1. 1 1 Bank of Zambia MEDIA BRIEFING BY CALEB M. FUNDANGA GOVERNOR BANK OF ZAMBIA 24 TH MARCH, 2009

2. INTRODUCTION This brief reviews monetary policy outcomes. Other economic and financial sector developments in Q4 2008, and first two months of 2009. In conclusion, an inflation outlook for Q2 2009 is provided. Bank of Zambia 2

3. 1.0MONETARY POLICY In Q4 2008, monetary policy focus was macroeconomic stability and achieving 7.0% end-year inflation target. In first two months of 2009, monetary policy focused on consolidating macroeconomic stability and achieving end- year inflation target of 10.0%.  By containing growth of liquidity in banking system within projected path. Bank of Zambia 3

4. 2.0 INFLATION Annual inflation rose to 16.6% in December 2008 due to increase in food and non-food inflation reflecting:  Low supply of maize and cereals coupled with high production costs of processed food items.  Pass-through effects of Kwacha exchange rate depreciation. However, annual inflation slowed down to 16.0% in January 2009 and further to 14.0% in February 2009.  Mainly due to a decline in food inflation owing to Food Reserve Agency subsidies and stable fuel prices. Bank of Zambia 4

5. 2.0 INFLATION (cont’d) Bank of Zambia 5

6. 3.0MONEY SUPPLY & DOMESTIC CREDIT Money supply (M3) growth rose by 22.1% at end Dec 2008 (17.3%, Sept 2008) due to expansion in both net domestic assets (NDA) and net foreign assets (NFA). M3 grew by 25.2% in Feb 2009 from 22.2% in Jan 2009 mainly due to a rise in NFA. Annual growth in total domestic credit increased to 34.0% (21.8%, Sept 2008) owing to net lending to Government.. By Feb 2009, domestic credit rose to 40.2% (40.1%, Jan 2009). Personal loans continued to account for highest share of total credit at 27.2% (28.7%, Q3) followed by agriculture at 15.4% (17.7%, Q3). Bank of Zambia 6

7. 4.0 INTEREST RATES Yield Rates On Government Securities Weighted average yield rate on Treasury bills (WATBR) increased to 17.1% (13.9% in September 2008). WATBR stood at 16.9% in February 2009. Weighted average yield rate on bonds rose to 16.7% (15.3% in September 2008) and further to 18.7% in February 2009. Commercial Bank Interest Rates Weighted average lending base rate rose to 20.8% (19.6% in September 2008). These rates remained relatively unchanged between January and February 2009 (WALBR, 20.9% and DR, 5.1%). 30-day deposit rate for over K20 million remained at 5.1%. Bank of Zambia 7

8. 5.0 FOREIGN EXCHANGE MARKET Between September 2008 and February 2009, Kwacha depreciated against most major foreign currencies;  against US dollar by 57.0%;  against pound sterling by 26.0%; and  Against South African Rand by 32.0%. Depreciation of the Kwacha was largely due to the effects of the ongoing global financial crisis. Bank of Zambia 8

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

10. 6.0 THE GLOBAL FINANCIAL CRISIS AND ITS IMPLICATIONS Causes of the Sub-Prime Crisis:  Poor underwriting standards for mortgage loans;  Weak regulation and supervision of banks; and  Exposure to the sub-prime security backed financial assets. Signs of Problem:  Inability to service debt when interest rates rose.  High loan defaults, foreclosures, and decline in demand for homes. Bank of Zambia 10

11. 6.1 Implications of the Financial Crisis Implications on World Economies:  Banking system short of liquidity (in the interbank market);  Business scale down or closure of operations ; and  Slow down in economic growth. To address impact, fiscal stimulus packages are being implemented by major economies. Bank of Zambia 11

12. 6.2 Implications of the Financial Crisis on Zambia Effect on the Zambian Economy: First Round  Banking System not directly affected due to absence of toxic assets;  Banking sector stable and growing with 4 new banks licensed as well as entrants of strategic partners in existing banks Second Round effects felt at macro level including :  Withdrawals by foreign portfolio investors reflected in reduced participation in the government securities market and poor showing of the LuSE Index  Lower commodity prices;  Weakening Kwacha exchange rate;  Reduced economic activity (e,g mines);  Increased unemployment; and  Low GDP. Bank of Zambia 12

13. 6.3 Responses to the Global Financial Crisis in Zambia Government:  2009 National Budget focused on measures aimed at supporting export diversification.  Interventions in Agriculture, Manufacturing (MFEZ), Tourism and infrastructure development. Bank of Zambia :  BoZ issued regulation to curb off-shore Kwacha lending;  Collaboration with other regulators to curb dollarization  Improving information flow; and  The market determined foreign exchange policy remains unchanged. Continued cooperation and indications of augmentation of resources by the donor community; Bank of Zambia 13

14. 7.0 BALANCE OF PAYMENTS (BoP) Overall BoP position-deficit of US $144.5 million in Q4 (deficit of US $120.6 million in Q3).  Due to decline in current account mainly following lower export earnings. Table 2 :Trade Data in US $ millions (f.o.b), Q3 2007-Q4 2008 Bank of Zambia Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008 Trade Bal97.2425.9231.7-224.8-461.8 Exports1,132.81,323.41,437.71,037.3875.7 Metals937.51,147.21,214.3807.6648.0 Copper858.41,035.51,124.2758.1389.4 Cobalt79.1111.790.149.530.9 Non- Traditional Exports 195.2176.3223.4229.7227.7 Imports-1,055.5-913.2-1225.9-1284.4-1,126.7 14

15. IMF mission in Zambia, 2 nd - 10 th December 2008 and 18 th February – 4 th March 2009:  Reviewed economic performance under PRGF arrangement. Mission noted that economic growth was slowing due to global financial crisis. Broad agreement on macroeconomic outlook for 2009. Zambian Government and the IMF reached agreement on structural measures for 2009. IMF to provide substantial BoP support under PRGF arrangement. 8.0 IMPLEMENTATION OF THE ECONOMIC PROGRAMME Bank of Zambia 15

16. Overall financial condition and performance of banking sector satisfactory in Q4.  Banks had adequate capital reserves, asset quality and liquidity remained satisfactory. However, earnings performance was unsatisfactory. Overall financial condition and performance of banking sector at end-February, 2009 was satisfactory.  The banking sector as a whole was adequately capitalized while asset quality, earnings performance and liquidity position remained satisfactory. 9.0 DEVELOPMENTS IN FINANCIAL SECTOR Bank of Zambia 16

17. The overall financial performance and condition of the NBFIs was rated fair during the period under review. On average, all NBFIs reported adequate regulatory capital, satisfactory earnings performance and asset quality whilst the liquidity position was rated fair. However, two leasing companies, one building society and one savings and Credit Company had regulatory capital deficiencies. 10.0 DEVELOPMENTS IN NON-BANK FINANCIAL INSTITUTIONS Bank of Zambia 17

18. 11.0 INFLATION OUTLOOK FOR SECOND QUARTER 2009 Inflationary pressures may arise from:  The proposed 66% increase in electricity tariffs to be effected in April 2009 and the negative spill over effects on the manufacturing sector;  The possible increase in water tariffs which automatically comes with higher electricity tariffs and negative effect on other service sectors; and  Pass through effects of the depreciation in the exchange rate of the Kwacha against the US dollar. Bank of Zambia 18

19. INFLATION OUTLOOK FOR SECOND QUARTER 2009 However these factors may be mitigated by the fall in food prices with the onset of the 2008/2009 crop harvest season. Bank of Zambia will continue to monitor these developments and undertake appropriate monetary policy actions to contain inflationary pressures. Bank of Zambia 19

20. 12 CONCLUSION Positive Signs Emerging:  Gradual Recovery of Copper Production and Prices;  Lower Inflation recorded in February; and  Narrowing trade deficit. Working together the nation can overcome the adverse effects of the crisis Thank You Bank of Zambia 20