 12.9% in June 2008).

• BoZ participated in forex market, recording net sales of US $56.5 million in Q3 (net purchases of US $16.5 million in Q2).

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Foreign Exchange Market (cont)Bank of Zambia

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6.0 BALANCE OF PAYMENTS (BoP)

• Overall BoP position-deficit of US $120.6 million in Q3 (surplus of US $146.1 million in Q2).

Due to decline in current account mainly following lower export earnings which fell by 27.9% in Q3 (8.6% increase, Q2).

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

Bank of Zambia

Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

Trade Bal 349.7 97.2 425.9 231.7 -224.8

Exports 1,318.7 1,132.8 1,323.4 1,437.7 1,037.3

Metals 1,094.8 937.5 1,147.2 1,214.3 807.6

Copper 1,027.9 858.4 1,035.5 1,124.2 758.1

Cobalt 66.9 79.1 111.7 90.1 49.5

Non-Metals 223.9 195.2 176.3 223.4 229.7

Imports -988.0 -1,055.5 -913.2 -1225.9 -1284.4

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• IMF mission in Zambia, 17th - 26th September 2008: Reviewed economic performance under PRGF arrangement

for period up to June 2008.

All end-June 2008 benchmarks observed. Broad agreement on macroeconomic outlook for 2008.o Mission satisfied with performance of Zambian economy. o Expect slow down in economic growth this year due to

relatively poor harvest and inadequate power supply. Follow up mission in December 2008.

7.0 IMPLEMENTATION OF THE

ECONOMIC PROGRAMME Bank of Zambia

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• Overall financial condition and performance of banking sector satisfactory in Q3.

Banks had adequate capital reserves, asset quality, earnings and

liquidity remained satisfactory.

• Overall financial condition and performance of NBFIs also satisfactory.

Leasing and finance companies, MFIs and bureaux de change- adequate regulatory capital.

Earnings, asset quality and liquidity positions fair.

8.0 DEVELOPMENTS IN

FINANCIAL SECTOR Bank of Zambia

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9.0 IMPLICATIONS OF GLOBAL

FINANCIAL CRISIS ON ZAMBIA • Causes of Credit Crunch:

Poor underwriting standards for mortgage loans; Weak regulation and supervision of banking sector; and Many international banks had exposure to the sub-prime security backed financial

assets;

• Signs of Problem: Sub-prime lenders unable to service debt when interest rates rose, early 2007. High loan defaults, foreclosures, and decline in demand for homes.

• Implications on World Economies:

Banking system short of liquidity, failing to lend to each other and not able to provide credit to private sector players;

Businesses scaling down operations and closures, reduced employment, default on financial obligations; and

Slow down in economic growth of USA and countries concerned.

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Implications of Global Financial Crisis on Zambia cont.

• Effect on the Zambian Economy: Withdrawals by foreign portfolio investors in Zambian Government

and private securities; Lower commodity prices e.g. copper at US $3,592.00 per mt as at 12 th

November 2008 (US $8,684.93, April 2008; and Result- weakening of Kwacha exchange rate; Low GDP growth.

• Prolonged Recession May: Deepen risk aversion and discourage both portfolio and FDI flows into

country; Reduce Zambia’s export earnings; Increase inflation, pass-through effects of exchange rate depreciation; Result in Banks raising interest rates, so avail less credit to private

sector ; and Further reduce GDP growth.

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Implications of Global Financial Crisis on Zambia cont.

• Lessons for the banking sector in Zambia:

Need for banks to adhere to strict underwriting procedures for mortgage and personal loans

Urgent need for banks to fully utilise the services of the Credit Reference Bureau

Commercial banks urged to share information with BoZ on a timely basis

BoZ to enhance supervision of banks in line with the Risk Based Supervision approach

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Implications of Global Financial Crisis on Zambia cont.

• Investor Confidence:To-date FDI continues to rise in Zambia;Banking system stable and adequately capitalised –

No liquidity problems; Higher vigilance of supervisory oversight; Strong economic fundamentals; andCo-operating partners disbursing financial support.

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• Inflationary pressures may arise from: Pass through effects of depreciation of the Kwacha against the US

dollar; Lower seasonal supply of fresh vegetables, maize, cereals and

tubers, typical during last quarter of year; and Increase in Government expenditure arising mainly from

presidential elections and higher subsidy on FSP.

• BoZ to undertake appropriate monetary policy actions to contain inflationary pressures.

• Thank You

10.0 INFLATION OUTLOOK FOR FOURTH QUARTER 2008

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