Boz Quarterly Brief - Speech (q2 2009)

BANK Of ZAMBIA

SECOND QUARTER 2009 MEDIA BRIEFING BY CALEB M. FUNDANGA GOVERNOR- BANK OF ZAMBIA

Presented at Bank of Zambia July 2009

GOVERNOR’S QUARTERLY MEDIA BRIEFING

July 2009

EXECUTIVE SUMMARY This brief provides a preliminary assessment of monetary policy implementation and its outcomes in the second quarter of 2009. The brief also reviews other economic and financial sector developments. It concludes with an outlook for inflation over the third quarter of 2009. Monetary Policy During the second quarter of 2009, monetary policy remained focussed on the achievement of the end-year inflation target of 10%. In this regard, the Bank of Zambia continued to rely largely on Open Market Operations and the auctioning of Government securities to maintain reserve money within the programmed growth path. These actions were to be complemented by prudent fiscal management Inflation Annual overall inflation increased to 14.4% in June 2009 from 13.1% at end-March 2009, reflecting a rise in both annual food and non-food inflation. Annual food inflation rose to 14.1% from 13.9% in March 2009 on account of price increases on breakfast and roller meal, white maize, beef and poultry products, dried kapenta, and fresh vegetables. Similarly, annual non-food inflation increased to 14.7% from 12.3%, reflecting the unfavourable pass-through effects of the depreciation of the Kwacha against global currencies. Money Supply and Domestic Credit Preliminary estimates indicate that growth in broad money (M3), comprehensively defined to include foreign currency deposits, marginally increased to 0.2% at end June 2009 from the 0.0% recorded at end March 2009. The increase in M3 was largely due to the expansion in net foreign assets (NFA) by 45.9% as a result of the valuation gains from the depreciation of the Kwacha against global currencies. However, net domestic assets (NDA) contracted by 33.1% as a result of the decline in lending to the private sector. On an annual basis, M3 growth slowed down to 20.5% from the 26.8% recorded in March 2009. This outturn was largely due to the fall in the NDA by 19.0% as the NFA increased by 74.1%.

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Total domestic credit, comprehensively defined to include foreign currency loans, fell by 4.4% in the second quarter of 2009 compared with a 7.1% increase in the first quarter of 2009. This was due to a 12.1% contraction in credit to the private sector (including the public enterprises) as lending to the Government increased by 24.2%. On an annual basis, domestic credit growth slowed to 39.2% in June 2009 from the 52.7% recorded in March 2009. The key influence on domestic credit expansion was lending to the central Government, which rose by 141.5%, compared to private sector credit growth of 19.9%. On sectoral basis, households (personal loans category) continued to be the largest recipient of credit, accounting for 24.9% (23.8%) 1 in June 2009. The agricultural sector again was second at 17.5% (16.9%), followed by manufacturing, 11.1% (10.8%); wholesale and retail trade, 9.1% (8.9%), financial services, 8.3% (9.6%); and transport and communications, 7.9% (7.0%) Interest Rates Despite the increase in demand for Government Securities, the two composite weighted average yield rates edged upwards. The Treasury bill composite weighted yield rate increased by 20 basis points to 16.9% while the composite yield rate for Government bonds rose by 40 basis points to close the second quarter at 18.8% up from 18.4%. Except the Average Savings Rate (ASR) for amounts above K100,000 which remained unchanged at 4.8%, all the reported commercial banks’ nominal interest rates increased in June 2009. The Weighted Average Lending Base Rate (WALBR), the Average Lending Rate (ALR) and the 30-day deposit rate for amounts exceeding K20 million increased to 22.4% (20.9%), 28.9% (27.0%) and 5.6% (5.1%), respectively. Real Sector The stock of maize grain held by major millers in the country fell by 56.2% to 26,842.8 metric tons (mt) from 61,241.2 mt in the first quarter of 2009. On an annual basis, however, the stock of maize grain rose by 14.4% to 26,842.8 mt in March 2009 from 23,472.6 mt during the corresponding period in 2008. Preliminary data show that copper output fell by 8.2% (increased by 9.4% last quarter) to 167,185.4 mt in the second quarter of 2009 from 182,148.7 mt recorded the previous quarter. This output level was, 1

Number in bracket is at end-March 2009.

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however, 20.3% higher than 138,921.7 mt recorded in the corresponding quarter of 2007. Similarly, cobalt output fell by 44.9% (9.5% decline last quarter) to 600.3 mt during the quarter under review from 1,090.0 mt last quarter. In addition, cobalt output at 600.3 mt was 47.5% lower than 1,144.5 mt produced during the same quarter last year. Cement output from Lafarge Plc increased by 25.1% to 190,750.0 mt during the second quarter 2009 from the 152,524.0 mt produced in the previous quarter. In addition, this output was 43.7% higher than the 132,784.0 mt produced in the corresponding quarter of 2008. On a yearto-date basis, output of 343,274 mt of cement was 45.0% above the cumulative output of 236,762% mt for the same period in 2008. The performance of the manufacturing sector on the Copperbelt was mixed during the second quarter of 2009. While output by companies such as Zambia Metal Fabricators (ZAMEFA), Non Ferrous Metals, Copperbelt Steel and Scaw Ltd declined, production by Wood Processing Ltd, Zamchin and Monarch Steel improved. Other improvements in output were recorded by companies in paint manufacturing and textiles. Compared to the same period in 2008, most of the companies recorded lower output in the second quarter of 2009. The fall in production was largely attributed to reduced demand from the mines on account of the global economic downturn. International arrivals at the country’s four international airports during the second quarter of 2009 were 88,066 passengers compared to 80,112 passengers in the first quarter of 2009. This was however lower than the 113,129 passengers recorded during the corresponding period in 2008. Total investment pledges during the quarter under review stood at US $567.2 million compared to US $198.8 million the previous quarter. These pledges when fully executed are expected to generate 6,068 jobs compared with 2,326 jobs as at end March 2009. Foreign Exchange Market The Kwacha was relatively stable against the US dollar, appreciating by 1.0% during the second quarter of 2009 compared with a depreciation of 9.3% in the first quarter of 2009. The average interbank exchange rate of the Kwacha against the US dollar strengthened to K5,281.64/US$ as at end-June 2009 from K5,337.18/US$ as at end March 2009.

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The appreciation was mainly due to reduced demand for foreign exchange, particularly from foreign financial institutions, as signs of a global economic recovery weakened risk aversion towards emerging markets. The Kwacha was also supported by improved sentiment in the foreign exchange market that reflected increased supplies triggered by rising copper prices on the international market and positive news that some of the planned closures of mining operations would not go ahead. Over the period, copper prices increased by 22.9% primarily due to strong Chinese demand and traded above US$5,000.00 per tonne for the first time since the fourth quarter of 2008. Balance of Payments Preliminary data show that Zambia recorded an overall balance of payments surplus of US $24.9 million during the second Quarter of 2009 compared with a deficit of US $147.7 million the previous quarter on account of the narrowing of the current deficit to US $107.3 million from US $231.3 million. Merchandise export earnings increased by 21.0% to US $864.1 million following a rise in metal and non- metal export earnings. Copper export earnings were 22.3% higher than US $562.9 million recorded during the first quarter, reflecting a 19.4% rise in the realised price of copper to US $4,045.66 per mt from US $3,3389.42 per mt and the increase in export volumes by 2.2% to 170,218.93 tons. Similarly, cobalt export earnings recorded a 39.2% increase to US $18.0 million, following an increase in the realised price to US $12.97 per pound from US $5.03 per pound. Cobalt export volumes, however, declined by 46.0% to 628.51 tons. Non-traditional exports at US $157.5 million were 14.0% higher than US $138.1 million realised in the previous quarter due to increased export earnings from copper wire, cane sugar, cotton yarn, fruits and vegetables, gemstones, petroleum products and electricity. Similarly, merchandise imports increased by 26.8% to US $847.6 million due to higher import bills associated with commodity groups such as food items, petroleum products, fertiliser, iron and steel products, industrial boilers and equipment, and electrical machinery and equipment. Economic Reform Programme Bank of Zambia

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During the second quarter of 2009, the IMF completed the first and second reviews under the PRGF arrangement and the Executive Board approved US $256.4 million to assist Zambia cope with the global economic meltdown. A total amount of US $162.2 million was disbursed in the period under review. Preliminary data indicate that all the quantitative benchmarks were observed and that the structural benchmarks were generally on track. Developments in the Financial Sector The overall financial performance and condition of the banking sector in the quarter ended June 2009 was satisfactory. Although the sector was fundamentally sound, it exhibited deterioration in asset quality and earnings performance on account of an increase in non-performing loans, which impacted the earnings performance for the quarter. However, all the banks were adequately capitalised and the liquidity position remained high. Similarly, the overall financial performance and condition of the NBFIs was rated fair during the quarter under review. On average, the leasing finance institutions and bureaux de change sub-sectors reported adequate regulatory capital and asset quality while earnings performance was unsatisfactory with a fair liquidity position. However, two leasing finance companies, one building society and one credit and savings institution had regulatory capital deficiencies. Developments in Banking, Currency and Payment Systems A total of 18 Payment Systems Businesses, 14 Payment System Participants and 3 Payment Systems had been designated by the Bank of Zambia, as end-June 2009. This is an indication that the Zambian payment system market and financial market in general has continued to grow resulting in a wider availability of service providers. It is regrettable that while the volume of unpaid cheques recorded during the second quarter of 2009 declined by 11% to 5,568, the value of cheques increased by 24% to K57 billion. The media is urged to continue educating the public on the consequences of ‘rubber cheques’ as provided for in the National Payment Systems Act No 1 of 2007. Notwithstanding the above, it is encouraging to note that the public is embracing Point of Sale and Automated Teller Machines as appropriate retail payment channels. This is another area in which the Media can play a role by educating the public on the availability and use of these Bank of Zambia

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channels. This would go a long way in reaching the unbanked and providing real-time banking services to the public. The Bank of Zambia in conjunction with the Bankers Association of Zambia has been involved in a project to implement a National Switch, which will serve as a common platform for financial service providers. The National Switch is expected to be operational in early 2010. Inflation Outlook for the Third Quarter Of 2009 Inflationary pressures in the third quarter of 2009 are expected to stem from high production costs associated with the current power shortages and the recently approved increase in electricity tariffs. In addition, higher international crude oil prices if sustained will exert pressure on domestic fuel prices to be adjusted upward. These pressures may, however, be offset by: •

Reductions in food inflation with the ongoing marketing season, which is expected to have a favourable effect on the supply of food crops such as maize, other cereal and tubers; and

•

Continued stability in the exchange rate.

On its part, the Bank of Zambia will continue to employ indirect instruments for monetary operations, namely open market operations and auctioning of Government securities. This is expected to be supported by prudent fiscal operations.

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INTRODUCTION This brief provides a preliminary assessment of monetary policy implementation and its outcomes in the second quarter of 2009. The brief also reviews other economic and financial sector developments. In the conclusion, it provides an inflation outlook for the third quarter of 2009. MONETARY POLICY Monetary policy during the second quarter of 2009 remained focussed on the achievement of the end-year inflation target of 10%. In this regard, the Bank of Zambia continued to rely largely on Open Market Operations and the auctioning of Government securities to maintain reserve money within the programmed growth path. These actions were to be complemented by prudent fiscal management INFLATION Overall Inflation Second quarter overall inflation increased to 3.2% from the 2.3% recorded in the first quarter of 2009 but was 0.2 percentage points higher than the 2.1% recorded in the second quarter of 2008. This development was mainly attributed to the increase in quarterly food inflation, as non-food inflation slowed down. Annual overall inflation increased to 14.4% in June 2009 from 13.1% at end-March 2009. This reflected a rise in both annual food and non-food inflation to 14.1% and 14.7% from 13.9% and 12.3%, respectively. Food Inflation Quarterly food inflation increased to 3.5% from 1.4% in the previous quarter and was 0.1 percentage point higher than the 3.4% recorded during the second quarter of 2008. This development was mainly due to price increases on Breakfast and Roller meal owing to the discontinuation of supply of Government subsidised maize by FRA to millers throughout the country. In addition there were price increases on imported rice, wheat plain flour, beef and pork products, poultry products, both fresh and dried fish, and vegetables. Nonetheless, there were price reductions on white maize, shelled groundnuts and sweet potatoes owing to seasonal supply. Similarly, annual food inflation rose to 14.1% from 13.9% in March 2009 on account of price increases on breakfast and roller meal, white maize, beef and poultry products, dried kapenta, and fresh vegetables.

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Non-Food Inflation Quarterly non-food inflation slowed down to 3.0% from the 3.2% observed at end-March 2009 but was 2.2 percentage points above the 0.8% recorded at end June 2008. This was largely due to price reductions on air fares for Lusaka/London as well as Lusaka/Ndola and Bed & continental breakfast for 3 to 5 star hotels resulting from the favourable pass-through effects of the appreciation of the Kwacha against global currencies. Annual non-food inflation, however, increased to 14.7% from 12.3% and was above the projection of 13.6%, reflecting price increases on air fares for Lusaka/London as well as Lusaka/Ndola and Bed & continental breakfast for 3 to 5 star hotels resulting from the unfavourable passthrough effects of the depreciation of the Kwacha against global currencies. BROAD MONEY AND DOMESTIC CREDIT In the second quarter of 2009, preliminary estimates indicate that growth in broad money (M3), comprehensively defined to include foreign currency deposits, marginally increased to 0.2% from the 0.0% recorded at end March 2009. The increase in M3 was largely due to the expansion in net foreign assets (NFA) by 45.9% as net domestic assets (NDA) contracted by 33.1%. The increase in NFA was mainly as a result of the valuation gains from the depreciation of the Kwacha against global currencies while the decline in NDA was as a result of the decline in lending to the private sector (including parastatals). On an annual basis, M3 growth slowed down to 20.5% (June 2008, 26.7%) from the 26.8% recorded in March 2009. This outturn was largely due to the fall in the NDA by 19.0% as the NFA increased by 74.1% on account of the increase in other items net and valuation effects due to the depreciation of the Kwacha against global currencies, respectively. Total domestic credit, comprehensively defined to include foreign currency loans, fell by 4.4% in the second quarter of 2009 compared with a 7.1% increase in the first quarter of 2009. This was due to a 12.1% contraction in credit to the private sector (including the public enterprises) as lending to the Government increased by 24.2%. On an annual basis, domestic credit growth was 39.2% in June 2009 (28.3%, in June 2008) compared to the 52.7% recorded in March 2009. The key influence on domestic credit expansion was lending to the central

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Government, which rose by 141.5%, compared to private sector credit growth of 19.9%. In terms of sectoral distribution, households (personal loans category) continued to be the largest recipient of credit, accounting for 24.9% (23.8%)2 in June 2009. Agricultural sector again was second at 17.5% (16.9%), followed by manufacturing, 11.1% (10.8%); wholesale and retail trade, 9.1% (8.9%), financial services, 8.3% (9.6%); and transport and communications, 7.9% (7.0%) INTEREST RATES Government Securities Despite the increase in demand for Government Securities, the two composite weighted average yield rates edged upwards. The Treasury bill composite weighted yield rate increased by 20 basis points to 16.9% while the composite yield rate for Government bonds rose by 40 basis points to close the second quarter at 18.8% up from 18.4%. The total stock of outstanding Government securities increased by 3.3% to K8,389.5 billion from K8,125.1 billion. In terms of the components of Government securities, the amount of outstanding Treasury bills increased by 5.0% (K174.4 billion) to K3,662.3 billion while the stock of Government bonds rose by 1.8% (K83.6 billion) to K4,727.20 billion. This increase in the overall stock of Government securities was on account of net sales of Treasury bills and Government Bonds reflecting the surpluses recorded on auctions owing to moderately high demand levels for Government securities mostly by local institutional investors. Foreign portfolio investors did not participate in the Government securities market as risk aversion levels in global markets remained high. During the second quarter of 2009, the foreign investors stayed out of the market for the most part of the period. By end June, the proportion of foreign held Treasury bills to the total outstanding issues stood at 0.04% from 3.9% in March 2009 Similarly, the foreign investors did not make any new purchases of Government bonds. As a consequence, the amount of bonds held by foreigners stood at 12.9% from 13.1% of the total Government bonds outstanding. Commercial Bank Interest Rates 2

Number in bracket is at end-March 2009.

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Except the Average Savings Rate (ASR) for amounts above K100,000 which remained unchanged at 4.8%, all the reported commercial banks’ nominal interest rates increased in June 2009. The Weighted Average Lending Base Rate (WALBR), the Average Lending Rate (ALR) and the 30-day deposit rate for amounts exceeding K20 million increased to 22.4% (20.9%)3, 28.9% (27.0%) and 5.6% (5.1%), respectively. As a result of the increase in inflation, all real interest rates, except the real ALR, declined. The real 30-day deposit rate for amounts exceeding K20 million declined to negative 9.7% (March 2009, negative 8.0%) while the real ASR declined to negative 8.8% (March 2009, negative 8.3%). However, the real ALR increased to 14.5% (March 2009, 13.9%) on account of a relatively higher increase in its nominal rate. REAL SECTOR DEVELOPMENTS Agriculture Maize As at end-March 2009, the stock of maize grain held by major millers4 in the country fell by 56.2% [declined by 43.5% as at end December 2008] to 26,842.8 metric tons (mt) from 61,241.2 mt last quarter. Copperbelt, Lusaka, Central and Southern provinces accounted for 18,280.0 mt (68.1%), 7,333.1 mt (37.3%), 979.9 mt (3.7%) and 249.8 mt (0.9%), respectively. However, on an annual basis, the stock of maize grain rose by 14.4% to 26,842.8 mt in March 2009 from 23,472.6 mt during the corresponding period in 2008. Mining Preliminary data show that copper output fell by 8.2% (increased 9.4% last quarter) to 167,185.4 mt in the first quarter of 2009 from 182,148.7 mt recorded the previous quarter. However, this output level was 20.3% higher than 138,921.7 mt recorded in the corresponding quarter of 2007. Similarly, cobalt output fell by 44.9% (9.5% decline last quarter) to 600.3 mt during the quarter under review from 1,090.0 mt last quarter. In addition, cobalt output at 600.3 mt was 47.5% lower than 1,144.5 mt produced during the same quarter last year. Manufacturing 3 4

The numbers in brackets are for the previous quarter. Millers require an estimated 55,000 mt of maize per month – Source: Millers Association of Zambia.

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Cement output from Lafarge Plc increased by 25.1% to 190,750.0 mt during the second quarter 2009 from the 152,524.0 mt produced in the previous quarter. In addition, this output was 43.7% higher than the 132,784.0 mt produced in the corresponding quarter of 2008. On a yearto-date basis, output of 343,274 mt of cement was 45.0% above the cumulative output of 236,762% mt for the same period in 2008. Zambian Breweries Plc produced 94,103.0 hectolitres of clear beer in the first two months of the second quarter of 2009, which was 29.5% higher than the 72,646.0 hectolitres output during the first two months of the previous quarter. However, this outturn was 5.7% lower than the 77,051.0 hectolitres produced during the same period in 2008. Output of soft drinks by Zambian Breweries Plc dropped by 14.7% to 55,862.0 hectolitres from the 65,499.0 hectolitres produced in the previous quarter. Additionally, this output level was 7.3% lower than the 60,279.0 hectolitres produced in the corresponding period of 2008. Production of milk by Parmalat Zambia Ltd during the quarter under review was fell 1.4% to 6,892,785 litres from 6,988,856 litres produced in the previous quarter. However, this output was 0.5% higher when compared to 6,860,057 litres of output recorded during the same quarter of 2008. On a year-to-date basis, milk output increased by 4.1% to 13,881,641.0 litres in June 2009 from 13,328,082.0 litres during the same period in 2008. The performance of the manufacturing sector on the Copperbelt was mixed during the second quarter of 2009. While output by companies such as Zambia Metal Fabricators (ZAMEFA), Non Ferrous Metals, Copperbelt Steel and Scaw Ltd declined, production by Wood Processing Ltd, Zamchin and Monarch Steel improved. Other improvements in output were recorded by companies in paint manufacturing and textiles. Compared to the same period in 2008, most of the companies recorded lower output in the second quarter of 2009. The fall in production was largely attributed to reduced demand from the mines on account of the global economic downturn. Tourism During the second quarter of 2009, international arrivals at the country’s four international airports5 were 88,066 passengers compared to 80,112 passengers in the first quarter of 2009. However, this was lower than the 113,129 passengers recorded during the corresponding period in 2008. The major tourist destinations, namely, Livingstone and Mfuwe accounted for (through their respective international airports) 14,215 passengers and 5

Lusaka, Livingstone, Mfuwe and Ndola.

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178 passengers against 12,873 passengers and 94 passengers in the previous quarter, respectively. Investment Pledges During the quarter under review, total investment pledges stood at US $567.2 million compared to US $198.8 million the previous quarter. On a sectoral basis, real estate pledges amounted to (US $202.1 million), tourism (US $88.2 million), energy (US $82.1 million), manufacturing (US $55.9 million), mining (US $50.0 million), health (US $21.9 million), financial (US $17.0 million), education (US $13.5 million), services (US $13.3 million), agriculture (US $11.0 million), construction (US $5.8 million), transport (US $3.4 million) and ICT (US $3.0 million). On a year to-date basis, investment pledges totalled US $762.7 million compared with the US $1,820.7 million recorded during the same period in 2008. The pledges when fully executed are expected to generate 6,068 jobs (2,326 jobs as at end March 2009): real estate 2,192 jobs; manufacturing 1,528 jobs; tourism 744 jobs; construction 430 jobs; agriculture; 413 jobs; service 194 jobs; education 157 jobs; transport 154 jobs; mining 140 jobs; health 55 jobs; ICT 34 jobs and financial 27 jobs. EXTERNAL SECTOR DEVELOPMENTS Foreign Exchange Market In the second quarter of 2009, the Kwacha was relatively stable against the US dollar and appreciated by 1.0% compared with a depreciation of 9.3% recorded in the first quarter of the year. Hence, the average interbank exchange rate of the Kwacha against the US dollar strengthened to K5,281.64/US$ as at end-June 2009 from K5,337.18/US$ as at end March 2009. The Kwacha’s appreciation was mainly on account of reduced demand for foreign exchange during the quarter under review, particularly from foreign financial institutions who reduced their purchases of foreign exchange as signs of a global economic recovery weakened risk aversion towards emerging markets. For instance, the foreign players made net supplies of US$59.8 million in the quarter under review compared with net purchases of US$7.7 million in the previous quarter. The Kwacha was also supported by improved sentiment in the foreign exchange market that reflected increased supplies triggered by rising copper prices on the international market and positive news that some of Bank of Zambia

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the planned closures of mining operations would not go ahead. Over the period, copper prices increased by 22.9% primarily due to strong Chinese demand and traded above US$5,000.00 per tonne for the first time since the fourth quarter of 2008. However, the Kwacha continued to depreciate against the other major foreign currencies. It weakened the most by 18.1% against the South African rand, up from 7.6%, previously. This pushed the quarterly average interbank rate to a record low of K630.99/ZAR from a previous interbank average rate of K534.28/ZAR. Against the pound sterling and euro, the Kwacha lost 7.8% and 5.7% of its value to end the quarter at interbank average rates of K8,163.28/£ and K7,242.14/€ from K7,571.32/£ and K6,852.73/€, respectively. In the previous quarter, the Kwacha depreciated by 4.6% against the pound sterling while it weakened by 6.0% with respect to the euro. The Kwacha’s weak performance against the other foreign currencies was on account of stronger demand for these currencies on the international market as improvements in the global economy dampened safe haven flows into the US dollar. Consequently, the rand, euro and pound sterling appreciated against the US dollar by 18.7%, 13.5% and 5.6%, respectively. The above, notwithstanding, it has come to the attention of the Bank of Zambia that a number of organisations are quoting prices for some goods and services in US dollars despite that the Kwacha/ US dollar exchange has exhibited relative stability during the second quarter of the year. We would like to remind members of the public that the Kwacha remains the legal tender of Zambia. Consequently, the public is encouraged to question any business organisation demanding settlement of financial obligations in foreign exchange. Balance of Payments Preliminary data show that Zambia recorded an overall balance of payments (BoP) surplus of US $24.9 million during the second Quarter of 2009 compared with a deficit of US $147.7 million recorded the previous quarter. This was on account of favourable performance in both the current and the capital and financial accounts. The current account deficit narrowed to US $107.3 million from a deficit of US $231.3 million recorded the previous quarter. This was largely explained by the increase in current transfers to US $156.9 million from US $32.1 million the previous quarter.

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Merchandise export earnings increased by 21.0% to US $864.1 million from US $713.9 million realised in the previous quarter following a rise in metal and non- metal export earnings. Metal export earnings increased by 22.7% to US $70.6.6 million, from US $575.8 million the previous quarter. A rise in both copper and cobalt export earnings accounted for this outturn. Copper export earnings, at US $688.6 million, were 22.3% higher than US $562.9 million recorded during the previous quarter, reflecting a 19.4% rise in the realised price of copper to US $4,045.66 from US $3,3389.42 per ton the previous quarter. Copper export volumes also increased, by 2.2% to 170,218.93 tons from 166,485.91 tons. Cobalt export earnings recorded a 39.2% increase to US $18.0 million, in the second quarter of 2009, from US $12.9 million realised the previous quarter following a big increase in the realised price to US $12.97 per pound from US $5.03 per pound. However, cobalt export volumes declined by 46.0% to 628.51 tons from 1,164.24 tons recorded in the first quarter. Non-traditional exports (NTEs), at US $157.5 million were 14.0% higher than US $138.1 million realised in the previous quarter. This was due to increased export earnings from copper wire, cane sugar, cotton yarn, fruits and vegetables, gemstones, petroleum products and electricity Similarly, merchandise imports increased by 26.8% to US $847.6 million from US $668.3 million recorded the previous quarter. This was due to higher import bills associated with commodity groups such as food items, petroleum products, fertiliser, iron and steel products, industrial boilers and equipment, and electrical machinery and equipment. The capital and financial account surplus decreased by 6.6% to US $113.7 million from US $121.7 million recorded the previous quarter. This was largely attributed to a smaller reduction in the outflows in portfolio investments by US $13.1 million in the second quarter 2009 compared to an outflow of US $65.0 million the first quarter of 2009.

ECONOMIC REFORM PROGRAMME

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During the second quarter of 2009, the International Monetary Fund (IMF) completed the first and second reviews under the PRGF arrangement and the Executive Board approved US $256.4 million to help Zambia cope with the global economic meltdown. A total amount of US $162.2 million was disbursed in the period under review. Preliminary data indicate that all the quantitative benchmarks were observed and that the structural benchmarks were generally on track. DEVELOPMENTS IN THE FINANCIAL SECTOR Banking Sector The overall financial performance and condition of the banking sector in the quarter ended June 2009 was satisfactory. Although the sector is fundamentally sound, it exhibited deterioration in asset quality and earnings performance on account of an increase in non-performing loans, which impacted the earnings performance for the quarter. However, all the banks were adequately capitalised and the liquidity position remained high. Overall, the banking sector’s total assets decreased by 0.7% to K17,133.9 billion (March, 2009: K17,251.2 billion). The asset structure continued to be dominated by ‘net loans and advances’ at 44.9% (March, 2009: 47.1%). Other significant assets were ‘investments in securities’ at 15.6%, ‘balances with foreign institutions’ at 14.9%, and ‘balances with Bank of Zambia’ at 12.1% (March , 2009: 14.2%, 14.3% and 12.2%, respectively). For the quarter under review, the sector remained adequately capitalised and all the banks met the K12 billion minimum capital requirements for banks and the capital adequacy ratios of 5% and 10% requirement for primary regulatory capital and total regulatory capital, respectively. The banking sector’s average capital adequacy ratios were 16.7% and 20.3% for primary and total regulatory capital, respectively (March, 2009:16.5% and 20.1%, respectively). The overall banking sector’s asset quality in the quarter under review deteriorated, with the gross non-performing loans as a percentage of total loans increasing to 10.4% from 8.8% as at the previous quarter. However, the ‘allowance for loan losses to minimum regulatory requirement’ remained adequate at 100.3% (March, 2009: 102.1%), and the ‘allowance for loan losses to gross non-performing loans’ increased to 80.6% (March, 2009: 78.5%).

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The banking sector’s earnings performance during the quarter under review declined with profitability decreasing to K38.6 billion (March, 2009: K140.5 billion). The decline in earnings performance was on account of an increase in ‘provisions for loan losses’ and ‘non-interest expenses’ and as result, the average return on assets (ROA) and return on equity (ROE) decreased to 2.2% and 10.0%, respectively (March, 2009: 3.2% and 18.0%, respectively). The sector’s liquidity condition was satisfactory with the liquidity ratio increasing to 41.3% at the end of the quarter compared to 39.8% as at the end of the last quarter and the ratio of ‘liquid assets to total assets’ to 34.0% from 33.2%. Non-Bank Financial Institutions Sector The overall financial performance and condition of the NBFIs was rated fair during the quarter under review. On average, the leasing finance institutions and bureaux de change sub-sectors reported adequate regulatory capital and asset quality while earnings performance was unsatisfactory with a fair liquidity position. However, two leasing finance companies, one building society and one credit and savings institution had regulatory capital deficiencies. Leasing Sub-Sector The overall performance of the leasing sub-sector was considered satisfactory during the quarter under review. As at 30 June 2009, the aggregate sub-sector regulatory capital stood at K32,851 million (March 2009: K26,768 million), representing a regulatory capital adequacy ratio of 17% (March 2009: 12%). The increase in the sub-sector’s regulatory capital was largely due to a capital injection of K5,241 million by one leasing finance company. Building Societies-Sub-Sector The overall financial condition and performance of building societies subsector in the quarter under review was fair. The sub-sector’s regulatory capital position improved to K217 million from negative K1,307 million as at 31 March 2009 largely due to a profit after tax K1,498 million. The sub- sector’s earnings performance improved by K4,384 million to K1,749 million from negative K2,635 million the previous quarter The improvement in earnings performance is explained by the fact that in the previous quarter, the sub-sector had recorded foreign exchange losses amounting to K4,031 million whereas in the current quarter, the subsector instead recorded foreign exchange gains amounting to K29 million.

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July 2009

Micro-Finance Sub-Sector The overall financial condition and performance of the MFI sub-sector during the quarter ended 30 June 2009 was satisfactory. The regulatory capital of the MFI sub-sector stood at K220,027 million (March 2009: K186,624 million) and was above the required minimum amount of K76,362 million by K143,666 million. The increase in regulatory capital was largely due to a profit after tax of K19,216 million recorded during the quarter coupled with a capital grant of K10,000 million received by one microfinance institution. Bureaux de Change Overall, the financial condition and performance of the bureaux de change sub-sector was rated satisfactory. During the quarter ended 30 June 2009, the sub-sector had ‘satisfactory’ regulatory capital and earnings performance. The volume of purchases and sales of foreign currency by the bureaux de change sub-sector in the quarter under review amounted to US$100.3 million (equivalent to K501,882 million) and US$100.4 million (equivalent to K506,210 million) compared to the previous quarter figures of US$81.3 million (equivalent to K434,243 million) and US$81.0 million (equivalent to K435,728 million) respectively. The volume of foreign exchange transactions represented an increase of 24% over the previous quarter’s position. The United States (US) Dollar remained the most traded currency in the quarter under review accounting for 94.6% followed by the South African (SA) Rand with 3.5%. Total purchases and sales of the US Dollar amounted to US$90.4 million (equivalent to K474,891 million) and US$90.3 million (equivalent to K477,880 million) while those of the SA Rand amounted to ZAR30.8 million (equivalent to K17,757 million) and ZAR30.6 million (equivalent to K19,425 million) respectively. Status of the FSDP Programme The initial five year period for the Financial Sector Development Plan (FSDP) approved by Cabinet in June 2004 lapsed at the end of June 2009. An updated draft document for the FSDP Phase II project proposal has been developed with technical support from a World Bank team of consultants. This document, which includes a monitoring and results based framework, has incorporated outstanding FSDP activities and the recent World Bank and International Monetary Fund (IMF) Financial Sector Assessment Programme (FSAP) recommendations for additional short to medium term policy reforms. Once finalized, the FSDP Phase II Bank of Zambia

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document will provide the basis for seeking further technical and financial support for an extended FSDP programme from cooperating partners and other stakeholders. In the interim, consultations for the extension to the second phase of the FSDP are currently on going and the Bank of Zambia has since requested the Ministry of Finance and National Planning for an administrative extension pending finalization and consensus on the FSDP Phase II project document. In order to bring all stakeholders on board, the FSDP Phase II Project document once finalised will be circulated to all key stakeholders with a view to having a consultative meeting towards the end of the third quarter. Thereafter, the final document is expected to be submitted to the Ministry of Finance and National Planning to seek formal Cabinet approval for the FSDP Phase II extension, to 2012. Update on the operations of Credit Reference Bureau Africa Limited The total number of reports searched by credit providers increased by 258 percent to 63,154 as at end of second quarter of 2009 from 17,647 as at end of the first quarter of 2009. The total number of reports submitted increased by 82 percent to 81,460 from 44,657 during the same period. During the quarter under review, the number of credit providers that submitted credit data to Credit Reference Bureau Africa Limited (CRBAL) increased by 11 to 31 from the previous period’s 20, out of a total of 44 credit providers. One bank and nine non-bank financial institutions (NBFIs) started submitting data during the reviewed quarter. Meanwhile, the number of credit providers that searched the database of CRBAL increased by 6 to 35 from 29 as at end March 2009. CRBAL management continues to encourage credit providers to submit credit data and search its database before extending credit. DEVELOPMENTS IN BANKING, CURRENCY AND PAYMENT SYSTEMS Designation of Payment System Participant and Payment System Businesses During the review period, one Payment System Participant and five Payment Systems Businesses were recommended for designation as outlined below:

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i. ii. iii. iv. v. vi.

July 2009

First National Bank Zambia Limited – Direct Debits and Credit Clearing (DDACC), Physical Interbank Clearing (PIC) and Zambia Interbank Payment and Settlement System (ZIPSS) Necor Transtech Limited – Money Transfer under Cash4Africa Mobile Payment Solutions Limited – Money transmission on Mobile phones National Savings and Credit Bank – Money Transmission on local system Access Bank Zambia Limited – Money Transmission on Western union Investrust Bank Plc – Money Transmission on MoneyGram

As at 30th June 2009, a total of 18 Payment Systems Businesses, 14 Payment System Participants and 3 Payment Systems had been designated by the Bank of Zambia. This is an indication that the Zambian payment system market and financial market in general has continued to grow resulting in a wider availability of service providers. Such services facilitate financial inclusion even in areas where the traditional banking facilities are not available. It is important to note that the Bank of Zambia has directed these institutions to receive and make payments in Kwacha as this is the legal tender in Zambia. Organisations that will not comply with this directive will therefore be in breach of the directive and risk being penalised. Non-Cash Retail Payments Cheques The Bank of Zambia has continued to monitor the developments on the unpaid cheques. It is regrettable that while the volume of unpaid cheques recorded during quarter 2 of 2009 declined by 11% to 5,568 cheques (Quarter 1: 6,264), the value increased by 24% to K57 billion (Quarter 1: K46 billion). The media is urged to take up the matter by educating the public in general on the consequences of ‘rubber cheques’ as provided for in the National Payment Systems Act No 1 of 2007. With the high cost associated with managing (printing, distributing, processing) the banknotes, the Bank would like to see that a cheque is widely accepted and used as a means of payment with the same certainty of payments as cash. On a monthly basis, the month of June showed a decrease in the volume and an increase in value of unpaid cheques.

Bank of Zambia

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July 2009

Point of Sale Terminals (PoS) and Automated Teller Machines (ATMs) PoS and ATMs are appropriate retail payment channels and it is encouraging to note that the public is embracing these channels. Education of the public on the availability and use of these channels will go a long way in reaching the unbanked and providing real-time banking services to the public. Commercial banks have shown their willingness to ensure these facilities are accessible country wide as evidenced in the upward trend in the number of machines rolled out. Point of Sale Terminals The number of point of sale terminals has increased by 7.69% to 770 terminals as at the end of the Second Quarter (First Quarter: 715). When compared to the same period last year, the number of terminals has increased by 22%. This overall increase in availability of access points should ideally have reduced the use of cash. Automated Teller Machines (ATMs) Similarly, the number of ATMs increased by 21.79% to 380 machines as at the end of the Second Quarter (First Quarter: 312 machines). The number of cards also increased by 8.21% to 699,058 cards as at the end of the Second Quarter (First Quarter: 645, 970 cards). This development has contributed to improving access to cash vending facilities. National Switch Project The Bank of Zambia in conjunction with the Bankers Association of Zambia has been involved in a project to implement a National Switch. The switch will serve as a common platform for financial service providers, which will link consumers and merchants through the use of electronic payment products such as debit cards, credit cards, mobile phones, and computers. The National Switch is expected to be operational in early 2010. INFLATION OUTLOOK FOR THE THIRD QUARTER OF 2009 Inflationary pressures in the third quarter of 2009 are expected to stem from high production costs associated with the current power shortages and the recently approved increase in electricity tariffs. In addition, higher international crude oil prices if sustained will exert pressure on domestic fuel prices to be adjusted upward. These pressures may, however, be offset by:

Bank of Zambia

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July 2009

•

Reductions in food inflation with the ongoing marketing season, which is expected to have a favourable effect on the supply of food crops such as maize, other cereal and tubers; and

•

Continued stability in the exchange rate.

On its part, the Bank of Zambia will continue to employ indirect instruments for monetary operations, namely open market operations and auctioning of Government securities. This is expected to be supported by prudent fiscal operations.

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