11 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,  Concludes with inflation outlook for Q3, Bank of Zambia 2

1.0MONETARY POLICY  Focus: Achievement of end-year inflation target of 10%.  Maintaining Reserve Money within programmed growth path. Bank of Zambia 3

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. Bank of Zambia 4

2.0 INFLATION (cont’d) Bank of Zambia 5

3.0MONEY 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). Bank of Zambia 6

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%). Bank of Zambia 7

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 Bank of Zambia 8

5.0 FOREIGN EXCHANGE MARKET (cont’d ) Bank of Zambia 9

5.0 FOREIGN EXCHANGE MARKET (cont’d ) Bank of Zambia 10

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. Bank of Zambia 11

6.0 BALANCE OF PAYMENTS (cont’d ) Trade Data in US $ millions (f.o.b.), Q Q Bank of Zambia 2008 Q Q Q Q Total 2009 Q Q2* Trade Balance Exports (c.i.f)1,318.61,441.81, , Metals1,147.21, , Copper1,035.51, , Cobalt NTEs Imports c.i.f , , ,

6.0 BALANCE OF PAYMENTS (cont’d)  Merchandise export earnings increased by 21.0% to US US $ 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, per mt from US $3, per mt;  Volumes increased by 2.2% to 170, mt. Bank of Zambia 13

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 mt. Bank of Zambia 14

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. Bank of Zambia 15

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. Bank of Zambia 16

 The IMF completed 1 st and 2 nd 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 Bank of Zambia 17

 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 18

 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 19

 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’ DEVELOPMENTS IN BCPS Bank of Zambia 20

 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 INFLATION OUTLOOK FOR SECOND QUARTER 2009 Bank of Zambia 21

Thank You 22