BANK Of ZAMBIA

QUARTERLY MEDIA BRIEFING

BY

DR CALEB M. FUNDANGA

GOVERNOR

19th November 2008

GOVERNOR’S QUARTERLY MEDIA BRIEFING November 2008

EXECUTIVE SUMMARY

• This brief provides a preliminary assessment of monetary policy

implementation and its outcomes in the third quarter of 2008. The brief
also reviews other economic and financial sector developments and
concludes with an inflation outlook for the fourth quarter of 2008.

Monetary Policy

• During the third quarter of 2008, monetary policy continued to be

focused at achieving the end-year inflation target of 7% and
consolidating macroeconomic stability. This goal entailed containing the
growth of liquidity in the banking system within the projected path.

Inflation

• Inflationary pressures rose during the third quarter of the year. Annual
overall inflation increased to 14.2% in September 2008 from 12.1%
recorded at end-June 2008, and was 4.9 percentage points higher than the
9.3% recorded in September 2007. This outturn reflected a rise in both
annual non-food and food inflation to 12.4% and 16.2% from 8.8% and
15.6%, respectively in June 2008.

• Contributing most to the annual non-food inflation outturn were higher

prices in the rent and household energy, transport and communications
and furniture and household goods sub-groups. This followed a rise in
domestic fuel prices (11.6%) due to high petroleum prices on the world
market, and the subsequent increase on transport costs coupled with pass-
through effects of the weakening of the Kwacha against the US dollar.

• The rise in food inflation was mainly due to price increases on maize
grain, maize meal, other cereal products, kapenta and processed food
items. These were driven by low supply and higher production costs
arising from increased transport costs and electricity load shedding.

• By October 2008, the annual inflation rate had risen to 15.2%, mainly on
account of an increase in both annual food and non-food inflation to
17.6% and 13.0%, respectively. This followed lower supply of various
food items to the market and pass through effects of the exchange rate
depreciation of the Kwacha against the US dollar.

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Money Supply and Domestic Credit

• Preliminary estimates indicate that money supply in the economy

increased by 3.3% during the third quarter, compared to the 5.4% growth
registered in the second quarter of the year. This was below the quarterly
target of 5.3%.

• On an annual basis, money supply growth is estimated to have slowed

down to 17.3% at end-September 2008 from 26.7% recorded in June
2008. This was largely due to a decline in net foreign assets.

• Total domestic credit, which includes both Kwacha and foreign currency
denominated loans rose by 7.1% in the third quarter of 2008 compared to
4.9% recorded during the previous quarter. This outturn largely reflected
a 15.2% increase in banking system lending to the private sector.

• On an annual basis, domestic credit growth slowed down to 21.8% in

September 2008 compared to 28.3% recorded in June 2008, although it
was well above the 8.6% growth recorded in September 2007. This
reflected 34.4% decrease in credit to Government despite 16.7% rise in
lending to the private sector.

• In terms of sectoral distribution, preliminary information indicates that

credit to households (personal loans category) remained the highest as at
end-September 2008, accounting for 28.7% [29.4%]1 while the
agricultural sector continued to be second at 17.7% [15.7%]. The
manufacturing, wholesale and retail trade, financial services, and
transport and communications sectors had 11.5% [10.8%], 11.2%
[10.0%], 7.7% [7.1%] and 7.6% [7.6%], respectively.

Interest Rates

• The average composite yield rate on Treasury bills rose to 14.0% at the
end of the third quarter from 13.5% at the close of the previous quarter,
while the composite yield rate on Government bonds declined to 15.3%
from 15.7% over the same period.

1
Numbers in square brackets are for June 2008.

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• Developments in commercial banks interest rates were mixed during the

period under review. The average lending rate (ALR) increased to 25.7%
in September 2008 from 24.6% in June 2008, while the 30 day deposit
rate for amounts over K20 million and the average savings rate (ASR) for
amounts above K100,000 remained unchanged at 5.0% and 4.8%,
respectively.

Real Sector

FRA Maize Purchases and Major Millers Maize Stocks

• During the month of September 2008, maize grain stocks held by the
Food Reserve Agency (FRA) declined by 19.0% to 139,231 metric tons
(mt) from 171,938 mt as at end-June 2008. This was despite the
additional purchase of 51,894 mt of maize out of the targeted 80,000 mt
from the market. By province, Eastern, Northern, Central, Southern and
Luapula provinces contributed 39,694.0 mt (28.5%), 38,862.0 mt
(27.9%), 15,335.0 mt (11.0%), 12,630.0 mt (9.1%) and 12,593.0 mt
(9.0%), respectively. Copperbelt, North-Western, Lusaka and Western
provinces held 8,476.0 mt (6.1%), 6,603.0 mt (4.7%), 4,482.0 mt (3.2%)
and 556.0 mt (0.4%), respectively.

• As at end-September 2008, the stock of maize grain held by major

millers in the country rose by 267.8% to 108,449.4 metric tons (mt) from
29,482 mt, recorded at end-June 2008. This was on account of higher
purchases from the market. On a provincial basis, millers in Lusaka,
Copperbelt, Southern, Central and Eastern provinces accounted for
50,676.9 mt (46.7%), 32,868.0 mt (30.3%), 14,181.6 mt (13.1%), 8,172.9
mt (7.5%) and 2,450 mt (2.3%), respectively

Copper and Cobalt Output

• Preliminary data indicates that copper output fell by 8.8% to 134,769.2

mt during the third quarter of 2008 from 147,828.0 mt recorded in the
previous quarter. Further, this output level was 4.5% lower than
141,068.3 mt recorded in the third quarter of 2007. However, on a year-
to-date basis, copper output at 421,519.3 mt, was 10.7% higher than the
380,907.3 mt recorded during the corresponding period in 2007.

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• Cobalt output increased by 12.7% to 1,223.5 mt during the quarter under

review from 1,086.0 mt in the second quarter of 2008. However, this
output was 15.3% lower than 1,444.2 mt produced during the third
quarter of 2007. On a year-to-date basis, cobalt output declined by 4.9%
to 3,453.9 mt as at September 2008 compared to 3,632.5 mt produced
during the same period in 2007.

Investment Pledges

• During the third quarter of 2008, total investment pledges rose to US

$2,428.9 million from $1,408.1 million recorded in the previous quarter.
On a sectoral basis, mining, manufacturing, service, real estate and
agriculture sectors accounted for US $2,084.9 million, US $243.6
million, US $48.8 million, US $24.0 million and US $17.2 million,
respectively. The transport, tourism, and construction sectors attracted
US $6.2 million, US $3.0 million and US $1.2 million, respectively.

• On a year-to-date basis, investment pledges amounted to US $4,249.6

million compared with the US $1,103.5 million recorded during the
corresponding period in 2007. This is an indication of increased investor
confidence in the economy.

Foreign Exchange Market

• The foreign exchange market was characterised by increased volatility

during the review period. This arose largely from uncertainty regarding
political stability in the country following the illness and eventual death
of President Mwanawasa, the worsening global financial crisis and
reduction of slightly over 20.0% in copper prices on the international
market as at end-September 2008. These factors led to the weakening of
the Kwacha against most major foreign currencies.

• Against the US dollar, the Kwacha depreciated by 8.8%, partially

offsetting the appreciation of 11.5% recorded in the second quarter.
Hence, the Kwacha ended the review period at an average rate of
K3,541.46/US$ from an average of K3,253.84/US$ at the close of the
second quarter. With regard to the South African rand and euro, the
Kwacha depreciated by 5.2% and 0.4% compared with appreciations of
9.6% and 10.6% recorded in the second quarter, respectively. The
exchange rates of the Kwacha against the South African and European

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currencies averaged K452.22/ZAR and K5,113.20/€ in September from

K429.78/ZAR and K5,092.35/€ in June. However, the Kwacha
appreciated by 0.7% against the pound sterling, down from an
appreciation of 12.9% in the second quarter, to close the review period at
an average rate of K6,397.36/₤.

• The supply of foreign exchange to the market increased during the

quarter as reflected by commercial banks’ foreign exchange purchases
which rose by 7.8% to US$1,520.6 million from US $1,410.8 million, in
the previous quarter. Similarly, commercial banks’ foreign exchange
sales rose by 16.8% to US$1,417.3 million from US $1,213.4 million.
Net inflows of foreign exchange therefore declined to US$103.3 million
compared with US$155.6 million in the previous review period, as
foreign exchange sales rose faster than purchases.

• In light of the volatility in the exchange rate, the Bank of Zambia

intervened in the market to provide liquidity and restore stability. To this
effect, the Bank sold US$60.0 million during the period under review
compared with US $20.5 million in the preceding quarter. During the
same period, the Bank purchased US$3.5 million compared with US
$37.0 million. As a result, the Bank recorded net sales of US$56.5
million in the third quarter compared with net purchases of US$16.5
million in the second quarter.

Balance of Payments

• Preliminary data show that Zambia’s overall balance of payments (BoP)

position recorded a deficit of US $120.6 million in the third quarter of
2008, from a surplus of US $146.1 million realised in the previous
quarter. This was mainly explained by a decline in the current account
balance on account of lower export earnings.

• A merchandise trade deficit of US $224.8 million was recorded

compared to a surplus of US $231.7 million registered in the previous
quarter, following a decline in merchandise export earnings and a higher
imports bill.

• Merchandise export earnings, at US $1,037.3 million, were 27.8% lower

than the US $1,437.7 million realised in the previous quarter, following

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GOVERNOR’S QUARTERLY MEDIA BRIEFING November 2008

a reduction in metal export earnings to US $807.6 million from US

$1,214.3 million the previous quarter.

• Copper export earnings at US $758.1 million were 32.6% lower than the
US $1,124.2 million recorded during the previous quarter, reflecting both
a decline in the realised price to US $6,949.11 per ton from US $7,850.51
per ton and lower export volumes. However, on a year-to-date basis
copper receipts at US $2,917.8 million were 14.5% higher than US
$2,548.1 million recorded during the corresponding period in 2007.

• Similarly cobalt export earnings fell to US $49.5 million, in the third

quarter of 2008, from US $90.1 million in the previous quarter, mainly
due to a decline in the realised price of cobalt to US $19.18 per pound
from US $37.85 per pound. During the year to September 2008, cobalt
receipts at US $251.3 million were 38.0% above US $182.1 million
recorded during the same period in 2007.

• However, non-traditional export earnings (NTEs) at US $229.7 million

were 2.8% above the US $223.4 million realised in the second quarter of
2008. This was on account of higher export earnings associated with
copper wire, cane sugar, burley tobacco, electric cables, fresh flowers and
fresh fruits and vegetables. On a year-to-date basis, NTEs at US $629.3
million were 7.5% higher than the US $585.5 million recorded during the
corresponding period in 2007.

• Meanwhile, the merchandise imports bill increased by 4.8% to US

$1,284.4 million from US $1,225.9 million recorded in the previous
quarter. The increase was mainly associated with higher import bills of
commodity groups such as petroleum products, food items, paper and
paper products, iron and steel, plastic and rubber products and electrical
equipment and machinery. On a year-to-date basis, imports at US
$3,423.4 million, were 34.0% higher than the US $2,555.1 million
recorded during the corresponding period in 2007.

Implementation of the Economic Programme

• A mission from the International Monetary Fund (IMF) visited Zambia

from 17th to 26th September 2008, to conduct the first review of the
Poverty Reduction and Growth Facility (PRGF) arrangement (approved
in June 2008) which supports the country’s economic reform programme,

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for the period up to June 2008. Preliminary indications are that all the
end-June 2008 Benchmarks were met. There was also broad agreement on
the macroeconomic outlook for 2008.

• A follow up mission will be undertaken to conclude discussions with the

Zambian Authorities in December 2008.

• The IMF mission expressed satisfaction with the performance of the

Zambian economy despite adverse shocks related to increases in world
food and fuel prices. Economic growth was however envisaged to slow
down this year due to relatively poor harvest and the electricity crisis. The
mission observed that fiscal policy was weaker than planned mainly on
account of the huge supplementary expenditures undertaken and the fuel
subsidies which might lead to revenue losses.

Developments in the Financial Sector

• The overall financial condition and performance of the banking sector

during the third quarter of 2008 was satisfactory. The sector maintained
adequate capital reserves while asset quality, earnings and liquidity
remained satisfactory.

• Similarly, the overall financial performance and condition of the non-

bank financial institutions, (NBFIs) was satisfactory as at 30th September
2008. On average, the leasing and finance companies, Microfinance
Institutions (MFIs) and the bureaux de change sub-sectors reported
adequate regulatory capital, while earnings performance, asset quality
and liquidity positions were fair.

• It is gratifying to note that there has been an improvement in support to

the small-scale entrepreneurs from MFIs and commercial banks who are
introducing products specifically tailored for the small scale businesses.
In addition other financial innovations have been introduced to the
market to attract more deposits by various banks. However, more needs
to be done to broaden financial inclusion in the country.

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Implications of the Financial Crisis in the USA and other Developed

Countries on Zambia

Current Effects on Zambian Economy

• Like most countries in Africa, Zambia is not fully integrated in the world
financial markets, therefore the banking sector may not immediately be
affected by the negative effects of the financial crisis in the USA and
other developed countries. However, the financial turmoil has already
resulted in a reduction in projected global economic growth and decline
in demand for Africa’s exports, as the USA remains one of the largest
players in the world economy.

• Despite this fact, interest for investments in African countries continues

to rise, partly because rates of return are higher relative to those in mature
markets and Africa offers unique diversification opportunities. For
example, foreign direct investment (FDI) has continued to grow in
Zambia. Moreover a substantial amount of FDI inflows comes from
China whose economy is projected to continue expanding at near double
digit rates in 2008 and beyond.

• The Zambian foreign exchange market has been partly affected through
withdrawals by foreign portfolio investors in Zambian Government and
private securities on account of demand for liquidity and global risk
aversion. This is reflected in the volatility and weakening of the Kwacha
exchange rate in the recent past. However, we wish to assure investors
that the fundamentals of the Zambian economy are still strong. Co-
operating partners are still disbursing financial support, and the financial
system remains stable with increased vigilance in terms of supervisory
oversight.

Possible Future Effects on Zambian Economy

• It should however be noted that prolonged recession in the global

economy might deepen risk aversion and discourage both portfolio and
foreign direct investment flows into the country. The slow down in
portfolio investments and possible cuts in overseas development
assistance may unfavourably affect economic growth and development in
Zambia.

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• Other channels through which the global financial market crisis could
affect Zambia include the potential weakening of foreign owned banks,
which could create a problem if parent retail banks started to withdraw
funds from their Zambian subsidiaries. In addition the decline in
commodity prices and reduction in demand for exports, will affect the
trade balance.

• The Bank of Zambia has already issued risk management and corporate
governance guidelines in order to enhance risk management and
corporate governance in the financial sector.

• Moreover, global developments will continue to be closely monitored

and the Bank of Zambia stands ready to take appropriate measures in the
local financial market to ensure that confidence in the banking system is
maintained, banks are adequately capitalised and any systemic risk is
avoided. Such actions will facilitate maintenance of the macroeconomic
gains achieved thus far.

Developments in Banking, Currency and Payment Systems

Currency Awareness and Sensitisation

• During the third quarter of 2008, the Bank undertook Currency and
National Payment Systems Awareness and Sensitisation Campaigns in
Lusaka, Kafue, Chongwe, Luangwa, Kabwe and Chibombo. During the
campaigns, the Bank disseminated information on issues, such as, the
proper storage and handling of banknotes, the recognition of security
features on banknotes, how to guard against counterfeits and new
features of the enhanced K10,000 banknote which was issued into
circulation beginning June 2008.

• The Bank also sensitized the public regarding available payment

mechanisms under the national payment system. The general public is
advised that these campaigns will be conducted on a regular basis to
ensure that all parts of the country are adequately covered.

Lusaka Currency Survey

• In September 2008, the Bank conducted a survey in Lusaka to assess the

availability, quality and sources of middle and low value banknotes in

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circulation. During the survey, major cash handlers, such as, retailers,
market vendors, restaurants and some commercial banks at Manda Hill,
Arcades and in Kabulonga, Woodlands, Chilenje, Kabwata, City Centre
and Matero were targeted.

• The feedback provided by the respondents was useful as it provided

information pertaining to the cash requirements of the public for its
various cash transactions and the apparent gaps and concerns that regard
the availability of middle and low value banknotes in circulation.

• The Bank of Zambia therefore wishes to advise the general public that it
intends to undertake such surveys on a regular basis in the various parts
of the country as way of interacting with the public on issues affecting
use of banknotes in Zambia.

Designations of Payment Systems

• The Bank of Zambia designated eight institutions as payment system

businesses, having met the requirements for designation out of the eleven
applications that were considered during the period under review. The
remaining applications are still under consideration.

• The Bank of Zambia would like to urge all organisations involved in the
provision of payment services such as Money Transfer services, Mobile
Phone Payment services, Payment Card schemes that have not yet
applied for designation to do so immediately.

National Switch Project

• The Bank of Zambia in conjunction with stakeholders has been involved

in a project to implement a National Switch. The Request For Proposal
(RFP) was issued by the Zambia Electronic Clearing House Limited
which is the implementing institution and 5 selected bidders responded to
the RFP. Following the bid submissions, a technical evaluation was
conducted and a financial proposal evaluation is due to commence soon.

• The switch will serve as a gateway that will link consumers and
merchants by means of e-payment products. The implementation of the
switch should also significantly reduce the transaction cost for electronic

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payments. It is expected that the reduction in transaction costs will

encourage more people to use electronic payment methods.

Inflation Outlook for the Fourth Quarter of 2008

• During the fourth quarter, inflationary pressures may arise from the
following factors:

1) The increase in Government expenditure arising mainly from

presidential elections and the higher subsidy for the Fertiliser Support
Programme;

2) Lower seasonal supply of fresh vegetables, maize, cereals and tubers

which is typical during the last quarter of the year; and

3) Pass through effects of the recent depreciation in the exchange rate of

the Kwacha against the US dollar.

• The Bank of Zambia will continue to monitor these developments and

undertake appropriate monetary policy actions to contain inflationary
pressures.

I THANK YOU FOR YOUR ATTENTION

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INTRODUCTION

• This brief provides a preliminary assessment of monetary policy

implementation and its outcomes in the third quarter of 2008. The brief
also reviews other economic and financial sector developments and
concludes with an inflation outlook for the fourth quarter of 2008.

MONETARY POLICY

• During the third quarter of 2008, monetary policy continued to be

focused at achieving the end-year inflation target and consolidating
macroeconomic stability. This goal entailed containing the growth of
liquidity in the banking system within the projected path. In this regard,
the Bank of Zambia (BoZ) relied mainly on Open Market Operations
(OMO) and the auctioning of Government securities to contain liquidity.
This was complemented by prudent fiscal management.

INFLATION

Overall Inflation

• Overall inflation rose to 3.0% in the third quarter of 2008, from 2.1%
registered in the second quarter, and was higher than the 1.1% recorded
in the third quarter of 2007. This outturn was mainly attributed to an
increase in non-food inflation.

• Similarly, annual overall inflation rose to 14.2% in September 2008 from

12.1% recorded at end-June 2008, and was 4.9 percentage points higher
than the 9.3% recorded in September 2007. This outturn reflected an
increase in both annual non-food and food inflation.

• By October 2008, the annual inflation rate had risen to 15.2%, mainly on
account of an increase in both annual food and non-food inflation to
17.6% and 13.0%, respectively. This followed lower supply of various
food items to the market and pass through effects of the exchange rate
depreciation of the Kwacha against the US dollar (reflected on airfares,
motor vehicles and hotel accommodation).

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Non-Food Inflation

• Quarterly non-food inflation surged to 4.9% in the third quarter of 2008,

from 0.8% recorded in the previous quarter, and was higher than the
1.6% registered in September 2007. This outcome was mainly attributed
to the increase in fuel prices and higher transport charges, coupled with
pass through effects of the exchange rate depreciation during the period
under review.

• Similarly, annual non-food inflation rose to 12.4% from 8.8% as at end-

June 2008, although it was at the same level (of 12.4%) recorded in
September 2007. Contributing most to this outcome were higher prices in
the rent and household energy, transport and communications and
furniture and household goods sub-groups. This followed a rise in
domestic fuel prices (11.6%) due to high petroleum prices on the world
market and the subsequent rise inn transport costs coupled with pass-
through effects of the weakening of the Kwacha against the US dollar.

Food Inflation

• Food inflation slowed down to 1.1% in the third quarter of 2008 from
3.4% recorded in the second quarter, although it was higher than the
0.6% recorded during the third quarter of 2007. This outturn was mainly
attributed to price reductions observed on beef products and selected
vegetables due to abundant supply on the market.

• On an annual basis, food inflation rose to 16.2% in September 2008,

from 15.6% recorded in June 2008, and was higher than the 6.2%
registered in September 2007. This outturn was largely due to price
increases on maize grain, maize meal, other cereals, cereal products,
kapenta and processed food products due to higher production costs
arising from increased transportation costs and electricity load shedding.

BROAD MONEY AND DOMESTIC CREDIT,

• Preliminary estimates indicate that money supply in the economy

increased by 3.3% in the third quarter of 2008 compared to the 5.4%
registered in the second quarter of the year. In absolute terms, broad

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money rose to K11,193.4 billion from K10,840.1 billion in June 2008,

reflecting an expansion in net domestic assets (NDA) by 6.3% despite
0.8% decline in net foreign assets (NFA).

• On an annual basis, money supply growth is estimated to have slowed

down to 17.3% at end-September 2008 compared with 26.7% recorded in
June 2008. The slow down in growth was largely due to 2.1% decrease in
NFA which contributed negative 1.0 percentage points to annual M3
growth. During the quarter under review, NDA growth was 35.8% and
contributed 18.3 percentage points to money supply growth.

• Preliminary estimates indicate that total domestic credit, which includes

both Kwacha and foreign currency denominated loans increased by 7.1%
in the third quarter of 2008 compared to 4.9% recorded during the second
quarter of 2008. In absolute terms, domestic credit edged up to K8,299.5
billion from K7,749.3 billion in June 2008. This outturn largely reflected
15.2% increase in banking system lending to the private sector.

• On an annual basis, domestic credit growth slowed down to 21.8% in

September 2008 compared to 28.3% in June 2008, although it was well
above the 8.6% growth recorded in September 2007. This reflected a
decline in credit to Government and public enterprises by 34.4% and
53.2%, respectively despite a 16.7% rise in lending to the private sector.

• In September 2008, households (personal loans category) remained the

largest recipient of credit, accounting for 28.7% [29.4%]2, while
agricultural sector continued to be second at 17.7% [15.7%]. The
manufacturing, wholesale and retail trade, financial services, and
transport and communications sectors had 11.5% [10.8%], 11.2%
[10.0%], 7.7% [7.1%] and 7.6% [7.6%], respectively. Other shares went
to mining and quarrying (4.4%) [4.7%], construction (3.4%) [3.5%], real
estate (2.6%) [3.2%] and electricity, gas, water and energy (2.5%)
[2.8%], respectively.

2
Numbers in square brackets are for June 2008.

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INTEREST RATES

Government Securities

• Demand for Government securities declined in the third quarter of 2008,

as exhibited by lower average subscription rates. On the Treasury bill
auctions, average subscription declined to 64.5% from 94% recorded in
the second quarter while average subscription on Government bond
auctions fell to 72.4% from 116.0% over the same period.

• The reduction in demand for government securities boosted the yield

rates, with weighted average Treasury bill yield rate rising by 0.5
percentage point to 14.0% at the end of the third quarter. However, the
composite bond yield rate declined to 15.3% from 15.7% over the same
period.

Commercial Banks Interest Rates

• Developments in commercial banks interest rates were mixed during the

third quarter of 2008. The weighted lending base rate (WLBR) and
average lending rate (ALR) increased to 19.6% and 25.7% in September
2008 from 18.5% and 24.6% in June 2008, respectively. However, the
30 day deposit rate for amounts over K20 million and the average savings
rate (ASR) for amounts above K100,000 remained unchanged at 5.0%
and 4.8%, correspondingly.

• Owing to the increase in annual overall inflation, all real interest rates
declined in the third quarter of 2008. The weighted average lending base
rate and the average lending rate declined to 5.4% and 11.5% in
September 2008 from 6.4% and 12.5%, respectively in June 2008.
Similarly, average savings rate for amounts above K100, 000 and the
30 day deposit rate fell to negative 9.4% and negative 9.2% from
negative 7.3% and negative 7.1%, respectively.

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REAL SECTOR DEVELOPMENTS

Agriculture

FRA Maize Purchases and Major Millers Maize Stocks

• During the month of September 2008, maize grain stocks held by the
Food Reserve Agency (FRA) fell by 19.0% to 139,231 mt from 171,938
mt as at end-June 2008. This was despite the additional purchase of
51,894 mt of maize out of the targeted 80,000 mt. By province, Eastern,
Northern, Central, Southern and Luapula provinces contributed 39,694.0
mt (28.5%), 38,862.0 mt (27.9%), 15,335.0 mt (11.0%), 12,630.0 mt
(9.1%) and 12,593.0 mt (9.0%), respectively. Copperbelt, North-Western,
Lusaka and Western provinces held 8,476.0 mt (6.1%), 6,603.0 mt
(4.7%), 4,482.0 mt (3.2%) and 556.0 mt (0.4%), correspondingly.

• As at end-September 2008, the stock of maize grain held by major

millers in the country increased by 267.8% to 108,449.4 mt from 29,482
mt, recorded at end-June 2008. This was on account of higher purchases
from the market. Lusaka, Copperbelt, Southern, Central and Eastern
provinces accounted for 50,676.9 mt (46.7%), 32,868.0 mt (30.3%),
14,181.6 mt (13.1%), 8,172.9 mt (7.5%) and 2,450 mt (2.3%),
respectively

Mining

• Preliminary data show that copper output fell by 8.8% to 134,769.2 mt

during the third quarter of 2008 from 147,828.0 mt recorded the previous
quarter. Further, this output level was 4.5% lower than 141,068.3 mt
recorded in the third quarter of 2007. However, on a year-to-date basis,
copper output at 421,519.3 mt, was 10.7% higher than the 380,907.3 mt
recorded during the corresponding period in 2007.

• Cobalt output rose by 12.7% to 1,223.5 mt during the quarter under

review from 1,086.0 mt in the previous quarter. However, this output was
15.3% lower than 1,444.2 mt produced during the third quarter of 2007.
On a year-to-date basis, cobalt output declined by 4.9% to 3,453.9 mt as
at September 2008 compared to 3,632.5 mt produced during the same
period in 2007.

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Manufacturing

Cement

• Cement output from Lafarge Plc increased by 20.8% to 160,362.0 mt

during the third quarter from 132,784.0 mt produced in the second
quarter of 2008. Further this output was 7.5% higher than the 149,192.0
mt produced in the third quarter of 2007.

Milk

• During the reviewed quarter, Parmalat Zambia Ltd produced 7,367,703

litres of milk which was 7.4% higher than the 6,860,057 litres produced
in the second quarter of 2008. However, this output was 4.5% lower
when compared to 7,710,826 litres of output recorded in the same quarter
of 2007.

Beer

• Zambian Breweries Plc produced 103,695.0 hectolitres of clear beer in

the third quarter of 2008, 9.6% lower than the 114,771.0 hectolitres
output recorded in the previous quarter. Further, this output level was
5.5% lower than 109,711.0 hectolitres produced in the same quarter of
2007.

Soft Drinks

• However, output of soft drinks by Zambian Breweries Plc rose by 7.3%

to 94,752.0 hectolitres from 88,336.0 hectolitres produced in the second
quarter of 2008. In addition, this output level was 26.1% higher than
75,126.0 hectolitres produced in the corresponding quarter of 2007.

Tourism

• During the third quarter of 2008, the number of international arrivals at

the country’s four international airports3 rose by 15.0% to 130,141
passengers from 113,129 passengers recorded in the second quarter of
2008. Further, this was higher than 119,455 passengers recorded during
the corresponding period in 2007. The major tourist destinations namely,
3
Lusaka, Livingstone, Mfuwe and Ndola.

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Livingstone and Mfuwe accounted for (through their respective

international airports) 25,992 passengers and 352 passengers against
18,632 passengers and 149 passengers in the previous quarter,
respectively.

Investment Pledges

• During the third quarter, total investment pledges rose to US $2,428.9

million from $1,408.1 million recorded in the previous quarter. On a
sectoral basis, mining, manufacturing, service, real estate and agriculture
sectors accounted for US $2,084.9 million, US $243.6 million, US $48.8
million, US $24.0 million and US $17.2 million, respectively. The
transport, tourism, and construction sectors attracted US $6.2 million,
US $3.0 million and US $1.2 million, respectively.

• The pledges, when fully executed, were expected to generate 4,449 jobs:
mining 2,183; manufacturing 1,057 jobs; agriculture 562 jobs; service
361 jobs; transport 97 jobs; tourism 81 jobs; construction 54 jobs and real
estate 54 jobs.

• On a year-to-date basis, investment pledges amounted to US $4,249.6

million compared with the US $1,103.5 million recorded during the same
period in 2007.

EXTERNAL SECTOR DEVELOPMENTS

Foreign Exchange Market

• The foreign exchange market was characterised by increased volatility

during the review period. This arose largely from uncertainty regarding
political stability in the country following the illness and eventual death
of President Mwanawasa, the worsening global financial crisis and the
reduction of slightly over 20.0% in copper prices on the international
market as at end-September 2008 These factors led to the weakening of
the Kwacha against most major foreign currencies.

• Against the US dollar, the Kwacha depreciated by 8.8%, partially off-

setting the appreciation of 11.5% recorded in the second quarter. Hence,
the Kwacha ended the review period at an average rate of K3,541.46/US$

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from an average of K3,253.84/US$ at the close of the second quarter.

With regard to the South African rand and euro, the Kwacha depreciated
by 5.2% and 0.4% compared with appreciations of 9.6% and 10.6%
recorded in the second quarter, respectively. The exchange rates of the
Kwacha against the South African and European currencies averaged
K452.22/ZAR and K5,113.20/€ in September from K429.78/ZAR and
K5,092.35/€ in June. However, the Kwacha appreciated by 0.7% against
the pound sterling, down from an appreciation of 12.9% in the second
quarter, to close the review period at an average rate of K6,397.36/₤.

• The supply of foreign exchange to the market increased during the

quarter as reflected by commercial banks’ foreign exchange purchases
which rose by 7.8% to US$1,520.6 million from US $1,410.8 million, in
the previous quarter. Similarly, commercial banks’ foreign exchange
sales rose by 16.8% to US$1,417.3 million from US $1,213.4
million. Net inflows of foreign exchange therefore declined to US$103.3
million compared with US$155.6 million in the previous review period,
as foreign exchange sales rose faster than purchases.

• In light of the volatility in the exchange rate arising from uncertainties in

the foreign exchange market, the Bank of Zambia intervened in the
market in order to provide liquidity and restore stability. To this effect,
the Bank sold US$60.0 million during the period under review compared
with US $20.5 million in the preceding quarter. During the same period,
the Bank purchased US$3.5 million compared with US $37.0 million. As
a result, the Bank recorded net sales of US$56.5 million in the third
quarter compared with net purchases of US$16.5 million in the second
quarter.

Balance of Payments

• Preliminary data show that Zambia’s overall balance of payments (BoP)

position recorded a deficit of US $120.6 million in the third quarter of
2008 from a surplus of US $146.1 million in the previous quarter. This
performance stemmed from a decline in the current account balance
explained mainly by lower export earnings.

• The current account recorded a deficit of US $668.7 million in the third

quarter of 2008 compared with a surplus of US $99.7 million recorded
during the previous quarter. This was mainly explained by an

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unfavourable merchandise trade balance coupled with deterioration in the

services account.

• The trade deficit was recorded at US $224.8 million from a surplus of US

$231.7 million registered during the previous quarter. This was largely
attributed to a decline in merchandise export earnings and a higher
imports bill.

• During the reviewed quarter, merchandise export earnings at US $1,037.3

million were 27.8% lower than the US $1,437.7 million realised in the
previous quarter, following a reduction in metal earnings. Metal export
earnings declined to US $807.6 million from US $1,214.3 million
recorded in the previous quarter, reflecting a fall in both copper and
cobalt export earnings.

• Copper export earnings at US $758.1 million were 32.6% lower than the
US $1,124.2 million recorded during the previous quarter. This followed
a decline in the realised LME price to US $6,949.11 per ton from US
$7,850.51 per ton and a fall in copper export volumes to 109,097.54 mt
from 143,199.46 mt in the second quarter. However, on a year-to-date
basis, copper export earnings at US $2,917.8 million were 14.5% higher
than the US $2,548.1 million recorded during the corresponding period in
2007.

• Similarly, cobalt export earnings declined to US $49.5 million in the

third quarter of 2008 from US $90.1 million in the previous quarter. This
was due to a decrease in the realised price of cobalt to US $19.18 per
pound from US $37.85 per pound, despite an increase in cobalt export
volumes to 1,170.31 mt from 1,080.05 mt recorded in the second quarter
of 2008. On a year-to-date basis, cobalt receipts at US $251.3 million
were 38.0% above the US $182.1 million recorded during the
corresponding period in 2007.

• However, non-traditional export earnings (NTEs) increased by 2.8% to

US $229.7 million from US $223.4 million realised in the previous
quarter. This was as a result of higher export earnings associated with
copper wire, cane sugar, burley tobacco, electric cables, fresh flowers and
fresh fruits and vegetables. On a year-to-date basis, NTEs at US $629.3
million were 7.5% higher than the US $585.5 million recorded during the
corresponding period in 2007.

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• Meanwhile, the merchandise imports bill increased by 4.8% to US

$1,284.4 million in the third quarter of 2008, from US $1,225.9 million
in the previous quarter. This was due to higher imports of petroleum
products (61.0%), food items (43.5%), paper and paper products (37.0%),
iron and steel (27.3%), plastic and rubber products (26.4%) and electrical
equipment and machinery (21.7%). On a year-to-date basis, imports at
US $3,423.4 million were 34.0% higher than the US $2,555.1 million
recorded during the corresponding period in 2007.

• During the quarter under review, the capital and financial account surplus
increased to US $412.6 million from US $202.0 million in the previous
quarter. This improvement was mainly attributed to a rise in project
grants, portfolio investments, and private foreign borrowing. On a year-
to-date basis, the capital and financial account balance at US $1,042.2
million was 51.1% higher than the US $689.7 million recorded during the
corresponding period in 2007.

IMPLEMENTATION OF THE ECONOMIC PROGRAMME

• A mission from the International Monetary Fund (IMF) visited Zambia

from 17th to 26th September 2008, to conduct the first review of the
Poverty Reduction and Growth Facility (PRGF) arrangement (approved
in June 2008) which supports the country’s economic reform programme,
for the period up to June 2008. Preliminary indications are that all the
end-June 2008 Benchmarks were met. There was also broad agreement on
the macroeconomic outlook for 2008.

• A follow up mission will be undertaken to conclude discussions with the

Zambian Authorities in December 2008.

• The mission was satisfied with the performance of the Zambian economy
despite adverse shocks related to increases in world food and fuel prices.
Economic growth was however envisaged to slow down this year due to
relatively poor harvest and electricity shortages. The mission observed that
fiscal policy was weaker than planned mainly on account of the huge
supplementary expenditures undertaken and the fuel subsidies which might
lead to revenue losses.

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DEVELOPMENTS IN THE BANKING SECTOR

• The overall financial condition and performance of the banking sector

during the third quarter of 2008 was satisfactory. The sector maintained
adequate capital reserves while asset quality, earnings and liquidity
remained satisfactory.

• Overall, the banking sector’s total assets went up by 8.0% to K15,615.3

billion [June 2008: K14,465.0 billion]. The asset structure of the banking
sector continued to be dominated by ‘Net Loans and Leases’ at 43.3%
[June 2008: 41.3 %] of total assets and ‘Investments in Securities’ at
15.0% [June 2008: 17.0 %]. Other significant balances were ‘Balances
with Bank of Zambia’ at 14.4% [June 2008: 14.0 %] and ‘Balances with
Foreign Institutions’ at 11.2% [June 2008: 13.1 %].

• The banking industry’s average capital adequacy ratios were 16.9% for
Primary Regulatory Capital and 19.2% for Total Regulatory Capital
[June 2008: 17.0% and 19.3%, respectively]. All the fourteen operating
banks met the minimum regulatory capital requirement of K12.0 billion
as at end-September 2008; and were all in excess of the minimum
regulatory capital adequacy ratios of 5% for primary regulatory capital
and 10% for total regulatory capital.

• The asset quality of the banking sector was satisfactory. The ‘Gross Non-
Performing Loans’ to ‘Total Gross Loans’ ratio increased to 6.8% [June
2008: 6.0%], and the ratio of ‘Net Non-Performing Loans’ to ‘Total
Regulatory Capital’ was at 6.3% [June 2008: 3.5%].

• The banking sector’s earnings performance was satisfactory. The average

‘Return on Assets’ (ROA) marginally declined to 4.7% and ‘Return on
Equity’ (ROE) to 32.9% [June 2008: 5.0% and 36.6% respectively]. This
was largely on account of an increase in non-interest expenses and
provisions for loan losses in the quarter under review compared to the
preceding quarter.

• The banking sector’s liquidity position was satisfactory, despite the

liquidity ratio marginally decreasing to 40.8% [June 2008: 41.2%] and
the ratio of liquid assets to total assets to 32.5% [June 2008: 32.8 %].

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DEVELOPMENTS IN THE NON-BANK FINANCIAL SECTOR

Leasing and Finance Institutions

• The overall performance of the leasing sub-sector was considered fair

during the quarter under review. As at 30 September 2008 the aggregate
sub-sector regulatory capital stood at K36,985 million. However, out of
the eleven operating leasing and finance companies as at 30 September
2008, two had regulatory capital deficiencies and measures have been put
in place to address the capital deficiencies.

Building Societies

• The building societies sub-sector continued to register positive

performance in the quarter under review. The sub-sector recorded an
aggregate profit before tax of K3,562 million, which was an increase of
K1,135 million or 47% over the profit before tax of K2,427 million
recorded in the previous quarter.

Bureaux de Change

• The volume of purchases and sales of foreign currency by the bureau de

change sub-sector in the quarter under review amounted to US$167.6
million (equivalent to K601,391 million) and US$167.5 million
(equivalent to K601,021 million) compared to US$ 180.8 million
(equivalent to K597,026 million) and US$179.8 million (equivalent to
K596,599 million), respectively for the quarter ended 30 June 2008. This
represented a combined decrease of 7% in the volumes of purchases and
sales transactions over the previous quarter.

• The United States (US) Dollar remained the most traded currency in the
quarter under review. Total purchases and sales of the US Dollar amounted
to US$166 million (equivalent to K568,629 million) and US$161 million
(equivalent to K568,173 million) while those of the South African Rand
amounted to ZAR46.9 million (equivalent to K20,998 million) and
ZAR46.9 million (equivalent to K21,271 million), respectively.

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Microfinance Institutions

• As at 30 September 2008, the regulatory capital of the sub-sector stood at

K122,505 million and was above the required minimum amount of
K58,769 million by K63,736 million. This represented an increase of
24%, largely due to a profit after tax of K17,213 million recorded during
the quarter under review.

Sovereign Rating – Hire of Financial Advisor

• Following the short listing of J.P Morgan and Citi Group and the
evaluation of their financial bids, J.P. Morgan was eventually selected as
the Financial Advisory Agent for the sovereign rating exercise in
Zambia. To this effect, the contract is being finalised to enable J.P.
Morgan commence the exercise.

Second FinScope Demand Survey

• The second FinScope Demand Survey is expected to be undertaken

during the fourth quarter of 2008. This follows the signing of a contract
between the Ministry of Commerce, Trade and Industry and the Bank of
Zambia (BoZ) to facilitate the release of funds (amounting to K1.4
billion) by the Private Sector Development Programme (PSD) to the
Financial Sector Development Programme. The survey will be
undertaken by FinMark Trust Zambia Limited, who has been contracted
on condition that they work with a local consultant to build local capacity
in the area of financial sector research that is done by FinMark Trust

Second African Rural and Agricultural Credit Association (AFRACA)

Central
Banks Forum
• The Bank of Zambia co-hosted the second AFRACA Central Banks
Forum under the theme “Promoting Financial Sector Inclusiveness with
Increased Investment in Agriculture” from 23 – 25 September 2008 in
Livingstone to which a number of non- bank financial institutions were
invited.

• The forum noted that in as much as it was beneficial to have financial

service providers attend the workshop, in future AFRACA should

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consider inviting other stakeholders such as users of financial services to

also give their own views on financial access.

• In addition, the forum urged Central Banks to continue providing

enabling environments with appropriate regulatory framework to
stimulate micro lending which is regarded as a way to extend financial
inclusiveness.

IMPLICATIONS OF THE FINANCIAL CRISIS IN THE USA AND

OTHER DEVELOPED COUNTRIES ON ZAMBIA

Current Effects on Zambian Economy

• Like most countries in Africa, Zambia is not fully integrated in the world
financial markets, therefore the banking sector may not immediately be
affected by the negative effects of the financial crisis in the USA and
other developed countries. However, the financial turmoil has already
resulted in a reduction in projected global economic growth and decline
in demand for Africa’s exports, as the USA remains one of the largest
players in the world economy.

• Despite this fact, interest for investments in African countries continues

to rise, partly because rates of return are higher relative to those in mature
markets and Africa offers unique diversification opportunities. For
example, foreign direct investment (FDI) has continued to grow in
Zambia. Moreover, a substantial amount of FDI inflows comes from
China whose economy is projected to continue expanding at near double
digit rates in 2008 and beyond.

• The Zambian foreign exchange market has been partly affected through
withdrawals by foreign portfolio investors in Zambian Government and
private securities on account of demand for liquidity and global risk
aversion. This is reflected in the volatility and weakening of the Kwacha
exchange rate in the recent past. However, we wish to assure investors
that the fundamentals of the Zambian economy are still strong. Co-
operating partners are still disbursing financial support, and the financial
system remains stable with increased vigilance in terms of supervisory
oversight.

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Possible Future Effects on Zambian Economy

• It should however be noted that prolonged recession in the global

economy might deepen risk aversion and discourage both portfolio and
foreign direct investment flows into the country. The slow down in
portfolio investments and possible cuts in overseas development
assistance may unfavourably affect economic growth and development in
Zambia.

• Other channels through which the global financial market crisis could
affect Zambia include the potential weakening of foreign owned banks,
which could create a problem if parent retail banks started to withdraw
funds from their Zambian subsidiaries. In addition the decline in
commodity prices and reduction in demand for exports, will affect the
trade balance.

• The Bank of Zambia has already issued risk management and corporate
governance guidelines in order to enhance risk management and
corporate governance in the financial sector.

• Moreover, global developments will continue to be closely monitored

and the Bank of Zambia stands ready to take appropriate measures in the
local financial market to ensure that confidence in the banking system is
maintained, banks are adequately capitalised and any systemic risk is
avoided. Such actions will facilitate maintenance of the macroeconomic
gains achieved thus far.

DEVELOPMENTS IN BANKING, CURRENCY AND PAYMENTS

SYSTEMS

Removal of Unfit Banknotes from the Economy

• The Bank of Zambia withdrew from circulation a total of 18.5 million

pieces of unfit banknotes with a value of K124.9 billion compared to 22.1
million pieces of unfit banknotes removed from circulation in the
previous quarter with a value of K149.9 billion.

• In addition, the public exchanged a total of 12,739 pieces of mutilated

banknotes valued at K87.3 million for clean banknotes at the Bank of

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Zambia’s mutilated currency window compared to 15,620 pieces of

mutilated banknotes with a value of K34.6 million in the previous
quarter. We urge the public to continue to exchange mutilated currency
for clean banknotes either at the Bank of Zambia or commercial banks.

Currency Awareness and Sensitisation

• During the period under review, the Bank undertook Currency and
National Payment Systems Awareness and Sensitisation Campaigns in
Lusaka, Kafue, Chongwe, Luangwa, Kabwe and Chibombo. During the
campaigns, the Bank disseminated information on issues, such as, the
proper storage and handling of banknotes, the recognition of security
features on banknotes by the public and how to guard against
counterfeits.

• The Bank also sensitized the public regarding available payment

mechanisms under the national payment system. The general public is
advised that these campaigns will be conducted on a regular basis to
ensure that all parts of the country are adequately covered.

Lusaka Currency Survey

• In September 2008, the Bank conducted a survey in Lusaka to assess the

availability, quality and sources of middle and low value banknotes in
circulation. During the survey, major cash handlers, such as, retailers,
market vendors, restaurants and some commercial banks at Manda Hill,
Arcades and in Kabulonga, Woodlands, Chilenje, Kabwata, City Centre
and Matero were targeted.

• The feedback provided by the respondents was useful as it provided

information pertaining to the cash requirements of the public for its
various cash transactions and the apparent gaps and concerns that regard
the availability of middle and low value banknotes in circulation.

• The Bank of Zambia therefore wishes to advise the general public that it
intends to undertake such surveys on a regular basis in the various parts
of the country as way of interacting with the public on issues affecting
use of banknotes in Zambia.

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Designations of Payment Systems

• The Bank of Zambia designated eight institutions as payment system

businesses, having met the requirements for designation out of the eleven
applications that were considered during the period under review. The
remaining applications are still under consideration.

• The Bank of Zambia would like to urge all organisations involved in the
provision of payment services such as Money Transfer services, Mobile
Phone Payment services, Payment Card schemes that have not yet
applied for designation to do so immediately.

National Switch Project

• The Bank of Zambia in conjunction with stakeholders has been involved

in a project to implement a National Switch. The Request For Proposal
(RFP) was issued by the Zambia Electronic Clearing House Limited
which is the implementing institution and 5 selected bidders responded to
the RFP. Following the bid submissions, a technical evaluation was
conducted and a financial proposal evaluation is due to commence soon.

• The switch will serve as a gateway that will link consumers and
merchants by means of e-payment products. The implementation of the
switch should also significantly reduce the transaction cost for electronic
payments. It is expected that the reduction in transaction costs will
encourage more people to use electronic payment methods.

INFLATION OUTLOOK FOR THE FOURTH QUARTER OF 2008

• During the fourth quarter, inflationary pressures may arise from the
following factors:

1) The increase in Government expenditure arising mainly from

presidential elections and the higher subsidy on the Fertiliser Support
programme;

2) Lower seasonal supply of fresh vegetables, maize, cereals and tubers

which is typical during the last quarter of the year; and

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3) Pass through effects of the recent depreciation in the exchange rate of

the Kwacha against the US dollar.

• The Bank of Zambia will continue to monitor these developments and

undertake appropriate monetary policy actions to contain inflationary
pressures.

Bank of Zambia 29