1. BANK Of ZAMBIA FIRST QUARTER 2008 MEDIA BRIEFING FIRST QUARTER 2008 MEDIA BRIEFINGBY DR. CALEB M. FUNDANGA GOVERNOR Bank of Zambia 28 APRIL 2008

2. 9/10/2015 2 1.0Introduction Media brief: Reviews monetary policy outcomes; and other economic and financial sector developments in quarter 1, 2008; and Gives inflation outlook quarter 2, 2008.

3. 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

4. 9/10/2015 4 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.

5. 9/10/2015 5 3.1Inflation 3.1.1 Overall Inflation Annual 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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7. 7 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).

8. 9/10/2015 8 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.

9. 9/10/2015 9 4.0Money Supply and Domestic Credit 4.1Money 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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11. 9/10/2015 11 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%.

12. 9/10/2015 12 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).

13. 9/10/2015 13 Table 1: Share in Total Loans and Advances (%), Dec 06 – Feb 08 Sector Dec 06Dec 07Jan 08 Feb 08 Agriculture27.221.019.818.5 Mining & Quarrying4.34.04.54.7 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 2.1 Personal Loans 11.2 15.7 21.5 21.3

14. 9/10/2015 14 5.0 Interest Rates 5.1Yields 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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17. 9/10/2015 17 5.2Commercial 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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19. 9/10/2015 19 6.0Foreign 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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21. 9/10/2015 21 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.

22. 9/10/2015 22 7.0Balance of Payments Cont…  Trade surplus of US $288.3 million ( US $115.7 million surplus, 4 th quarter 2007)  Increase in copper (3.2%) and cobalt earnings (36.9%).  Copper export earnings at US $886.0 million (US $858.4 million, 4 th quarter 2007)  Higher realised LME prices at US $7,746.94 per ton (US $6,949.22 per ton, 4 th quarter).  Cobalt export earnings at US $108.3 million (US $79.1 million, 4 th quarter,  Increase in realised price to US $42.37 per pound from US $28.76 per pound (see Charts 7 & 8).

23. 9/10/2015 23 Chart 7: Export Earnings (US $ Millions)

24. 9/10/2015 24 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.

25. 9/10/2015 25 Chart 8: Movement in the LME Copper Price

26. 9/10/2015 26 Table 2: Non-Traditional Exports (US $ Million) 200420052006 2007Q4.2007 Q1.2008 Copper wire58.5106.5175.0186.746.226.8 Sugar33.467.854.362.9 24.512.5 Burley Tobacco43.360.370.551.6 15.62.2 Cotton Lint51.455.962.334.1 8.25.8 Electric cables32.748.5103.7132.9 46.110.9 Flowers25.532.134.728.2 12.64.2 Cotton Yarn23.924.118.912.4 2.14.5 Fresh Fruit Vegetables23.221.325.323.2 3.94.0 Gemstone16.219.518.129.6 4.82.7 Gasoil/Petroleum Oils24.39.810.321.6 4.11.6 Electricity4.83.87.06.0 2.82.7

27. 9/10/2015 27 8.0Copper 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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29. 9/10/2015 29 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.

30. 9/10/2015 30 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.

31. 9/10/2015 31 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.

32. 9/10/2015 32 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

33. 9/10/2015 33 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.

34. 9/10/2015 34 12.2Implementation 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.

35. 9/10/2015 35 12.3Implementation 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.

36. 9/10/2015 36 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.

37. 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%). 9/10/2015 37

38. 9/10/2015 38 14.0 Conclusion The Bank of Zambia will continue to monitor these developments and undertake appropriate monetary policy actions. Thank You