governors quarterly media brief october 2008

8/14/2019 Governors Quarterly Media Brief October 2008

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BANKOfZAMBIA

19th

November 2008

QUARTERLY MEDIA BRIEFING

BY

DR CALEB M. FUNDANGA

GOVERNOR


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GOVERNORS QUARTERLY MEDIA BRIEFING November 2008

Bank of Zambia 1

EXECUTIVE SUMMARY

This brief provides a preliminary assessment of monetary policyimplementation and its outcomes in the third quarter of 2008. The brief

also reviews other economic and financial sector developments andconcludes with an inflation outlook for the fourth quarter of 2008.

Monetary Policy

During the third quarter of 2008, monetary policy continued to befocused at achieving the end-year inflation target of 7% andconsolidating macroeconomic stability. This goal entailed containing thegrowth of liquidity in the banking system within the projected path.

Inflation

Inflationary pressures rose during the third quarter of the year. Annualoverall inflation increased to 14.2% in September 2008 from 12.1%recorded at end-June 2008, and was 4.9 percentage points higher than the9.3% recorded in September 2007. This outturn reflected a rise in bothannual non-food and food inflation to 12.4% and 16.2% from 8.8% and15.6%, respectively in June 2008.

Contributing most to the annual non-food inflation outturn were higherprices in the rent and household energy, transport and communicationsand furniture and household goods sub-groups. This followed a rise indomestic fuel prices (11.6%) due to high petroleum prices on the worldmarket, and the subsequent increase on transport costs coupled with pass-through effects of the weakening of the Kwacha against the US dollar.

The rise in food inflation was mainly due to price increases on maizegrain, maize meal, other cereal products, kapenta and processed fooditems. These were driven by low supply and higher production costsarising from increased transport costs and electricity load shedding.

By October 2008, the annual inflation rate had risen to 15.2%, mainly onaccount of an increase in both annual food and non-food inflation to17.6% and 13.0%, respectively. This followed lower supply of variousfood items to the market and pass through effects of the exchange ratedepreciation of the Kwacha against the US dollar.


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Bank of Zambia 2

Money Supply and Domestic Credit

Preliminary estimates indicate that money supply in the economyincreased by 3.3% during the third quarter, compared to the 5.4% growthregistered in the second quarter of the year. This was below the quarterlytarget of 5.3%.

On an annual basis, money supply growth is estimated to have sloweddown to 17.3% at end-September 2008 from 26.7% recorded in June2008. This was largely due to a decline in net foreign assets.

Total domestic credit, which includes both Kwacha and foreign currencydenominated loans rose by 7.1% in the third quarter of 2008 compared to

4.9% recorded during the previous quarter. This outturn largely reflecteda 15.2% increase in banking system lending to the private sector.

On an annual basis, domestic credit growth slowed down to 21.8% inSeptember 2008 compared to 28.3% recorded in June 2008, although itwas well above the 8.6% growth recorded in September 2007. Thisreflected 34.4% decrease in credit to Government despite 16.7% rise inlending to the private sector.

In terms of sectoral distribution, preliminary information indicates thatcredit to households (personal loans category) remained the highest as atend-September 2008, accounting for 28.7% [29.4%]1 while theagricultural sector continued to be second at 17.7% [15.7%]. Themanufacturing, wholesale and retail trade, financial services, andtransport and communications sectors had 11.5% [10.8%], 11.2%[10.0%], 7.7% [7.1%] and 7.6% [7.6%], respectively.

Interest Rates

The average composite yield rate on Treasury bills rose to 14.0% at theend of the third quarter from 13.5% at the close of the previous quarter,while the composite yield rate on Government bonds declined to 15.3%from 15.7% over the same period.

1 Numbers in square brackets are for June 2008.


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Bank of Zambia 3

Developments in commercial banks interest rates were mixed during theperiod under review. The average lending rate (ALR) increased to 25.7%in September 2008 from 24.6% in June 2008, while the 30 day depositrate for amounts over K20 million and the average savings rate (ASR) for

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

Real Sector

FRA Maize Purchases and Major Millers Maize Stocks

During the month of September 2008, maize grain stocks held by theFood Reserve Agency (FRA) declined by 19.0% to 139,231 metric tons(mt) from 171,938 mt as at end-June 2008. This was despite the

additional purchase of 51,894 mt of maize out of the targeted 80,000 mtfrom the market. By province, Eastern, Northern, Central, Southern andLuapula provinces contributed 39,694.0 mt (28.5%), 38,862.0 mt(27.9%), 15,335.0 mt (11.0%), 12,630.0 mt (9.1%) and 12,593.0 mt(9.0%), respectively. Copperbelt, North-Western, Lusaka and Western

provinces held 8,476.0 mt (6.1%), 6,603.0 mt (4.7%), 4,482.0 mt (3.2%)and 556.0 mt (0.4%), respectively.

As at end-September 2008, the stock of maize grain held by majormillers in the country rose by 267.8% to 108,449.4 metric tons (mt) from29,482 mt, recorded at end-June 2008. This was on account of higher

purchases from the market. On a provincial basis, millers in Lusaka,Copperbelt, Southern, Central and Eastern provinces accounted for50,676.9mt (46.7%), 32,868.0 mt (30.3%), 14,181.6 mt (13.1%), 8,172.9mt (7.5%) and 2,450 mt (2.3%), respectively

Copper and Cobalt Output

Preliminary data indicates that copper output fell by 8.8% to 134,769.2mt during the third quarter of 2008 from 147,828.0 mt recorded in the

previous quarter. Further, this output level was 4.5% lower than141,068.3 mt recorded in the third quarter of 2007. However, on a year-to-date basis, copper output at 421,519.3 mt, was 10.7% higher than the380,907.3 mt recorded during the corresponding period in 2007.


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Cobalt output increased by 12.7% to 1,223.5 mt during the quarter underreview from 1,086.0 mt in the second quarter of 2008. However, thisoutput was 15.3% lower than 1,444.2 mt produced during the thirdquarter of 2007. On a year-to-date basis, cobalt output declined by 4.9%

to 3,453.9 mt as at September 2008 compared to 3,632.5 mt producedduring the same period in 2007.

Investment Pledges

During the third quarter of 2008, total investment pledges rose to US$2,428.9 million from $1,408.1 million recorded in the previous quarter.On a sectoral basis, mining, manufacturing, service, real estate andagriculture sectors accounted for US $2,084.9 million, US $243.6million, US $48.8 million, US $24.0 million and US $17.2 million,

respectively. The transport, tourism, and construction sectors attractedUS $6.2 million, US $3.0 million and US $1.2 million, respectively.

On a year-to-date basis, investment pledges amounted to US $4,249.6million compared with the US $1,103.5 million recorded during thecorresponding period in 2007. This is an indication of increased investorconfidence in the economy.

Foreign Exchange Market

The foreign exchange market was characterised by increased volatilityduring the review period. This arose largely from uncertainty regarding

political stability in the country following the illness and eventual deathof President Mwanawasa, the worsening global financial crisis andreduction of slightly over 20.0% in copper prices on the internationalmarket as at end-September 2008. These factors led to the weakening ofthe Kwacha against most major foreign currencies.

Against the US dollar, the Kwacha depreciated by 8.8%, partiallyoffsetting the appreciation of 11.5% recorded in the second quarter.Hence, the Kwacha ended the review period at an average rate ofK3,541.46/US$ from an average of K3,253.84/US$ at the close of thesecond quarter. With regard to the South African rand and euro, theKwacha depreciated by 5.2% and 0.4% compared with appreciations of9.6% and 10.6% recorded in the second quarter, respectively. Theexchange rates of the Kwacha against the South African and European


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Bank of Zambia 5

currencies averaged K452.22/ZAR and K5,113.20/ in September fromK429.78/ZAR and K5,092.35/ in June. However, the Kwachaappreciated by 0.7% against the pound sterling, down from anappreciation of 12.9% in the second quarter, to close the review period atan average rate of K6,397.36/.

The supply of foreign exchange to the market increased during thequarter as reflected by commercial banks foreign exchange purchaseswhich rose by 7.8% to US$1,520.6 million from US $1,410.8 million, inthe previous quarter. Similarly, commercial banks foreign exchangesales rose by 16.8% to US$1,417.3 million from US $1,213.4 million.

Net inflows of foreign exchange therefore declined to US$103.3 millioncompared with US$155.6 million in the previous review period, asforeign exchange sales rose faster than purchases.

In light of the volatility in the exchange rate, the Bank of Zambiaintervened in the market to provide liquidity and restore stability. To thiseffect, the Bank sold US$60.0 million during the period under reviewcompared with US $20.5 million in the preceding quarter. During thesame period, the Bank purchased US$3.5 million compared with US$37.0 million. As a result, the Bank recorded net sales of US$56.5million in the third quarter compared with net purchases of US$16.5million in the second quarter.

Balance of Payments

Preliminary data show that Zambias overall balance of payments (BoP)position recorded a deficit of US $120.6 million in the third quarter of2008, from a surplus of US $146.1 million realised in the previousquarter. This was mainly explained by a decline in the current account

balance on account of lower export earnings.

A merchandise trade deficit of US $224.8 million was recordedcompared to a surplus of US $231.7 million registered in the previousquarter, following a decline in merchandise export earnings and a higherimports bill.

Merchandise export earnings, at US $1,037.3 million, were 27.8% lowerthan the US $1,437.7 million realised in the previous quarter, following


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Bank of Zambia 6

a reduction in metal export earnings to US $807.6 million from US$1,214.3 million the previous quarter.

Copper export earnings at US $758.1 million were 32.6% lower than theUS $1,124.2 million recorded during the previous quarter, reflecting botha decline in the realised price to US $6,949.11 per ton from US $7,850.51

per ton and lower export volumes. However, on a year-to-date basiscopper receipts at US $2,917.8 million were 14.5% higher than US$2,548.1 million recorded during the corresponding period in 2007.

Similarly cobalt export earnings fell to US $49.5 million, in the thirdquarter of 2008, from US $90.1 million in the previous quarter, mainlydue to a decline in the realised price of cobalt to US $19.18 per poundfrom US $37.85 per pound. During the year to September 2008, cobalt

receipts at US $251.3 million were 38.0% above US $182.1 millionrecorded during the same period in 2007.

However, non-traditional export earnings (NTEs) at US $229.7 millionwere 2.8% above the US $223.4 million realised in the second quarter of2008. This was on account of higher export earnings associated withcopper wire, cane sugar, burley tobacco, electric cables, fresh flowers andfresh fruits and vegetables. On a year-to-date basis, NTEs at US $629.3million were 7.5% higher than the US $585.5 million recorded during the

corresponding period in 2007.

Meanwhile, the merchandise imports bill increased by 4.8% to US$1,284.4 million from US $1,225.9 million recorded in the previousquarter.The increase was mainly associated with higher import bills ofcommodity groups such as petroleum products, food items, paper and

paper products, iron and steel, plastic and rubber products and electricalequipment and machinery. On a year-to-date basis, imports at US$3,423.4 million, were 34.0% higher than the US $2,555.1 millionrecorded during the corresponding period in 2007.

Implementation of the Economic Programme

A mission from the International Monetary Fund (IMF) visited Zambiafrom 17

thto 26

thSeptember 2008, to conduct the first review of the

Poverty Reduction and Growth Facility (PRGF) arrangement (approvedin June 2008) which supports the countrys economic reform programme,


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Bank of Zambia 7

for the period up to June 2008. Preliminary indications are that all theend-June 2008 Benchmarks were met. There was also broad agreement onthe macroeconomic outlook for 2008.

A follow up mission will be undertaken to conclude discussions with theZambian Authorities in December 2008.

The IMF mission expressed satisfaction with the performance of theZambian economy despite adverse shocks related to increases in worldfood and fuel prices. Economic growth was however envisaged to slowdown this year due to relatively poor harvest and the electricity crisis. Themission observed that fiscal policy was weaker than planned mainly onaccount of the huge supplementary expenditures undertaken and the fuelsubsidies which might lead to revenue losses.

Developments in the Financial Sector

The overall financial condition and performance of the banking sectorduring the third quarter of 2008 was satisfactory. The sector maintainedadequate capital reserves while asset quality, earnings and liquidityremained satisfactory.

Similarly, the overall financial performance and condition of the non-bank financial institutions, (NBFIs) was satisfactory as at 30

th

September2008. On average, the leasing and finance companies, MicrofinanceInstitutions (MFIs) and the bureaux de change sub-sectors reportedadequate regulatory capital, while earnings performance, asset qualityand liquidity positions were fair.

It is gratifying to note that there has been an improvement in support tothe small-scale entrepreneurs from MFIs and commercial banks who areintroducing products specifically tailored for the small scale businesses.In addition other financial innovations have been introduced to themarket to attract more deposits by various banks. However, more needsto be done to broaden financial inclusion in the country.


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Bank of Zambia 8

Implications of the Financial Crisis in the USA and other Developed

Countries on Zambia

Current Effects on Zambian Economy

Like most countries in Africa, Zambia is not fully integrated in the worldfinancial markets, therefore the banking sector may not immediately beaffected by the negative effects of the financial crisis in the USA andother developed countries. However, the financial turmoil has alreadyresulted in a reduction in projected global economic growth and declinein demand for Africas exports, as the USA remains one of the largest

players in the world economy.

Despite this fact, interest for investments in African countries continuesto rise, partly because rates of return are higher relative to those in maturemarkets and Africa offers unique diversification opportunities. Forexample, foreign direct investment (FDI) has continued to grow inZambia. Moreover a substantial amount of FDI inflows comes fromChina whoseeconomy is projected to continue expanding at near doubledigit rates in 2008 and beyond.

The Zambian foreign exchange market has been partly affected throughwithdrawals by foreign portfolio investors in Zambian Government and

private securities on account of demand for liquidity and global riskaversion. This is reflected in the volatility and weakening of the Kwachaexchange rate in the recent past. However, we wish to assure investorsthat the fundamentals of the Zambian economy are still strong. Co-operating partners are still disbursing financial support, and the financialsystem remains stable with increased vigilance in terms of supervisoryoversight.

Possible Future Effects on Zambian Economy

It should however be noted that prolonged recession in the globaleconomy might deepen risk aversion and discourage both portfolio andforeign direct investment flows into the country. The slow down in

portfolio investments and possible cuts in overseas developmentassistance may unfavourably affect economic growth and development inZambia.


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Other channels through which the global financial market crisis couldaffect Zambia include the potential weakening of foreign owned banks,which could create a problem if parent retail banks started to withdrawfunds from their Zambian subsidiaries. In addition the decline in

commodity prices and reduction in demand for exports, will affect thetrade balance.

The Bank of Zambia has already issued risk management and corporategovernance guidelines in order to enhance risk management andcorporate governance in the financial sector.

Moreover, global developments will continue to be closely monitoredand the Bank of Zambia stands ready to take appropriate measures in thelocal financial market to ensure that confidence in the banking system is

maintained, banks are adequately capitalised and any systemic risk isavoided. Such actions will facilitate maintenance of the macroeconomicgains achieved thus far.

Developments in Banking, Currency and Payment Systems

Currency Awareness and Sensitisation

During the third quarter of 2008, the Bank undertook Currency and National Payment Systems Awareness and Sensitisation Campaigns inLusaka, Kafue, Chongwe, Luangwa, Kabwe and Chibombo. During thecampaigns, the Bank disseminated information on issues, such as, the

proper storage and handling of banknotes, the recognition of securityfeatures on banknotes, how to guard against counterfeits and newfeatures of the enhanced K10,000 banknote which was issued intocirculation beginning June 2008.

The Bank also sensitized the public regarding available paymentmechanisms under the national payment system. The general public isadvised that these campaigns will be conducted on a regular basis toensure that all parts of the country are adequately covered.

Lusaka Currency Survey

In September 2008, the Bank conducted a survey in Lusaka to assess theavailability, quality and sources of middle and low value banknotes in


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circulation. During the survey, major cash handlers, such as, retailers,market vendors, restaurants and some commercial banks at Manda Hill,Arcades and in Kabulonga, Woodlands, Chilenje, Kabwata, City Centreand Matero were targeted.

The feedback provided by the respondents was useful as it providedinformation pertaining to the cash requirements of the public for itsvarious cash transactions and the apparent gaps and concerns that regardthe availability of middle and low value banknotes in circulation.

The Bank of Zambia therefore wishes to advise the general public that itintends to undertake such surveys on a regular basis in the various partsof the country as way of interacting with the public on issues affectinguse of banknotes in Zambia.

Designations of Payment Systems

The Bank of Zambia designated eight institutions as payment systembusinesses, having met the requirements for designation out of the elevenapplications that were considered during the period under review. Theremaining applications are still under consideration.

The Bank of Zambia would like to urge all organisations involved in theprovision of payment services such as Money Transfer services, MobilePhone Payment services, Payment Card schemes that have not yetapplied for designation to do so immediately.

National Switch Project

The Bank of Zambia in conjunction with stakeholders has been involvedin a project to implement a National Switch. The Request For Proposal(RFP) was issued by the Zambia Electronic Clearing House Limitedwhich is the implementing institution and 5 selected bidders responded tothe RFP. Following the bid submissions, a technical evaluation wasconducted and a financial proposal evaluation is due to commence soon.

The switch will serve as a gateway that will link consumers andmerchants by means of e-payment products. The implementation of theswitch should also significantly reduce the transaction cost for electronic


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Bank of Zambia 12

INTRODUCTION

This brief provides a preliminary assessment of monetary policyimplementation and its outcomes in the third quarter of 2008. The briefalso reviews other economic and financial sector developments andconcludes with an inflation outlook for the fourth quarter of 2008.

MONETARY POLICY

During the third quarter of 2008, monetary policy continued to befocused at achieving the end-year inflation target and consolidatingmacroeconomic stability. This goal entailed containing the growth of

liquidity in the banking system within the projected path. In this regard,the Bank of Zambia (BoZ) relied mainly on Open Market Operations(OMO) and the auctioning of Government securities to contain liquidity.This was complemented by prudent fiscal management.

INFLATION

Overall Inflation

Overall inflation rose to 3.0% in the third quarter of 2008, from 2.1%registered in the second quarter, and was higher than the 1.1% recordedin the third quarter of 2007. This outturn was mainly attributed to anincrease in non-food inflation.

Similarly, annual overall inflation rose to 14.2% in September 2008 from12.1% recorded at end-June 2008, and was 4.9 percentage points higherthan the 9.3% recorded in September 2007. This outturn reflected anincrease in both annual non-food and food inflation.

By October 2008, the annual inflation rate had risen to 15.2%, mainly onaccount of an increase in both annual food and non-food inflation to17.6% and 13.0%, respectively. This followed lower supply of variousfood items to the market and pass through effects of the exchange ratedepreciation of the Kwacha against the US dollar (reflected on airfares,motor vehicles and hotel accommodation).


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Non-Food Inflation

Quarterly non-food inflation surged to 4.9% in the third quarter of 2008,from 0.8% recorded in the previous quarter, and was higher than the1.6% registered in September 2007. This outcome was mainly attributedto the increase in fuel prices and higher transport charges, coupled with

pass through effects of the exchange rate depreciation during the periodunder review.

Similarly, annual non-food inflation rose to 12.4% from 8.8% as at end-June 2008, although it was at the same level (of 12.4%) recorded inSeptember 2007. Contributing most to this outcome were higher prices inthe rent and household energy, transport and communications and

furniture and household goods sub-groups. This followed a rise indomestic fuel prices (11.6%) due to high petroleum prices on the worldmarket and the subsequent rise inn transport costs coupled with pass-through effects of the weakening of the Kwacha against the US dollar.

Food Inflation

Food inflation slowed down to 1.1% in the third quarter of 2008 from3.4% recorded in the second quarter, although it was higher than the

0.6% recorded during the third quarter of 2007. This outturn was mainlyattributed to price reductions observed on beef products and selectedvegetables due to abundant supply on the market.

On an annual basis, food inflation rose to 16.2% in September 2008,from 15.6% recorded in June 2008, and was higher than the 6.2%registered in September 2007. This outturn was largely due to priceincreases on maize grain, maize meal, other cereals, cereal products,kapenta and processed food products due to higher production costsarising from increased transportation costs and electricity load shedding.

BROAD MONEY AND DOMESTIC CREDIT,

Preliminary estimates indicate that money supply in the economyincreased by 3.3% in the third quarter of 2008 compared to the 5.4%registered in the second quarter of the year. In absolute terms, broad


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money rose to K11,193.4 billion from K10,840.1 billion in June 2008,reflecting an expansion in net domestic assets (NDA) by 6.3% despite0.8% decline in net foreign assets (NFA).

On an annual basis, money supply growth is estimated to have sloweddown to 17.3% at end-September 2008 compared with 26.7% recorded inJune 2008. The slow down in growth was largely due to 2.1% decrease in

NFA which contributed negative 1.0 percentage points to annual M3growth. During the quarter under review, NDA growth was 35.8% andcontributed 18.3 percentage points to money supply growth.

Preliminary estimates indicate that total domestic credit, which includesboth Kwacha and foreign currency denominated loans increased by 7.1%in the third quarter of 2008 compared to 4.9% recorded during the second

quarter of 2008. In absolute terms, domestic credit edged up to K8,299.5billion from K7,749.3 billion in June 2008. This outturn largely reflected15.2% increase in banking system lending to the private sector.

On an annual basis, domestic credit growth slowed down to 21.8% inSeptember 2008 compared to 28.3% in June 2008, although it was wellabove the 8.6% growth recorded in September 2007. This reflected adecline in credit to Government and public enterprises by 34.4% and53.2%, respectively despite a 16.7% rise in lending to the private sector.

In September 2008, households (personal loans category) remained thelargest recipient of credit, accounting for 28.7% [29.4%]

2, while

agricultural sector continued to be second at 17.7% [15.7%]. Themanufacturing, wholesale and retail trade, financial services, andtransport and communications sectors had 11.5% [10.8%], 11.2%[10.0%], 7.7% [7.1%] and 7.6% [7.6%], respectively. Other shares wentto mining and quarrying (4.4%) [4.7%], construction (3.4%) [3.5%], realestate (2.6%) [3.2%] and electricity, gas, water and energy (2.5%)[2.8%], respectively.

2 Numbers in square brackets are for June 2008.


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INTEREST RATES

Government Securities

Demand for Government securities declined in the third quarter of 2008,as exhibited by lower average subscription rates. On the Treasury billauctions, average subscription declined to 64.5% from 94% recorded inthe second quarter while average subscription on Government bondauctions fell to 72.4% from 116.0% over the same period.

The reduction in demand for government securities boosted the yieldrates, with weighted average Treasury bill yield rate rising by 0.5

percentage point to 14.0% at the end of the third quarter. However, thecomposite bond yield rate declined to 15.3% from 15.7% over the same

period.

Commercial Banks Interest Rates

Developments in commercial banks interest rates were mixed during thethird quarter of 2008. The weighted lending base rate (WLBR) andaverage lending rate (ALR) increased to 19.6% and 25.7% in September2008 from 18.5% and 24.6% in June 2008, respectively. However, the30 day deposit rate for amounts over K20 million and the average savings

rate (ASR) for amounts above K100,000 remained unchanged at 5.0%and 4.8%, correspondingly.

Owing to the increase in annual overall inflation, all real interest ratesdeclined in the third quarter of 2008. The weighted average lending baserate and the average lending rate declined to 5.4% and 11.5% inSeptember 2008 from 6.4% and 12.5%, respectively in June 2008.Similarly, average savings rate for amounts above K100, 000 and the30 day deposit rate fell to negative 9.4% and negative 9.2% fromnegative 7.3% and negative 7.1%, respectively.


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REAL SECTOR DEVELOPMENTS

Agriculture

FRA Maize Purchases and Major Millers Maize Stocks

During the month of September 2008, maize grain stocks held by theFood Reserve Agency (FRA) fell by 19.0% to 139,231 mt from 171,938mt as at end-June 2008. This was despite the additional purchase of51,894 mt of maize out of the targeted 80,000 mt. By province, Eastern,

Northern, Central, Southern and Luapula provinces contributed 39,694.0mt (28.5%), 38,862.0 mt (27.9%), 15,335.0 mt (11.0%), 12,630.0 mt(9.1%) and 12,593.0 mt (9.0%), respectively. Copperbelt, North-Western,Lusaka and Western provinces held 8,476.0 mt (6.1%), 6,603.0 mt

(4.7%), 4,482.0 mt (3.2%) and 556.0 mt (0.4%), correspondingly.

As at end-September 2008, the stock of maize grain held by majormillers in the country increased by 267.8% to 108,449.4 mt from 29,482mt, recorded at end-June 2008. This was on account of higher purchasesfrom the market. Lusaka, Copperbelt, Southern, Central and Eastern

provinces accounted for 50,676.9 mt (46.7%), 32,868.0 mt (30.3%),14,181.6 mt (13.1%), 8,172.9 mt (7.5%) and 2,450 mt (2.3%),respectively

Mining

Preliminary data show that copper output fell by 8.8% to 134,769.2 mtduring the third quarter of 2008 from 147,828.0 mt recorded the previousquarter. Further, this output level was 4.5% lower than 141,068.3 mtrecorded in the third quarter of 2007. However, on a year-to-date basis,copper output at 421,519.3 mt, was 10.7% higher than the 380,907.3 mtrecorded during the corresponding period in 2007.

Cobalt output rose by 12.7% to 1,223.5 mt during the quarter underreview from 1,086.0 mt in the previous quarter. However, this output was15.3% lower than 1,444.2 mt produced during the third quarter of 2007.On a year-to-date basis, cobalt output declined by 4.9% to 3,453.9 mt asat September 2008 compared to 3,632.5 mt produced during the same

period in 2007.


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Manufacturing

Cement

Cement output from Lafarge Plc increased by 20.8% to 160,362.0 mtduring the third quarter from 132,784.0 mt produced in the secondquarter of 2008. Further this output was 7.5% higher than the 149,192.0mt produced in the third quarter of 2007.

Milk

During the reviewed quarter, Parmalat Zambia Ltd produced 7,367,703litres of milk which was 7.4% higher than the 6,860,057 litres producedin the second quarter of 2008. However, this output was 4.5% lower

when compared to 7,710,826 litres of output recorded in the same quarterof 2007.

Beer

Zambian Breweries Plc produced 103,695.0 hectolitres of clear beer inthe third quarter of 2008, 9.6% lower than the 114,771.0 hectolitresoutput recorded in the previous quarter. Further, this output level was5.5% lower than 109,711.0 hectolitres produced in the same quarter of

2007.

Soft Drinks

However, output of soft drinks by Zambian Breweries Plc rose by 7.3%to 94,752.0 hectolitres from 88,336.0 hectolitres produced in the secondquarter of 2008. In addition, this output level was 26.1% higher than75,126.0 hectolitres produced in the corresponding quarter of 2007.

Tourism

During the third quarter of 2008, the number of international arrivals atthe countrys four international airports

3rose by 15.0% to 130,141

passengers from 113,129 passengers recorded in the second quarter of2008. Further, this was higher than 119,455 passengers recorded duringthe corresponding period in 2007. The major tourist destinations namely,

3Lusaka, Livingstone, Mfuwe and Ndola.


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Livingstone and Mfuwe accounted for (through their respectiveinternational airports) 25,992 passengers and 352 passengers against18,632 passengers and 149 passengers in the previous quarter,respectively.

Investment Pledges

During the third quarter, total investment pledges rose to US $2,428.9million from $1,408.1 million recorded in the previous quarter. On asectoral basis, mining, manufacturing, service, real estate and agriculturesectors accounted for US $2,084.9 million, US $243.6 million, US $48.8million, US $24.0 million and US $17.2 million, respectively. Thetransport, tourism, and construction sectors attracted US $6.2 million,US $3.0 million and US $1.2 million, respectively.

The pledges, when fully executed, were expected to generate 4,449 jobs:mining 2,183; manufacturing 1,057 jobs; agriculture 562 jobs; service361 jobs; transport 97 jobs; tourism 81 jobs; construction 54 jobs and realestate 54 jobs.

On a year-to-date basis, investment pledges amounted to US $4,249.6million compared with the US $1,103.5million recorded during the same

period in 2007.

EXTERNAL SECTOR DEVELOPMENTS

Foreign Exchange Market

The foreign exchange market was characterised by increased volatilityduring the review period. This arose largely from uncertainty regarding

political stability in the country following the illness and eventual deathof President Mwanawasa, the worsening global financial crisis and the

reduction of slightly over 20.0% in copper prices on the internationalmarket as at end-September 2008 These factors led to the weakening ofthe Kwacha against most major foreign currencies.

Against the US dollar, the Kwacha depreciated by 8.8%, partially off-setting the appreciation of 11.5% recorded in the second quarter. Hence,the Kwacha ended the review period at an average rate of K3,541.46/US$


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from an average of K3,253.84/US$ at the close of the second quarter.With regard to the South African rand and euro, the Kwacha depreciated

by 5.2% and 0.4% compared with appreciations of 9.6% and 10.6%recorded in the second quarter, respectively. The exchange rates of theKwacha against the South African and European currencies averagedK452.22/ZAR and K5,113.20/ in September from K429.78/ZAR andK5,092.35/ in June. However, the Kwacha appreciated by 0.7% againstthe pound sterling, down from an appreciation of 12.9% in the secondquarter, to close the review period at an average rate of K6,397.36/.

The supply of foreign exchange to the market increased during thequarter as reflected by commercial banks foreign exchange purchaseswhich rose by 7.8% to US$1,520.6 million from US $1,410.8 million, inthe previous quarter. Similarly, commercial banks foreign exchange

sales rose by 16.8% to US$1,417.3 million from US $1,213.4million. Net inflows of foreign exchange therefore declined to US$103.3million compared with US$155.6 million in the previous review period,as foreign exchange sales rose faster than purchases.

In light of the volatility in the exchange rate arising from uncertainties inthe foreign exchange market, the Bank of Zambia intervened in themarket in order to provide liquidity and restore stability. To this effect,the Bank sold US$60.0 million during the period under review compared

with US $20.5 million in the preceding quarter. During the same period,the Bank purchased US$3.5 million compared with US $37.0 million. Asa result, the Bank recorded net sales of US$56.5 million in the thirdquarter compared with net purchases of US$16.5 million in the secondquarter.

Balance of Payments

Preliminary data show that Zambias overall balance of payments (BoP)position recorded a deficit of US $120.6 million in the third quarter of

2008 from a surplus of US $146.1 million in the previous quarter. This performance stemmed from a decline in the current account balanceexplained mainly by lower export earnings.

The current account recorded a deficit of US $668.7 million in the thirdquarter of 2008 compared with a surplus of US $99.7 million recordedduring the previous quarter. This was mainly explained by an


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unfavourable merchandise trade balance coupled with deterioration in theservices account.

The trade deficit was recorded at US $224.8 million from a surplus of US$231.7 million registered during the previous quarter. This was largelyattributed to a decline in merchandise export earnings and a higherimports bill.

During the reviewed quarter, merchandise export earnings at US $1,037.3million were 27.8% lower than the US $1,437.7 million realised in the

previous quarter, following a reduction in metal earnings. Metal exportearnings declined to US $807.6 million from US $1,214.3 millionrecorded in the previous quarter, reflecting a fall in both copper andcobalt export earnings.

Copper export earnings at US $758.1 million were 32.6% lower than theUS $1,124.2 million recorded during the previous quarter. This followeda decline in the realised LME price to US $6,949.11 per ton from US$7,850.51 per ton and a fall in copper export volumes to 109,097.54 mtfrom 143,199.46 mt in the second quarter. However, on a year-to-date

basis, copper export earnings at US $2,917.8 million were 14.5% higherthan the US $2,548.1 million recorded during the corresponding period in2007.

Similarly, cobalt export earnings declined to US $49.5 million in thethird quarter of 2008 from US $90.1 million in the previous quarter. Thiswas due to a decrease in the realised price of cobalt to US $19.18 per

pound from US $37.85 per pound, despite an increase in cobalt exportvolumes to 1,170.31 mt from 1,080.05 mt recorded in the second quarterof 2008. On a year-to-date basis, cobalt receipts at US $251.3 millionwere 38.0% above the US $182.1 million recorded during thecorresponding period in 2007.

However, non-traditional export earnings (NTEs) increased by 2.8% toUS $229.7 million from US $223.4 million realised in the previousquarter. This was as a result of higher export earnings associated withcopper wire, cane sugar, burley tobacco, electric cables, fresh flowers andfresh fruits and vegetables. On a year-to-date basis, NTEs at US $629.3million were 7.5% higher than the US $585.5 million recorded during thecorresponding period in 2007.


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Meanwhile, the merchandise imports bill increased by 4.8% to US$1,284.4 million in the third quarter of 2008, from US $1,225.9 millionin the previous quarter. This was due to higher imports of petroleum

products (61.0%), food items (43.5%), paper and paper products (37.0%),iron and steel (27.3%), plastic and rubber products (26.4%) and electricalequipment and machinery (21.7%). On a year-to-date basis, imports atUS $3,423.4 million were 34.0% higher than the US $2,555.1 millionrecorded during the corresponding period in 2007.

During the quarter under review, the capital and financial account surplusincreased to US $412.6 million from US $202.0 million in the previousquarter. This improvement was mainly attributed to a rise in projectgrants, portfolio investments, and private foreign borrowing. On a year-

to-date basis, the capital and financial account balance at US $1,042.2million was 51.1% higher than the US $689.7 million recorded during thecorresponding period in 2007.

IMPLEMENTATION OF THE ECONOMIC PROGRAMME

A mission from the International Monetary Fund (IMF) visited Zambiafrom 17th to 26th September 2008, to conduct the first review of the

Poverty Reduction and Growth Facility (PRGF) arrangement (approvedin June 2008) which supports the countrys economic reform programme,for the period up to June 2008. Preliminary indications are that all theend-June 2008 Benchmarks were met. There was also broad agreement onthe macroeconomic outlook for 2008.

A follow up mission will be undertaken to conclude discussions with theZambian Authorities in December 2008.

The mission was satisfied with the performance of the Zambian economydespite adverse shocks related to increases in world food and fuel prices.Economic growth was however envisaged to slow down this year due torelatively poor harvest and electricity shortages. The mission observed thatfiscal policy was weaker than planned mainly on account of the hugesupplementary expenditures undertaken and the fuel subsidies which mightlead to revenue losses.


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DEVELOPMENTS IN THE BANKING SECTOR

The overall financial condition and performance of the banking sectorduring the third quarter of 2008 was satisfactory. The sector maintainedadequate capital reserves while asset quality, earnings and liquidityremained satisfactory.

Overall, the banking sectors total assets went up by 8.0% to K15,615.3billion [June 2008: K14,465.0 billion]. The asset structure of the bankingsector continued to be dominated by Net Loans and Leases at 43.3%[June 2008: 41.3 %] of total assets and Investments in Securities at15.0% [June 2008: 17.0 %]. Other significant balances were Balances

with Bank of Zambia at 14.4% [June 2008: 14.0 %] and Balances withForeign Institutions at 11.2% [June 2008: 13.1 %].

The banking industrys average capital adequacy ratios were 16.9% forPrimary Regulatory Capital and 19.2% for Total Regulatory Capital[June 2008: 17.0% and 19.3%, respectively]. All the fourteen operating

banks met the minimum regulatory capital requirement of K12.0 billionas at end-September 2008; and were all in excess of the minimumregulatory capital adequacy ratios of 5% for primary regulatory capital

and 10% for total regulatory capital.

The asset quality of the banking sector was satisfactory. The Gross Non-Performing Loans to Total Gross Loans ratio increased to 6.8% [June2008: 6.0%], and the ratio of Net Non-Performing Loans to TotalRegulatory Capital was at 6.3% [June 2008: 3.5%].

The banking sectors earnings performance was satisfactory. The averageReturn on Assets (ROA) marginally declined to 4.7% and Return onEquity (ROE) to 32.9% [June 2008: 5.0% and 36.6% respectively]. Thiswas largely on account of an increase in non-interest expenses and

provisions for loan losses in the quarter under review compared to thepreceding quarter.

The banking sectors liquidity position was satisfactory, despite theliquidity ratio marginally decreasing to 40.8% [June 2008: 41.2%] andthe ratio of liquid assets to total assets to 32.5% [June 2008: 32.8 %].


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DEVELOPMENTS IN THE NON-BANK FINANCIAL SECTOR

Leasing and Finance Institutions

The overall performance of the leasing sub-sector was considered fairduring the quarter under review. As at 30 September 2008 the aggregatesub-sector regulatory capital stood at K36,985 million. However, out ofthe eleven operating leasing and finance companies as at 30 September2008, two had regulatory capital deficiencies and measures have been putin place to address the capital deficiencies.

Building Societies

The building societies sub-sector continued to register positive performance in the quarter under review. The sub-sector recorded anaggregate profit before tax of K3,562 million, which was an increase ofK1,135 million or 47% over the profit before tax of K2,427 millionrecorded in the previous quarter.

Bureaux de Change

The volume of purchases and sales of foreign currency by the bureau dechange sub-sector in the quarter under review amounted to US$167.6million (equivalent to K601,391 million) and US$167.5 million(equivalent to K601,021 million) compared to US$ 180.8 million(equivalent to K597,026 million) and US$179.8 million (equivalent toK596,599 million), respectively for the quarter ended 30 June 2008. Thisrepresented a combined decrease of 7% in the volumes of purchases andsales transactions over the previous quarter.

The United States (US) Dollar remained the most traded currency in thequarter under review. Total purchases and sales of the US Dollar amountedto US$166 million (equivalent to K568,629 million) and US$161 million(equivalent to K568,173 million) while those of the South African Randamounted to ZAR46.9 million (equivalent to K20,998 million) andZAR46.9 million (equivalent to K21,271 million), respectively.


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Microfinance Institutions

As at 30 September 2008, the regulatory capital of the sub-sector stood atK122,505 million and was above the required minimum amount of

K58,769 million by K63,736 million. This represented an increase of24%, largely due to a profit after tax of K17,213 million recorded duringthe quarter under review.

Sovereign Rating Hire of Financial Advisor

Following the short listing of J.P Morgan and Citi Group and theevaluation of their financial bids, J.P. Morgan was eventually selected asthe Financial Advisory Agent for the sovereign rating exercise inZambia. To this effect, the contract is being finalised to enable J.P.

Morgan commence the exercise.

Second FinScope Demand Survey

The second FinScope Demand Survey is expected to be undertakenduring the fourth quarter of 2008. This follows the signing of a contract

between the Ministry of Commerce, Trade and Industry and the Bank ofZambia (BoZ) to facilitate the release of funds (amounting to K1.4

billion) by the Private Sector Development Programme (PSD) to the

Financial Sector Development Programme. The survey will beundertaken by FinMark Trust Zambia Limited, who has been contractedon condition that they work with a local consultant to build local capacityin the area of financial sector research that is done by FinMark Trust

Second African Rural and Agricultural Credit Association (AFRACA)

Central

Banks Forum

The Bank of Zambia co-hosted the second AFRACA Central BanksForum under the theme Promoting Financial Sector Inclusiveness withIncreased Investment in Agriculture from 23 25 September 2008 inLivingstone to which a number of non- bank financial institutions wereinvited.

The forum noted that in as much as it was beneficial to have financialservice providers attend the workshop, in future AFRACA should


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consider inviting other stakeholders such as users of financial services toalso give their own views on financial access.

In addition, the forum urged Central Banks to continue providingenabling environments with appropriate regulatory framework tostimulate micro lending which is regarded as a way to extend financialinclusiveness.

IMPLICATIONS OF THE FINANCIAL CRISIS IN THE USA AND

OTHER DEVELOPED COUNTRIES ON ZAMBIA

Current Effects on Zambian Economy

Like most countries in Africa, Zambia is not fully integrated in the worldfinancial markets, therefore the banking sector may not immediately beaffected by the negative effects of the financial crisis in the USA andother developed countries. However, the financial turmoil has alreadyresulted in a reduction in projected global economic growth and declinein demand for Africas exports, as the USA remains one of the largest

players in the world economy.

Despite this fact, interest for investments in African countries continuesto rise, partly because rates of return are higher relative to those in maturemarkets and Africa offers unique diversification opportunities. Forexample, foreign direct investment (FDI) has continued to grow inZambia. Moreover, a substantial amount of FDI inflows comes fromChina whoseeconomy is projected to continue expanding at near doubledigit rates in 2008 and beyond.

The Zambian foreign exchange market has been partly affected throughwithdrawals by foreign portfolio investors in Zambian Government and

private securities on account of demand for liquidity and global risk

aversion. This is reflected in the volatility and weakening of the Kwachaexchange rate in the recent past. However, we wish to assure investorsthat the fundamentals of the Zambian economy are still strong. Co-operating partners are still disbursing financial support, and the financialsystem remains stable with increased vigilance in terms of supervisoryoversight.


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Possible Future Effects on Zambian Economy

It should however be noted that prolonged recession in the globaleconomy might deepen risk aversion and discourage both portfolio and

foreign direct investment flows into the country. The slow down in portfolio investments and possible cuts in overseas developmentassistance may unfavourably affect economic growth and development inZambia.

Other channels through which the global financial market crisis couldaffect Zambia include the potential weakening of foreign owned banks,which could create a problem if parent retail banks started to withdrawfunds from their Zambian subsidiaries. In addition the decline incommodity prices and reduction in demand for exports, will affect the

trade balance.

The Bank of Zambia has already issued risk management and corporategovernance guidelines in order to enhance risk management andcorporate governance in the financial sector.

Moreover, global developments will continue to be closely monitoredand the Bank of Zambia stands ready to take appropriate measures in thelocal financial market to ensure that confidence in the banking system is

maintained, banks are adequately capitalised and any systemic risk isavoided. Such actions will facilitate maintenance of the macroeconomicgains achieved thus far.

DEVELOPMENTS IN BANKING, CURRENCY AND PAYMENTS

SYSTEMS

Removal of Unfit Banknotes from the Economy

The Bank of Zambia withdrew from circulation a total of 18.5 millionpieces of unfit banknotes with a value of K124.9 billion compared to 22.1million pieces of unfit banknotes removed from circulation in the

previous quarter with a value of K149.9 billion.

In addition, the public exchanged a total of 12,739 pieces of mutilated banknotes valued at K87.3 million for clean banknotes at the Bank of


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Zambias mutilated currency window compared to 15,620 pieces ofmutilated banknotes with a value of K34.6 million in the previousquarter. We urge the public to continue to exchange mutilated currencyfor clean banknotes either at the Bank of Zambia or commercial banks.

Currency Awareness and Sensitisation

During the period under review, the Bank undertook Currency and National Payment Systems Awareness and Sensitisation Campaigns inLusaka, Kafue, Chongwe, Luangwa, Kabwe and Chibombo. During thecampaigns, the Bank disseminated information on issues, such as, the

proper storage and handling of banknotes, the recognition of securityfeatures on banknotes by the public and how to guard againstcounterfeits.

The Bank also sensitized the public regarding available paymentmechanisms under the national payment system. The general public isadvised that these campaigns will be conducted on a regular basis toensure that all parts of the country are adequately covered.

Lusaka Currency Survey

In September 2008, the Bank conducted a survey in Lusaka to assess theavailability, quality and sources of middle and low value banknotes incirculation. During the survey, major cash handlers, such as, retailers,market vendors, restaurants and some commercial banks at Manda Hill,Arcades and in Kabulonga, Woodlands, Chilenje, Kabwata, City Centreand Matero were targeted.

The feedback provided by the respondents was useful as it providedinformation pertaining to the cash requirements of the public for itsvarious cash transactions and the apparent gaps and concerns that regard

the availability of middle and low value banknotes in circulation.

The Bank of Zambia therefore wishes to advise the general public that itintends to undertake such surveys on a regular basis in the various partsof the country as way of interacting with the public on issues affectinguse of banknotes in Zambia.


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Designations of Payment Systems

The Bank of Zambia designated eight institutions as payment systembusinesses, having met the requirements for designation out of the eleven

applications that were considered during the period under review. Theremaining applications are still under consideration.

The Bank of Zambia would like to urge all organisations involved in theprovision of payment services such as Money Transfer services, MobilePhone Payment services, Payment Card schemes that have not yetapplied for designation to do so immediately.

National Switch Project

The Bank of Zambia in conjunction with stakeholders has been involvedin a project to implement a National Switch. The Request For Proposal(RFP) was issued by the Zambia Electronic Clearing House Limitedwhich is the implementing institution and 5 selected bidders responded tothe RFP. Following the bid submissions, a technical evaluation wasconducted and a financial proposal evaluation is due to commence soon.

The switch will serve as a gateway that will link consumers andmerchants by means of e-payment products. The implementation of the

switch should also significantly reduce the transaction cost for electronic payments. It is expected that the reduction in transaction costs willencourage more people to use electronic payment methods.

INFLATION OUTLOOK FOR THE FOURTH QUARTER OF 2008

During the fourth quarter, inflationary pressures may arise from thefollowing factors:

1) The increase in Government expenditure arising mainly frompresidential elections and the higher subsidy on the Fertiliser Supportprogramme;

2) Lower seasonal supply of fresh vegetables, maize, cereals and tuberswhich is typical during the last quarter of the year; and


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3) Pass through effects of the recent depreciation in the exchange rate ofthe Kwacha against the US dollar.

The Bank of Zambia will continue to monitor these developments andundertake appropriate monetary policy actions to contain inflationarypressures.

governors quarterly media brief october 2008

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