BANK BANK Of Of ZAMBIAZAMBIA

FIRST QUARTER 2008 MEDIA BRIEFINGFIRST QUARTER 2008 MEDIA BRIEFING

BY BY

DR. CALEB M. FUNDANGADR. CALEB M. FUNDANGA

GOVERNORGOVERNOR

Bank of Zambia Bank of Zambia

28 APRIL 200828 APRIL 2008

04/21/23 2

1.0 Introduction

Media brief:

Reviews monetary policy outcomes; and other economic and financial sector

developments in quarter 1, 2008; andGives inflation outlook quarter 2, 2008.

2.0 NATIONAL BUDGET FOR 2008 The Minister of MoFNP presented the 2008 National

Budget to Parliament on 26 January 2008. Major Macroeconomic targets for 2008 Real GDP growth at least 7%; and End year inflation of 7%. A new fiscal regime for the Mining Sector was

announced Corporate tax increased to 30% from 25% Mineral royalty on base metals at 3% (up from 0.6%) A windfall tax to be triggered at different price levels

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3.0 Monetary Policy

In quarter 1 of 2008, monetary policy focus:

consolidating macroeconomic stability i.e. maintaining single digit inflation (8.9%, December 2007).

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

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3.1 Inflation3.1.1 Overall InflationAnnual overall inflation rate

Single digit 9.8%, end-March 2008 (8.9%, December 2007).

Increase in food inflation (see Chart 1).

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Chart 1: Annual Inflation - December 2005 to March 2008

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3.1.2 Food Inflation

Annual food inflation 9.1%, March 2008 (5.9%, December 2007)

Higher prices of mealie-meal, maize grain, other cereals, cereal products, groundnuts, fresh fruits, chicken, fish (bream), beef, milk, eggs, oils and fats.

Higher production costs (electricity load shedding, rising transportation costs, lower seasonal supply, fishing ban & continued ban on movement of cattle from Southern Province- CBPP).

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3.1.3 Non-Food Inflation

Annual non-food inflation lower, 10.4%, March 2008 (11.9%,

December 2007).

Relative stability exchange rate of Kwacha vs major trading currencies.

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4.0 Money Supply and Domestic Credit4.1 Money Supply

Annual money supply (M3) growth,27.7%, March 2008 (26.3%,

December 2007) (see Chart 2).

Rise in Net Foreign Assets (NFA) by 56.5%.

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Chart 2: Annual Broad Money Growth, December 2005 - March 2008

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4.2 Domestic Credit

Domestic credit growth slowed down, 7.1%, March 2008 (19.7%, December

2007).

Fall in net claims on government by 36.9%, despite a 28.2% expansion in private sector credit.

Excluding foreign currency denominated credit, which decreased by 3.6%, domestic credit rose by 10.7%.

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4.2 Domestic Credit Cont...

Sector analysis Credit dominated by:

Personal loans at 21.3%; Agriculture 18.5%; Financial services 13.7%; and Manufacturing 10.7% (see Table

1).

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Table 1: Share in Total Loans and Advances (%), Dec 06 – Feb 08

SectorDec 06 Dec 07 Jan

08Feb

08

Agriculture 27.2 21.0 19.8 18.5

Mining & Quarrying 4.3 4.0 4.5 4.7

Manufacturing 13.3 10.7 10.9 10.7

Electricity, gas, water & energy 3.2 4.9 3.7 3.4

Construction 2.2 3.5 3.6 3.7

Wholesale and retail trade 14.5 10.8 10.9 10.3

Restaurants & hotels 2.0 1.2 1.1 1.0

Transport storage and communicat. 8.0 7.2 7.4 6.9

Financial services 4.7 4.2 10.1 13.7

Community, social and pers.services 2.5 1.6 1.7 1.5

Real Estate 4.8 2.2 2.2 2.1

Personal Loans 11.2 15.7 21.5 21.3

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5.0 Interest Rates5.1 Yields on Government Securities Yield rates on Treasury bills declined

Weighted average Treasury bill rate 12.7%, end-March 2008 (12.9%, end-December 2007) (see Chart 3).

Increased demand for Government securities. Bond rates increased

Weighted average bond rate 15.9%, March 2008 (15.6%, December 2007)

Continued foreign investor interest, especially in longer dated securities (see Chart 4).

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Chart 3: Treasury bill Yield Rates % p.a

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91-day 182-day 273-day 364-day

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Chart 4: Government bonds yield rates, % p.a

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5.2 Commercial Banks Interest Rate

Lending rates continued to trend downwards Average lending rate 24.3%, March 2008 (24.4%,

December 2007). Deposit rates increased

30-day deposit rate for over K20 million 5.0%, March 2008 (4.8%, December 2007)

Average savings rate for over K100, 000 remained unchanged at 4.8%.

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Chart 5 : Commercial Banks Interest Rates

0369

12151821242730

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Lending Avg Savings Deposit Rate (30 days)

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6.0 Foreign Exchange Rate

Kwacha appreciated against major foreign currencies. By 4.2% to K3,675.36 against the US dollar; and By 4.9% to K475.56 against the SAR.

Stronger supply of foreign exchange on the market, due to high copper prices in international markets;

Increased foreign investor participation in Government securities market due to reduction in interest rates in USA; and

General weakening of the US dollar in global markets due to on-going credit crisis.

Kwacha depreciated by 1.8% to K5,629.90 against Euro (see Chart 6).

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7.0 Balance of Payments

Overall BoP surplus of US $164.8 million in quarter 1 of 2008 (US $60.6 million surplus, Quarter 4 of 2007).

Improvements in capital and financial accounts due to increase in financial inflows in form of capital transfers and other investments.

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7.0 Balance of Payments Cont…

Trade surplus of US $288.3 million ( US $115.7 million surplus, 4th quarter 2007) Increase in copper (3.2%) and cobalt earnings (36.9%).

Copper export earnings at US $886.0 million (US $858.4 million, 4th quarter 2007)

Higher realised LME prices at US $7,746.94 per ton (US $6,949.22 per ton, 4th quarter).

Cobalt export earnings at US $108.3 million (US $79.1 million, 4th quarter,

Increase in realised price to US $42.37 per pound from US $28.76 per pound (see Charts 7 & 8).

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Chart 7: Export Earnings (US $ Millions)

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Copper Cobalt NTE's

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7.0 Balance of Payments Cont…

NTEs 16.1% decline to US $183.6 million in Q1 2008

Lower export earnings of copper wire, white spoon sugar, burley tobacco, cotton lint, electric cables, fresh flowers and gemstones (see Table 2).

However, NTEs were 5.6% higher compared to Q1 2007.

Merchandise imports 8.8% decline to US $901.1 million in Q1 2008

Lower import bills of iron & steel products, petroleum products, fertiliser, industrial boilers & equipment and electrical machinery & equipment.

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Chart 8: Movement in the LME Copper Price

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Table 2: Non-Traditional Exports (US $ Million)

2004 2005 2006 2007 Q4.2007

Q1.2008

Copper wire 58.5 106.5 175.0 186.7 46.2 26.8

Sugar 33.4 67.8 54.3 62.9 24.5 12.5

Burley Tobacco 43.3 60.3 70.5 51.6 15.6 2.2

Cotton Lint 51.4 55.9 62.3 34.1 8.2 5.8

Electric cables 32.7 48.5 103.7 132.9 46.1 10.9

Flowers 25.5 32.1 34.7 28.2 12.6 4.2

Cotton Yarn 23.9 24.1 18.9 12.4 2.1 4.5

Fresh Fruit Vegetables 23.2 21.3 25.3 23.2 3.9 4.0

Gemstone 16.2 19.5 18.1 29.6 4.8 2.7

Gasoil/Petroleum Oils 24.3 9.8 10.3 21.6 4.1 1.6

Electricity 4.8 3.8 7.0 6.0 2.8 2.7

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8.0 Copper and Cobalt Output

Copper output 8.9% decline to 128,592.7 mt in Q1 2008 (see Chart 9).

Flooding of mines, typical in rain season.

But output higher than 114,912.7 mt recorded in Q1 2007.

Cobalt output 8.2% decline to 1,150.2 mt. But, 26.9% higher than 906.5 mt produced in Q1 2007.

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Chart 9: Mineral Production (Metric Tons)

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9.0 Implementation of the Economic Programme IMF Mission visit to Zambia in Q1

2008. Article IV consultations; and Discussions on new economic

programme. PRGF arrangement ended September 2007.

Understanding reached on new three-year economic programme under PRGF.

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10.0 Developments in Banking Sector Overall financial condition and

performance of banking sector in Q1 2008- satisfactory.

Maintained adequate capital & reserves; and Asset quality, earnings and liquidity-

satisfactory.

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11.0 Developments in Non-Bank Financial Sector

Overall financial condition and performance of NBFIs in review period- satisfactory.

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

One leasing company and one building society recorded regulatory capital deficiencies.

However, measures have been put in place to address the deficiencies.

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12.0 Banking, Currency and Payment Systems

Currency in circulation, 7.0% decrease to K1,408.4 billion (K1,514.9 billion, end-December 2007).

Lower demand for cash in Q1. Q4 demand for cash usually higher due to festive season

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12.1 Removal of unfit paper and polymer banknotes from circulation

Unfit banknotes removed amounted to 20.3 million pieces (21.5 million pieces, Q4 of 2007).

Public exchange of mutilated banknotes amounted to 11,984 pieces (9,779 pieces, Q4 2007).

Notes burnt by fire or eaten by rats. The public is encouraged to deposit excess

cash with commercial banks.

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12.2 Implementation of Item Value Limits Item Value Limits implementation has

reduced dependency on cheques and DDACC in transfer of funds and payments for large value and urgent transactions.

However, some customers have in some

cases split the amount and drawn more than one cheque to the same beneficiary.

The Public encouraged to utilise RTGS for transmission of large value transactions.

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12.3 Implementation of Tax Payment Stream Implementation of Tax payment stream has

enabled tax payers to make payments through commercial banks on any day before the deadline. Queues at ZRA offices greatly reduced. Some corporate tax payers with appropriate

infrastructure can issue tax payment instructions from their offices.

Public to embrace this payment stream for all their tax payment obligations.

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13.0 Inflation Outlook for the Second Quarter of 2008 Overall annual inflation to slow down

in Q2 2008.

Easing of both food and non-food inflationary pressures.

Lower food prices Improved seasonal supply.

13.0 Inflation Outlook for the Second Quarter of 2008 (cont.)

Lower non-food inflation pass-through effects of appreciation of Kwacha against major currencies; and

Reduction in VAT to 16.0% effective 1 April 2008 (from 17.5%).

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14.0 Conclusion

The Bank of Zambia will continue to monitor these developments and undertake appropriate monetary policy actions.

Thank You