Bank of Zambia

THIRD QUARTER 2008 MEDIA BRIEFING

BY

DR CALEB M. FUNDANGA

Governor
BANK OF ZAMBIA

Presented at the Bank of Zambia

19th November, 2008
1
 INTRODUCTION
Bank of Zambia

 This brief reviews monetary policy

outcomes; and
 Other economic and financial sector
developments in Q3 2008.
 In conclusion, an inflation outlook for Q4
2008 is provided.

2
 1.0 MONETARY POLICY
Bank of Zambia

• 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.

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Bank of Zambia 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.

Chart 1 : Annual Inflation Dec 04- Oct 08

23
21
19
17
15
13
119
75
(%)

31
-1
Jun

Jun
Sep

Sep
Sept

Jun 07

Jun 08
Dec 04

Dec 05

Dec 06

Dec 07

Oct 08
Mar 05

Mar 06

Mar 07

Mar 08

Sept 08
Overall Food Non-food
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 3.0 MONEY SUPPLY & DOMESTIC
CREDIT
Bank of Zambia

• 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)

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 4.0 INTEREST RATES

Bank of Zambia
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.

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 5.0 FOREIGN EXCHANGE MARKET
Bank of Zambia

• 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).

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Bank of Zambia Foreign Exchange Market (cont)
Chart 2: Interbank Exchange Rates (Kwacha per Currency)
9,500.00 605.00
9,000.00
585.00
8,500.00
8,000.00 565.00
7,500.00
US$.Pound, Euro

545.00
7,000.00
6,500.00 525.00

Rand
6,000.00 505.00
5,500.00
485.00
5,000.00
4,500.00 465.00
4,000.00
445.00
3,500.00
3,000.00 425.00
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
USD P ound Euro SA Rand

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 6.0 BALANCE OF PAYMENTS (BoP)
Bank of
Zambia
• 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), Q3 2007-Q3 2008

Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

Trade Bal 349.7 97.2 425.9 231.7 -224.8

Exports 1,318.7 1,132.8 1,323.4 1,437.7 1,037.3

Metals 1,094.8 937.5 1,147.2 1,214.3 807.6

Copper 1,027.9 858.4 1,035.5 1,124.2 758.1

Cobalt 66.9 79.1 111.7 90.1 49.5
Non-Metals 223.9 195.2 176.3 223.4 229.7
Imports -988.0 -1,055.5 -913.2 -1225.9 -1284.4

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 7.0 IMPLEMENTATION OF THE
ECONOMIC PROGRAMME
Bank of Zambia

• IMF mission in Zambia, 17th - 26th September 2008:

 Reviewed economic performance under PRGF arrangement
for period up to June 2008.

 All end-June 2008 benchmarks observed.

 Broad agreement on macroeconomic outlook for 2008.

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 2008.

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 8.0 DEVELOPMENTS IN
FINANCIAL SECTOR
Bank of Zambia

• 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.

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 9.0 IMPLICATIONS OF GLOBAL

Bank of
FINANCIAL CRISIS ON ZAMBIA
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 2007.
 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.

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 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 $3,592.00 per mt as at 12th
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.

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 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

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 Implications of Global Financial Crisis on
Zambia cont.
Bank of Zambia

• 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.

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 10.0 INFLATION OUTLOOK FOR
FOURTH QUARTER 2008
Bank of Zambia

• 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
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