111 Bank of Zambia THIRD QUARTER 2008 MEDIA BRIEFING BY DR CALEB M. FUNDANGA Governor BANK OF ZAMBIA Presented at the Bank of Zambia 19 th November, 2008

2 INTRODUCTION This brief reviews monetary policy outcomes; and Other economic and financial sector developments in Q In conclusion, an inflation outlook for Q is provided. Bank of Zambia

3 1.0MONETARY 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. Bank of Zambia

4 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

5 3.0MONEY 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) Bank of Zambia

6 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. Bank of Zambia

7 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). Bank of Zambia

8 Foreign Exchange Market (cont) Bank of Zambia

9 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), Q Q Bank of Zambia Q3 2007Q4 2007Q1 2008Q2 2008Q Trade Bal Exports1,318.71,132.81,323.41,437.71,037.3 Metals1, ,147.21, Copper1, ,035.51, Cobalt Non-Metals Imports ,

10 IMF mission in Zambia, 17 th - 26 th September 2008:  Reviewed economic performance under PRGF arrangement for period up to June  All end-June 2008 benchmarks observed.  Broad agreement on macroeconomic outlook for 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 IMPLEMENTATION OF THE ECONOMIC PROGRAMME Bank of Zambia

11 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

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  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. Bank of Zambia

13 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, 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.

14 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

15 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; and  Co-operating partners disbursing financial support. Bank of Zambia

16 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 Bank of Zambia