Boz Quarterly Brief - Speech (q3 2009)

BANK Of ZAMBIA

THIRD QUARTER 2009 MEDIA BRIEF BY CALEB M. FUNDANGA

Presented at Bank of Zambia November 2009

EXECUTIVE SUMMARY This brief provides a preliminary assessment of monetary policy implementation and its outcomes in the third quarter of 2009. The brief also reviews other economic and financial sector developments. It concludes with an outlook for inflation over the fourth quarter of 2009. Monetary Policy In the third quarter of 2009, monetary policy continued to focus on the achievement of the end-year inflation target of 10%. Accordingly, the Bank of Zambia relied mainly on Open Market Operations and Government securities auctioning to maintain reserve money within the programmed growth path. Prudent fiscal management was expected to complement monetary policy. Inflation Annual overall inflation fell by 1.4 percentage points to 13.0% (June 2009, 14.4%) in the third quarter as a result of the fall in both food and non-food inflation. Annual food inflation fell to 13.9% from 14.1% in June 2009 mainly attributed to the decline in prices of mealie meal, white plain flour, Mpulungu dried kapenta, and vegetables. Similarly, annual non-food inflation decreased to 12.1% from 14.7% due to declines in air fares for the Lusaka/London route and rates for accommodation for bed & continental breakfast, in turn largely explained by the favourable pass-through effect of the appreciation of the Kwacha against major currencies Money Supply and Domestic Credit In the third quarter of 2009, preliminary estimates indicate that growth in broad money (M3), comprehensively defined to include foreign currency deposits, increased to 2.6% from 0.2% recorded at end – June 2009. The increase in M3 was largely due to the expansion in net foreign assets (NFA) by 12.7% as net domestic assets (NDA) contracted by 8.1%. The NFA increased mainly as a result of the increase in the gross international reserves to US $1,737.9 million at end-September 2009. On the other hand, the decline in NDA was as a result of the fall in lending to the private sector.

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On an annual basis, M3 growth slowed down further to 19.8% from the 20.6% recorded in June 2009. This outturn was largely due to the fall in the NDA as the NFA increased. Total domestic credit, comprehensively defined to include foreign currency loans, increased by 5.9% in the third quarter of 2009 (1.6% fall in the previous quarter). This outturn was due to an increase in expansion of credit to the Government as lending to the private sector declined. On an annual basis, domestic credit growth slowed down to 41.7% in September 2009 from 43.3% in June 2009. This was due to a slowdown in credit growth to the private sector, to 17.0% as credit growth to Government accelerated to 221.4%. On a sectoral basis, households (personal loans category) continued to be the largest recipient of credit, accounting for 21.0 (25.9%) followed by agriculture at 16.3% (16.2%). Interest Rates The composite weighted average yield rate was lower at 17.5% against 18.8% recorded in the second quarter. The composite bond yield rate ended the quarter higher at an average of 19.1% from 18.9%. Developments in commercial banks nominal interest rates were mixed in September 2009. The weighted average lending base rate (WALBR) increased to 23.2% (June 2009, 22.4%) while average savings rate (ASR) for amounts above K100,000 remained unchanged at 4.7%. Real Sector The stock of maize grain held by major millers in the country increased by 198.1% (second quarter 2009, 44.6%) to 115,772.8 metric tons (mt) from 38,829.7 mt the previous quarter. In terms of holdings by province, the Copperbelt contributed 48,500.0 mt (41.9%), Lusaka 41,210.2 mt (35.6%), Southern 19,393.8 mt (16.8%) and Central 4,328.6 mt (3.7%) while Northern and Eastern provinces accounted 2,300.0 mt (2.0%) and 40.0 mt (0.03%), respectively. Preliminary estimates show that copper production increased by 3.9% (second quarter 2009, 8.1%) to 174,948.4 mt in the third quarter. On a year-to-date basis, copper output at 514,320.0 mt was 19.7% higher when compared with 429,791.5 mt produced in the corresponding period of 2008. Bank of Zambia

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Similarly, cobalt output increased by 65.1% (second quarter 2009, negative 39.5%) to 1,080.8 mt. On a year-to-date basis, cobalt output at 2,816.1 mt during the reviewed quarter was 20.1% lower than the 3,526.8 mt recorded during the same period in 2008. Cement output increased by 30.4% to 248,751.0 mt during the third quarter 2009. On a year-to-date basis, output of 592,025 mt of cement was 49.1% above the cumulative output of 397,124 mt for the same period in 2008. During the reviewed quarter, 153,220.0 hectolitres of clear beer by the country’s key manufacturer were produced, which was 11.0% higher than the output during the previous quarter. On a year-to-date basis, output of 408,951.0 hectolitres was 27.0% higher than the 321,940.0 hectolitres produced during the same period in 2008. Further, total output of soft drinks increased by 15.4% to 91,968.0 hectolitres from the 79,654.0 hectolitres produced in the previous quarter. On a year-to-date basis, output of 264,025.0 hectolitres was 1.5% lower than the 268,183.0 hectolitres produced during the same period in 2008. Production of milk increased by 14.9% to 7,923,382 litres from 6,892,785 litres produced in the previous quarter. On a year-to-date basis, milk output increased by 5.4% to 21,805,023.0 litres in September 2009 from 20,695,785.0 litres during the same period in 2008. International arrivals at the country’s four international airports increased to 102,918 passengers from 88,066 passengers in the second quarter of 2009. However, this was 21.0% lower than the 130,141 passengers recorded during the corresponding period in 2008. The number of tourists visiting the country’s national parks was 26,7201 in the third quarter of 2009, up from 11,440 in the previous quarter, reflecting some easing in the adverse impact of the global financial crisis. Total investment pledges stood at US $622.8 million compared to US $567.2 million in the second quarter. When fully executed, these pledges are expected to generate 5,594 jobs.

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These figures do not include national parks in the Northern region

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Foreign Exchange Market During the third quarter, the Kwacha consolidated on the gains posted in the second quarter against the US dollar and rebounded against all other currencies. It recorded a 7.7% gain against the US dollar, the largest rate of appreciation since the beginning of the year. Accordingly, the average interbank rate ended the quarter at K4,875.58/US$. Explaining this development were increased foreign exchange inflows, stemming mainly from continued higher copper prices (copper prices strengthened by 24.4%), stronger positive sentiments in the economy and reduction in the domestic demand for foreign exchange by the public. BoZ participated in the foreign exchange market, with lower net sales of US $8.0 million in third quarter (net sales of US $48.0 million in second quarter). Balance of Payments Preliminary data show that Zambia’s overall balance of payments (BoP) surplus improved to US $645.5 million during the third Quarter of 2009 from a surplus of US $24.9 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 was boosted by a 43.3% increase to US $1,267.7 million in merchandise export earnings, which in turn followed the increase in metal as well as non–metal export earnings by 45.6% and 35.7%, respectively. Both copper and cobalt export earnings contributed to the rise in metal export earnings. Copper export earnings rose by 44.3% to US $947.9 million, reflecting a 23.8% increase in the realised price of copper to US $5,157.47 per metric ton, as well as a 19.1% increase in copper export volumes. Further, cobalt export earnings recorded a 92.5% increase to US $35.3 million, explained by a 15.3% increase in the realised price to US $32,779.77 per pound. In addition, cobalt export volume increased by 67.0% to 1,077.65 metric tons. Non-traditional exports (NTEs) at US $284.5 million were 35.7% higher than exports in the previous quarter. This was due to higher export earnings from copper wire, cane sugar, burley tobacco, cotton lint, electrical cables, fruits and vegetables, petroleum products and electricity. Merchandise imports increased by 7.5% to US $979.6 million during the quarter under review. This was on account of higher imports bill Bank of Zambia

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associated with commodity groups such as chemical products, plastic and rubber products, paper and paper products, iron and steel products, industrial boilers and equipment, and vehicles. The capital and financial account surplus had a large increase to US $532.0 million from US $129.7 million recorded the previous quarter. This was mainly attributed to a receipt of an SDR allocation of US $627.3 million from the International Monetary Fund in the third quarter and an increase in capital transfers to US $65.0million compared to US $41.4 million in the previous quarter. Developments in the Financial Sector The overall financial condition of the banking sector was satisfactory. However, the asset quality and earnings performance continued to deteriorate although the non-performing loans were adequately provided for. Similarly, the overall financial performance and condition of the NBFIs was rated fair during the quarter under review. On average, the leasing finance institutions, microfinance institutions and bureaux de change sub-sectors reported adequate regulatory capital, fair asset quality and liquidity positions while earning performance was marginal. 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 As at the end of the third quarter, 23 licenses (18, at end of second quarter 2009) had been issued to various institutions country-wide to provide various payment products including money transmission, card payments and mobile payments. This is an encouraging development as it enables growth, particularly in the payment channels. The total volume of cheques returned unpaid on account of insufficiently funded accounts fell by 8% to 5,117 cheques while the value decreased by 28% to K41.30 billion. This is an encouraging trend, which the Bank would like to see continue. The public is reminded that bouncing of cheques is a criminal offence. During the quarter, improvements in the use of Point of Sale (PoS) terminals continued as reflected in the increase in terminals and the value of transactions. The Bank wishes to encourage members of the Bank of Zambia

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press and other relevant stakeholders to sensitise the public on the advantages of using of this electronic payment method which is convenient and also safer than cash. The Bank continued to implement its “Clean Note Policy” by among other measures withdrawing unfit banknotes from circulation. Members of the public are encouraged to surrender unfit notes in exchange for fit ones, including the low value ones, to commercial banks and other deposit taking institutions. Further, the Bank is appealing to members of the public to continue handling banknotes carefully to minimise soiling. Economic Reform Programme During the third quarter of 2009, an IMF Mission visited Zambia from 31st August to 4th September 2009 to participate in the preparation of the Medium Term Expenditure Framework (MTEF) and agree the 2010 Budget principles with the Zambian authorities. The mission agreed a framework for the 2010 budget which placed emphasis on Government’s spending on priority capital projects and social sectors while remaining consistent with macroeconomic stability. It was agreed that continued efforts improve revenue collection was key to ensuring that the 2010 budget was successfully executed. Total disbursed poverty reduction budget support (PRBS) in the third quarter amounted to US $21.9 million. In addition to the PRBS, the IMF disbursed SDR362, 574,623.00 (US $567,037,704.40) in August 2009 and a further SDR38,264,892.00 (US $60,248,837.75) in September 2009. Disbursement of these funds followed the approval by the IMF Board to increase the general allocation of SDR and the Fourth Amendment to the IMF Articles of Agreement providing for a special onetime allocation of SDRs in order to supplement the foreign exchange reserves of its member countries. These funds have increased the Gross International Reserves by SDR 400,839,515.00 (US $627.3 million). 2010 National Budget The Minister of Finance and National Planning, Hon Situmbeko Musokotwane, presented to parliament, the 2010 National Budget on October 9, 2009. In the 2010 Budget the Government has maintained the broad thrust of the 2009 Budget of ensuring that Zambia can Bank of Zambia

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diversify its economy, reduce the cost of doing business, and harness the full capacity of its land and people. The Government’s macroeconomic objectives in 2010 are: (a) to exceed 5 percent growth; (b) to reduce end-year inflation to 8.0 percent; and (c) to limit domestic borrowing to 2.0 percent of GDP. Furthermore, the following are the issues that require action by the Bank of Zambia and other stakeholders in the financial sector: i.

Review of monetary policy framework with a view to shift from the strict use of monetary aggregates to short term interest rates as the anchor for monetary policy;

ii.

Introduction of a framework to facilitate secondary market trading of Government securities and other debt instruments;

iii.

Revision of the lender of last resort policy to align it with acceptable international standards and ensure that it remains effective and relevant under prevailing circumstances;

iv.

Preparation of a financial sector contingency plan to deal with problems of a systemic nature;

v.

Commencement of implementation of the second phase of the Financial Sector Development Plan to improve access to credit and reduce the high cost of borrowing; and

vi.

Establishment of an independent Financial Intelligence Unit.

The Bank of Zambia will endeavour to implement all the issues addressed in the budget. Inflation Outlook for the Third Quarter of 2009 Inflationary pressures in the fourth quarter of 2009 are expected to originate mainly from: •

Price increases on manufactured goods in response to the upward adjustments in electricity tariffs in the month of August 2009; and

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•

Seasonal increase in prices of beef and beef products.

Further, the broader risk to the achievement of the end-year inflation target is the likely increase in the domestic fuel pump prices, which have not been adjusted for the past eleven months despite an increase in the international prices of the commodity. Notwithstanding the above, inflationary pressures would be moderated by the: • •

Expected stability in prices of mealie-meal and fresh vegetables, resulting from increased supply on the market; and Relative stability in the exchange rate of the Kwacha against major foreign currencies.

By and large, the end year projection of 12.0% announced by the Minister of Finance and National Planning in his 2010 Budget Address is well within and inflation is likely to trend towards the original target of 10.0%.

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INTRODUCTION This brief provides a preliminary assessment of monetary policy implementation and its outcomes in the third quarter of 2009. The brief also reviews other economic and financial sector developments. In the conclusion, it provides an inflation outlook for the fourth quarter of 2009. MONETARY POLICY In the third quarter of 2009, monetary policy continued to focus on the achievement of the end-year inflation target of 10%2. In this regard, annual overall inflation was projected to be no more than 11.4% at the end of the third quarter with food and non-food inflation projected at the end of the reviewed period to be at the most 12.1% and 10.7%, respectively. Accordingly, the Bank of Zambia relied mainly on Open Market Operations and Government securities auctioning to maintain reserve money within the programmed growth path. Prudent fiscal management was expected to complement monetary policy. INFLATION In the third quarter of 2009, overall inflation declined to 1.7% from the 3.2% recorded in the second quarter of 2009, and was 1.3 percentage points lower than the 3.0% recorded in the third quarter of 2008. This outturn was mainly attributed to the decline in both food and non-food prices. Annual overall inflation fell by 1.4 percentage points to 13% from 14.4% at end June. This is reflected in the decline in both food and non-food inflation to 13.9% and 12.1% from 14.1% and 14.7% respectively. Food Inflation Quarterly food inflation declined to 0.9% from the 3.5% recorded in the previous quarter and was 0.2 percentage point lower than the 1.1% recorded during the third quarter of 2008. This development was mainly due to price declines on Breakfast and Roller meal, flour meal, Mpulungu dried kapenta and vegetables. This was largely due to improved seasonal supply of the commodities. Similarly, annual food inflation fell to 13.9% (June 2009, 14.1%). This was due to price declines on most vegetables except onion and tomato and mince meat.

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End-2009 inflation revised to 12.0% in the Budget Speech for 2010.

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Non-Food Inflation Quarterly non-food inflation declined to 2.5% from the 3.0% observed at endJune 2009 and was 2.4 percentage points below the 4.9% recorded at end September 2008. This was largely due to price reductions on air fares for the Lusaka/London route and rates on accommodation for the bed and continental breakfast category (3 to 5 star hotels) resulting from the favourable pass-through effects of the appreciation of the Kwacha against major currencies in September 2009 compared to June 2009. Annual non-food inflation declined to 12.1% from 14.7% recorded in June. This was due to the fall in inflation rates for rent, fuel and lighting; transport and communication; furniture and household goods; and other goods and services sub groups. BROAD MONEY AND DOMESTIC CREDIT3 In the third quarter of 2009, preliminary estimates indicate that growth in broad money (M3), comprehensively defined to include foreign currency deposits, increased to 2.6% from 0.2% recorded at end – June 2009 but was below the 5.0% projected quarterly growth rate. The increase in M3 was largely due to the expansion in net foreign assets (NFA) as net domestic assets (NDA) contracted. NFA increased by 12.7%, contributing 6.5 percentage points to M3 expansion, mainly as a result of the increase in the gross international reserves to US $1,737.9 million at end-September 2009 from US $1,120.4 million at end-June 2009 following the IMF’s release of the US $600 million worth of drawing rights. However, NDA declined by 8.1%, contributing negative 4.0 percentage points to M3 growth. 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 further to 19.8% from the 20.6% recorded in June 2009 (September 2008, 26.7%). This outturn was largely due to the fall in the NDA as the NFA increased. The NDA declined by 11.8% (March 2009, 10.5%), primarily on account of the decrease in other items net, contributing negative 7.0 percentage points to annual M3 growth. The NFA increased by 65.8% (September 2008, 16.6%) compared with the 45.9% recorded in June 2009, largely on account of valuation effects due to the depreciation of the Kwacha against global currencies and the increase in the stock of the gross international reserves from US $1,302.3 million, and contributed 26.8 percentage points to M3 expansion.

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Estimates used before monetary survey is compiled.

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Total domestic credit, comprehensively defined to include foreign currency loans, increased by 5.9% in the third quarter of 2009 compared with a 1.6% decline in the second quarter of 2009. The outturn in domestic credit was due to an expansion of credit to the Government as lending to the private sector declined. In the period under review, lending to the private sector (including parastatals) declined by 0.3% compared with the 3.6% decline recorded in the second quarter of 2009 and accounted for negative 0.3 percentage points to the total domestic credit growth. Nonetheless, net claims on central government rose by 26.8% compared with the 6.0% registered in the second quarter of 2009 and contributed 6.2 percentage points to the growth in domestic credit. On an annual basis, domestic credit growth slowed down to 41.7% in September 2009 from 43.3% in June 2009. This outturn was due to a decline in credit growth to the private sector. Annual credit growth to the private sector declined to 17.0% compared with 31.5% recorded in June 2009, contributing 15.0 percentage points to annual credit expansion. However, credit growth to Government accelerated to 221.4% from the 106.1% growth recorded in June 2009, and contributed 26.7 percentage points to annual credit growth. On sectoral basis, households (personal loans category) continued to be the largest recipient of credit, accounting for 21.0 (21.6%) in September 2009. The agricultural sector was second at 16.3% (18.4%), followed by manufacturing, 12.0% (11.0%); wholesale and retail trade, 10.2% (9.1%), financial services, 7.3% (8.4%); and Real Estate, 7.1 % (7.0%). INTEREST RATES Despite the increase in demand for Government Securities by 5.6%, the two composite weighted average yield rates had mixed movements with Bonds edging upwards, while Treasury bills marginally fell. The Treasury bill composite weighted yield rate decreased by 14 basis points to 17.1% while the composite yield rate for Government bonds rose by 19 basis points to close the third quarter at 18.9% up from 18.7%. Developments in commercial banks nominal interest rates were mixed in September 2009. The weighted average lending base rate (WALBR) increased to 23.2% (June 2009, 22.4%)4 while the average lending rate (ALR) rose to 29.7% (June 2009, 28.9%). However, the 30-day deposit rate for amounts exceeding K20 million and the average savings rate (ASR) for amounts above K100,000 remained unchanged at 5.6% and 4.7%, respectively.

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The numbers in brackets are for the previous quarter

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REAL SECTOR DEVELOPMENTS Agriculture Maize As at end-September 2009, the stock of maize grain held by major millers in the country increased by 198.1% [44.6% increase, last quarter] to 115,772.8 metric tons (mt) from 38,829.7 mt the previous quarter. In terms of holding by province, the Copperbelt contributed 48,500.0 mt (41.9%), Lusaka 41,210.2 mt (35.6%), Southern 19,393.8 mt (16.8%) and Central 4,328.6 mt (3.7%) while Northern and Eastern provinces accounted 2,300.0 mt (2.0%) and 40.0 mt (0.03%), respectively. Mining Preliminary estimates show that copper production increased by 3.9% (second quarter 2009, 8.1%) to 174,948.4 mt in third quarter of 2009 from 168,424.3 mt recorded in the second quarter. On a year-to-date basis, copper output at 514,320.0 mt was 19.7% higher than 429,791.5 mt produced in the corresponding period of 2008. Similarly, cobalt output increased by 65.1% (declined 39.5%, second quarter 2009,) to 1,080.8 mt during the third quarter of 2009 from 654.3 mt recorded in the second quarter of 2009. On a year-to-date basis, cobalt output at 2,816.1 mt during the reviewed quarter was 20.1% lower than the 3,526.8 mt recorded during the same period in 2008. Manufacturing Performance of the manufacturing sector was favourable, with all subsectors recording increases during the review period. Cement output increased by 30.4% to 248,751.0 mt during the third quarter 2009 from the 190,750.0 mt produced in the previous quarter. On a year-todate basis, output of 592,025 mt of cement was 49.1% above the cumulative output of 397,124 mt for the same period in 2008. The production of clear beer increased by 11.0% to 153,220.0 hectolitres during the third quarter of 2009 from 137,983.0 hectolitres during the previous quarter. On a year-to-date basis, output of 408,951.0 hectolitres was 27.0% higher than the 321,940.0 hectolitres produced during the same period in 2008.

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Further, output of soft drinks rose by 15.4% to 91,968.0 hectolitres from the 79,654.0 hectolitres over the same period. However, on the year-to-date basis, output of 264,025.0 hectolitres was 1.5% lower than the 268,183.0 hectolitres produced during the same period in 2008. Production of processed milk during the quarter under review increased by 14.9% to 7,923,382 litres from 6,892,785 litres produced in the previous quarter. On a year-to-date basis, milk output at 21,805,023.0 litres in September 2009, was 5.4% higher than 20,695,785.0 litres during the same period in 2008. Tourism During the third quarter of 2009, international arrivals at the country’s four international airports5 were 102,918 passengers compared to 88,066 passengers in the second quarter of 2009. The major tourist destinations, namely, Livingstone and Mfuwe posted increases to (through their respective international airports) 18,786 passengers and 239 passengers from 14,215 passengers and 178 passengers in the previous quarter. The number of tourists visiting the country’s national parks was 26,7206 in the third quarter of 2009, up from 11,440 in the previous quarter, reflecting the easing of the global financial crisis. Investment Pledges During the reviewed quarter, total investment pledges stood at US $622.8 million compared to US $567.2 million in the second quarter. On a sectoral basis manufacturing pledges amounted to (US $363.6 million), real estate (US $106.0 million), mining (US $60.8 million), health (US $35.2 million), services (US $25.7 million), agriculture (US $16.7 million), tourism (US $9.0 million), construction (US $3.9 million), education (US $1.1 million) and transport (US $0.5 million). The pledges when fully executed are expected to generate 5,594 jobs (6,068 jobs as at end-June 2009): manufacturing 3,443 jobs; service 689 jobs; agriculture 549 jobs; mining 419 jobs; construction 200 jobs; tourism 91 jobs; health 79 jobs; real estate 78 jobs; transport 25 jobs and education 21 jobs. On a year to-date basis, investment pledges totalled US $1,385.5 million compared with the US $4,249.6 million recorded during the same period in 2008.

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Lusaka, Livingstone, Mfuwe and Ndola.

These figures do not include national parks in the Northern region

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EXTERNAL SECTOR DEVELOPMENTS Foreign Exchange Market During the third quarter, the Kwacha consolidated on the gains posted in the second quarter relative to the US dollar and appreciated against the major currencies. The domestic currency recorded a 7.7% gain against the US dollar, the largest rate of appreciation since the beginning of the year. Accordingly, the average interbank rate ended the period at K4,875.58/US$. Kwacha gains were on the back of increased foreign exchange inflows, stemming mainly from a sustained rise in international metal prices (to US $5,157.47 from US $4,166.20 per mt over the quarter), stronger positive sentiments in the economy and a reduction in the domestic demand for foreign exchange by the public, particularly from foreign financial institutions, as signs of a global economic recovery continued to weaken risk aversion towards emerging markets. The Bank of Zambia reduced its activities in the foreign exchange market as demand pressures subsided further in the third quarter owing to favourable global developments and the general stability of the Kwacha. Accordingly, during the review period, net sales of foreign exchange to commercial banks scaled down to US$8.0 million from US$48.0 million recorded in the second quarter. Balance of Payments Preliminary data show that Zambia recorded an increase in the overall balance of payments (BoP) surplus to US $645.5 million during the third Quarter of 2009 compared with a surplus of US $24.9 million recorded the previous quarter. This outturn was on account of the improvement in both the current and, the capital and financial accounts surpluses to US $236.5 million (US $129.7 million, second quarter 2009) and US $532.0 million (US $129.7 million, second quarter 2009). Merchandise export earnings increased by 43.3% to US $1,267.7 million following a rise in metal and non-metal export earnings by 45.6% and 35.7%, respectively. A rise in both copper and cobalt export earnings accounted for this outturn. Copper export earnings, at US $947.9 million, were 44.3% higher than the earnings recorded during the second quarter. This reflected a 23.8% rise in the realised price of copper to US $5,157.47 from US $4,166.20 per metric ton and an increase in export volumes by 19.1% to 187,721.4 metric tons. Correspondingly, cobalt export earnings recorded a 92.5% increase to US $35.3 million, following a 15.3% increase in the realised price to US $14.87 Bank of Zambia

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per pound from US $12.90 per pound recorded the previous quarter. Cobalt export volumes also increased by 67.0% to 1,077.7 metric tons. Non-traditional exports (NTEs) increased to US $284.5 million from US $209.7 million realised in the previous quarter. This was due to increased export earnings from copper wire, cane sugar, burley tobacco, cotton lint, electrical cables, fruits and vegetables, petroleum products and electricity. Merchandise imports increased by 7.5% to US $979.6 million during the reviewed quarter. This was due to higher import bills associated with commodity groups such as chemical products, plastic and rubber products, paper and paper products, iron and steel products, industrial boilers and equipment, and vehicles. The capital and financial account surplus increased to US $532.0 million from US $129.7 million recorded the previous quarter. This was largely attributed to receipt of SDR allocation of US $627.3 million from the IMF by the Bank of Zambia and an increase in capital transfers to US $65.0 million from US $41.4 million in the last quarter. DEVELOPMENTS IN THE FINANCIAL SECTOR The overall financial condition of the banking sector for the quarter ended September 2009 was satisfactory. All banks were adequately capitalized and the banking sector’s liquidity position remained satisfactory. However, the asset quality and earnings performance continued to deteriorate even though the non-performing loans were adequately provided for. The overall financial performance and condition of the NBFIs was rated fair during the quarter under review. On average, the leasing finance institutions, microfinance institutions and bureaux de change sub-sectors reported adequate regulatory capital, fair asset quality and liquidity position while earning performance was marginal. 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 As at the end of the third quarter, a total of 23 licenses had been issued to various institutions country-wide to provide various payment products including money transmission, card payments and mobile payments compared with 18 as at end-second quarter 2009. This is an encouraging development as it enables growth in the payment channels and facilitates development of various Financial Sector initiatives that include access to financial services. Bank of Zambia

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The total volume of cheques returned unpaid on account of insufficiently funded accounts decreased by 8% to 5,117 cheques while the value decreased by 28% to K41.30 billion. This is an encouraging trend and the Bank would like to see downward trend continue. The public is reminded that bouncing a cheque on account of insufficiently funded account, is a criminal offence under the National Payment System Act. To this end, members of the public should ensure that they have sufficiently funded accounts whenever they issue cheques to avoid facing criminal charges. During the quarter, improvements in the use of Point of Sale terminals continued as reflected increased terminals (by 8%) and the value of transactions (by 10%). The Bank encourages members of the press and other relevant stakeholders to sensitise the public on the advantages of using of this electronic payment method which is convenient and also safer than cash. The Bank of Zambia continued to implement its “Clean Note Policy” by among other measures withdrawing unfit banknotes from circulation. Members of the public are encouraged to surrender unfit notes in exchange for fit ones, including the low value ones, to commercial banks and other deposit taking institutions in line with the Bank’s policy on maintaining clean notes. Further, as you may be aware printing of bank notes is costly, the Bank is therefore appealing to members of the public to continue handling banknotes currency carefully to minimise soiling. ECONOMIC REFORM PROGRAMME During the third quarter of 2009, an International Monetary Fund (IMF) Mission, led by Mr. George Tsibouris, visited Zambia from 31st August to 4th September 2009 to participate in the preparation of the Medium Term Expenditure Framework (MTEF) and agree the 2010 Budget principles with the Zambian authorities. The mission agreed a framework for the 2010 budget with the Zambian Authorities that placed more emphasis on Government’s spending on priority capital projects and social sectors while remaining consistent with macroeconomic stability. It was agreed that continued efforts in revenue collection was key to ensuring feasibility of the 2010 budget. Total disbursed poverty reduction budget support (PRBS) in the third quarter amounted to US $21.9 million from the United Kingdom (US $14.8 million) and Finland (US $7.1 million). In addition to the PRBS, the International Monetary Fund (IMF) disbursed SDR362,574,623.00 (US $567,037,704.40) in 8 Bank of Zambia

August 2009 and a further SDR38,264,892.00 (US $60,248,837.75) in September 2009. Disbursement of these funds followed the approval by the IMF Board to increase the general allocation of Special Drawing Rights and the Fourth Amendment to the IMF Articles of Agreement providing for a special one-time allocation of SDRs in order to supplement the foreign exchange reserves of its member countries. These funds have increased the increased the Gross International Reserves by SDR 400,839,515.00 (US $627.3 million). INFLATION OUTLOOK FOR THE FOURTH QUARTER OF 2009 Inflationary pressures in the fourth quarter of 2009 are expected to originate mainly from: • •

Price increases on manufactured goods in response to the upward adjustments in electricity tariffs in the month of August 2009; and Seasonal increase in prices of beef and beef products.

Further, the broader risk to the achievement of the end-year inflation target is the likely increase in the domestic fuel pump prices, which have not been adjusted for the past eleven months despite an increase in the international prices of the commodity. Notwithstanding the above, inflationary pressures would be moderated by the: • •

Expected stability in prices of mealie-meal and fresh vegetables, resulting from increased supply on the market; and Relative stability in the exchange rate of the Kwacha against major foreign currencies.

By and large, the end year projection of 12.0% announced by the Minister of Finance and National Planning in his 2010 Budget Address is well within and inflation is likely to trend towards the original target of 10.0%.

Bank of Zambia

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