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%.

Bank of Zambia 2
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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.

Bank of Zambia 3
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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 year-
to-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.

Bank of Zambia 4
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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 5
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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 6
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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.

Bank of Zambia 7
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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.

Bank of Zambia 8
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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 pass-
through 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

Bank of Zambia 9
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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.

Bank of Zambia 10
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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
The numbers in brackets are for the previous quarter.
4
Millers require an estimated 55,000 mt of maize per month – Source: Millers Association of Zambia.

Bank of Zambia 11
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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 year-
to-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.

Bank of Zambia 12
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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 13
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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.

Bank of Zambia 14
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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

Bank of Zambia 15
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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%).

Bank of Zambia 16
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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 sub-

sector 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 sub-
sector instead recorded foreign exchange gains amounting to K29 million.

Bank of Zambia 17
GOVERNOR’S QUARTERLY MEDIA BRIEFING 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 18
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

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:

Bank of Zambia 19
GOVERNOR’S QUARTERLY MEDIA BRIEFING July 2009

i. First National Bank Zambia Limited – Direct Debits and Credit

Clearing (DDACC), Physical Interbank Clearing (PIC) and Zambia
Interbank Payment and Settlement System (ZIPSS)
ii. Necor Transtech Limited – Money Transfer under Cash4Africa
iii. Mobile Payment Solutions Limited – Money transmission on Mobile
phones
iv. National Savings and Credit Bank – Money Transmission on local
system
v. Access Bank Zambia Limited – Money Transmission on Western
union
vi. 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 20
GOVERNOR’S QUARTERLY MEDIA BRIEFING 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 21
GOVERNOR’S QUARTERLY MEDIA BRIEFING 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.

Bank of Zambia 22