BANK Of ZAMBIA

FIRST QUARTER 2010 MEDIA BRIEFING

BY

CALEB M. FUNDANGA
GOVERNOR
BANK OF ZAMBIA

Presented at Bank of Zambia

13 May 2010

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Introduction

This brief examines monetary policy implementation and its outcomes in the first
quarter of 2010. The brief also reviews other economic and financial sector
developments. In the conclusion, it provides an inflation outlook for the second
quarter of 2010.

Monetary Policy

In the first quarter of 2010, monetary policy continued to focus on the

achievement of the end-year inflation target of 8.0%. Consistent with this
objective, overall annual inflation was projected at 10.8% at end March, 2010 The
Bank of Zambia was to rely mainly on Open Market Operations and the auctioning
of Government securities to maintain reserve money within the programmed
growth path. Prudent fiscal management was also expected to complement
monetary policy.

Inflation

Overall inflation increased to 2.5% in the first quarter of 2010 from the 2.3%
recorded in the fourth quarter of 2009, and was 0.2 percentage points above the
2.3% recorded in the first quarter of 2009. This outturn was mainly attributed to
the rise in food inflation to 2.6% from the 2.0% recorded in the previous quarter
while non-food inflation declined slightly to 2.5% from the 2.6% recorded over the
same period.

Money Supply and Domestic Credit

Preliminary estimates indicate that growth in broad money (M3), comprehensively

defined to include foreign currency deposits, was at 5.5% in the first quarter of
2010 up from 4.1% recorded at end-December 2009, but was below the 6.3%
projected quarterly growth rate. In absolute terms, M3 is estimated to have
increased to K14,897.4 billion from K14,125.5 billion in December 2009. The
increase in M3 was largely due to the 16.4% expansion in net foreign assets (NFA)
which contributed 5.9 percentage points to M3 growth. The increase in NFA was
mainly due to the rise in gross international reserves by 1.2% to US$1,736.6
million at end-March 2010 from US $1,715.3 million at end-December 2009.
However, NDA declined by 0.6% and contributed negative 0.4 percentage points
to the M3 outturn. The contraction was mainly a result of the decline in lending to
the private sector (including public enterprises) in the quarter under review.
Excluding foreign currency deposits that increased by 4.5% (December 2009, fell
by 2.9%), money supply growth was 6.0% from the 8.0% recorded during the
fourth quarter of 2009.

On an annual basis, M3 growth was 14.2% in March 2010 up from 8.3% in

December 2009. This outturn was due to the rise in both NDA and NFA. The NDA
increased by 19.3% (December 2009, rose by 21.9%) primarily on account of
increased lending to government. Similarly, the NFA edged up by 7.1% compared
with negative 9.8% recorded in December 2009.

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Total domestic credit, comprehensively defined to include foreign currency loans,
edged up by 2.1% at end-March 2010 compared with negative 2.7% registered in
the fourth quarter of 2009. The outturn in domestic credit was mainly due to
17.8% rise in net claims on central government compared with the 2.8%
registered in the fourth quarter of 2009 and contributed 5.9 percentage points to
the growth in domestic credit. However, lending to the private sector (including
public enterprises) contracted by 5.7% and contributed negative 3.8% to the total
domestic credit outturn. Excluding foreign currency denominated credit, which
rose by 4.3%, domestic credit growth increased by 1.5% against negative 2.1%
recorded in December 2009.

On an annual basis, domestic credit growth slowed down to 9.8% in March 2010
from 15.2% in December 2009. This outturn largely reflected a decline in credit
growth to the private sector (including public enterprises) by 13.8% which
contributed negative 10.9% to the total domestic credit outturn. However, credit
to Government increased to 97.6% from 73.6% growth recorded in December
2009 and contributed 20.7% to the total domestic credit growth in the quarter
under review.

On a sectoral basis, households (personal loans category) continued to account for

the largest share of outstanding credit, accounting for 27.7% (22.1%)1 in March
2010. The agricultural sector was second at 20.0% (19.3%), followed by wholesale
and retail trade, 12.2% (10.2%), manufacturing, 11.4% (12.3%); Transport,
Storage and Communications, 5.9% (6.3%) and Real Estate, 5.2% (8.4%).

Interest Rates

Due to high levels of liquidity in the banking sector, yield rates on Government
securities declined further. The composite yield rate for Treasury bills ended the
quarter at 3.7%, down from 9.5% recorded at the end of 2009. The weighted
average yield rate for Government bonds fell to 10.3%, 6.0 percentage points
lower than the end December 2009 closing rate.

Developments in commercial banks’ nominal interest rates were mixed in March

2010. The weighted average lending base rate (WALBR) and the average lending
rate (ALR) declined marginally to 22.5% (22.7%) and 29.0% (29.2%), respectively.
However, the 30-day deposit rate for amounts exceeding K20 million and the
average savings rate (ASR) for amounts above K100,000 were unchanged at 5.6%
and 4.7%, in that order.

Real Sector

As at 30th March 2010, the stock of maize grain held by major millers in the
country fell by 49.3% [10.0% decline last quarter] to 52,826.5 metric tons from
104,168.5 metric tons (mt) the previous quarter. In terms of holdings by province,
the Copperbelt contributed 11,350.0 mt (21.49%), Lusaka 32,971.8 mt (62.42%),
and Southern 8,484.7 mt (16.06%) while Eastern provinces accounted for 20.0 mt
(0.04%), respectively. The Central and Northern provinces had no maize stocks as
at the reporting date.

1 Figures in brackets are for the end of the previous quarter.

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Copper output at 174,725.12 mt was lower by 3.0% compared with 180,188.17 mt
produced in the fourth quarter of 2009. The fall in copper output relative to the
previous quarter was mainly explained by unfavourable geological conditions
characteristic of open pit and deep underground mines. Torrential rains and
subsequent high water levels created operational difficulties thereby reducing ore
extraction. However, this output was 2.2% higher than 170,948.19 mt of copper
produced in the first quarter of 2009.

Cobalt output increased by 1.3% to 1,921.55 mt during the first quarter of 2010
from 1,896.24 mt, the previous quarter. In comparison with the output of 1,080.84
mt during the corresponding quarter of 2009, this was a 77.8% increase. The
recent trend in cobalt output shows notable recovery after a lengthy period of
falling output. The resumption of production at Konkola Copper Mines in the
second quarter of 2009 and Chambishi Metals Plc in 2010 largely explained the
recorded recovery.

Cement production by Lafarge Zambia Plc declined by 36.0% to 144,030 mt from

225,198.0 mt during the fourth quarter 2009. This output was also l5.6% lower
than the 152,524 mt of cement produced in the corresponding quarter of 2009.

During the quarter under review, production of clear beer by Zambian Breweries
Plc was 135,169 hectolitres, which was 15.9% lower than 160,820.0 hectolitres of
beer produced in the fourth quarter of 2009. However, this output was 14.8%
higher than the 117,740.0 hectolitres produced in the corresponding quarter of
2009.

Output of soft drinks by Zambian Breweries Plc decreased by 19.2% to 91,027.0

hectolitres from 112,722.0 hectolitres produced in the previous quarter. Moreover,
this output level was 1.5% lower than 92,403.0 hectolitres produced in the
corresponding quarter of 2009. Reduced demand following the end of the festive
season largely explained the fall in production of both beer and soft drinks.

Production of milk by Parmalat Zambia Ltd during the quarter under review fell by
4.2% to 7,837,803 litres from 8,178,335 litres produced in the previous quarter.
Nonetheless, this output was 12.1% higher than 6,988.856.0 litres of milk
produced during the corresponding quarter of 2009.

During the quarter under review, international arrivals at the country’s four
international airports2 were 93,241 passengers compared with 93,688 passengers
in the fourth quarter of 2009. However, this was 16.4% higher than 80,112
passengers recorded during the same quarter in 2009. Livingstone and Mfuwe,
which are the major tourist destinations, accounted for (through their respective
international airports) 19,220 passengers and 59 passengers compared with
17,133 passengers and 103 passengers in the previous quarter, respectively.

Total investment pledges were estimated at US $1.4 billion, up from US $452.0

million in the fourth quarter. The pledges when fully executed are expected to
generate 5,943 jobs (5,614 jobs: fourth quarter 2009) with the highest
contribution from manufacturing at 1,479 followed by mining at 1,435 jobs. The
rest were real estate (1,196 jobs), construction (619 jobs), services (519 jobs),

2 Lusaka, Livingstone, Mfuwe and Ndola.

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agriculture (292 jobs), energy (199 jobs), agro-processing (60 jobs), tourism (53
jobs), ICT (41 jobs), health (33 jobs) and education (17 jobs).

Foreign Exchange Market

The Kwacha continued to appreciate during the quarter under review. The Kwacha
appreciated by 0.8%, 6.8% and 5.3% against the US dollar, Euro and Pound
Sterling, to an average of K4,633.96, K6,425.77/€ and K7,245.85/£, respectively.
Against the South African rand, the Kwacha posted a gain of 1.1% ending the
period at an average of K616.39/ZAR.

These broad-based gains were largely supported by a sustained rise in copper

prices. International copper prices ended the quarter at an average of
US$6,569.45/ton 9.2% above the end fourth quarter average closing position of
US$6,013.37/ton.

The volume of foreign exchange traded in the market marginally declined.

Commercial banks’ sales to the market decreased to US$850.2 million from
US$855.3 million while purchases amounted to US$930.2 million, down from
US$1,059.2 million. With regard to the South African currency, commercial banks
sold only ZAR40.6 million to the non-bank public, down from ZAR736.1 million
reported in the previous quarter. Commercial banks’ rand purchases from the
market stood at ZAR33.0 million, a third of the amount acquired in the preceding
period.

In contrast, commercial banks recorded a slight increase in transactions involving

the Euro and pound sterling. Commercial banks’ purchases of Euros totalled €25.9
million compared with €15.2 million while sales totalled €21.4 million relative to
€13.5 million made available in the fourth quarter, translating into net purchases
of €4.5 million. In terms of the pound sterling, the banks recorded net sales of
₤4.1 million, more than double the ₤1.4 million recorded in the previous quarter.

Balance of Payments

Preliminary data show that Zambia recorded an overall balance of payments (BoP)
deficit of US $81.4 million during the first quarter of 2010 compared with a surplus
of US $18.2 million recorded the previous quarter. This was on account of
unfavourable performance in the financial and capital account.

During the period under review, the current account deficit narrowed to US $25.1
million from US $113.3 million recorded in the previous quarter. This was largely
explained by a reduction in the income account balance following the decline in
income on equity payments. The performance of the goods, services and current
transfers, however, worsened.

The merchandise trade surplus increased by 35.4% to US $368.5 million in the

first quarter of 2010, from US $272.2 million recorded in the fourth quarter of
2009 mainly due to an increase in exports. Merchandise export earnings rose by
13.7% to US $1,611.1 million in the period under review from US $1,416.6 million
realised in the previous quarter. This followed an increase in metals export
earnings which grew by 20.1% to US $1,352.7 million in the first quarter of 2010,

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from US $1,126.1 million realised the preceding quarter following increases in
both copper and cobalt export earnings.

During the first quarter of 2010, non-traditional exports (NTEs) declined by 11.0%
to US $258.4 million from the US $290.5 million realised in the previous quarter.
This was largely due to a fall in export earnings from copper wire, cane sugar,
burley tobacco, cotton lint, fresh flowers and fruits and vegetables.

During the quarter under review, the capital and financial account surplus
narrowed to US $117.6 million from US $196.1 million recorded the previous
quarter. This was attributed to a decline in capital transfers (to US $49.1 million
from US $85.8 million), direct investment (to US $169.8 million from US $174.8
million), portfolio investment (to minus US $16.8 million from US $19.4 million)
and other investments (to minus US $84.5 million from minus US $83.8 million).

Developments in the Financial Sector

The overall financial condition of the banking sector for the quarter ended March
2010 was satisfactory. On aggregate, the banking sector was adequately
capitalized and the liquidity position remained satisfactory. However there was
deterioration in the sector’s asset quality and earnings performance.

The overall financial performance and condition of the NBFIs was rated fair during
the quarter under review. On average, the microfinance institutions and bureaux
de change sub-sectors reported adequate regulatory capital, fair asset quality and
liquidity position while earning performance was marginal. However, four leasing
finance companies, one building society and one credit and savings institution had
regulatory capital deficiencies.

Developments in Banking, Currency and Payment Systems

During the quarter, improvements in the availability of electronic payment options

increased as reflected by the increase in the number of Point of Sale terminals by
10.7% to 985 terminals (Qtr 4 2009: 889). The volume of Point of Sale
transactions also increased by 9.5% to 147,790 (Qtr 4 2009: 134,920) although
the values declined marginally by 2% to K61.7 Billion (Qtr 4 2009: K63 Billion). The
Bank encourages members of the press to sensitise the public on the advantage
of using this electronic payment method which is much safer and more convenient
than cash.

Further, we have noted that there has also been an improvement in the number of
cheques returned unpaid. The total volume of cheques returned unpaid on
account of insufficiently funded accounts decreased by 15% to 5,287 (Qtr 4 2009:
6,247) cheques while the value decreased by 16% to K39.83 billion (Qtr 4 2009:
K47.49 billion). The Bank is pleased to see the reduction and hopes that this trend
will continue over the coming months.

The Bank would like to take the opportunity to advise the public that the Bank is
issuing new directives on unpaid cheques and unpaid direct debit instructions that
will help to maintain the credibility and confidence in cheques and direct debit
instructions as an alternative payment instrument. The public is reminded that
bouncing a cheque on account of an insufficiently funded account, is a criminal
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offence under the National Payment System Act. To this end, members of the
public should always ensure that they have sufficient funds in their accounts
whenever they issue cheques to avoid facing criminal charges under the Act.

Economic Reform Programme

An IMF Mission, led by Mr. George Tsibouris, was in the country from 18th February
to 2nd March 2010 to conduct the fourth review of the Three –Year Economic
Programme under the Extended Credit Facility (formerly Poverty Reduction and
Growth Facility Arrangement) with the Zambian Authorities.

The mission reached preliminary agreement with the Zambian Authorities on the
2010 Macroeconomic framework and structural measures. The issues that
remained to be discussed before the conclusion of the mission were the fuel
pricing and electricity pricing mechanisms, as well as issues relating to the
financing road construction. It was envisaged that the IMF Executive Board will
discuss the fourth review of Zambia’s IMF Programme in May 2010.

Total disbursed poverty reduction budget support (PRBS) in the first quarter of
2010 amounted to US $66.3 million against a projection of US $128.5 million. The
inflows were from the United Kingdom (US $38.6 million) and Norway (US $27.7
million). The difference is mainly attributed to an amount of US $48.3 million that
was expected from the European Union during the quarter under review but was
not disbursed as programmed, as it was moved to the second quarter. Payments
to various creditors, excluding IMF debt service, amounted to US $10.6 million.

Inflation Outlook for the Second Quarter of 2010

The annual inflation rate is expected to slow down during the second quarter of
2010, largely due to an increase in the supply of fresh food items with the onset of
the 2009/2010 crop harvest period.

I THANK YOU FOR YOUR ATTENTION