Bank of Zambia

FINANCIAL SECTOR DEVELOPMENT AND POVERTY REDUCTION Presentation to the Zambia UN Country Team Annual Retreat

Caleb M. Fundanga Governor - Bank of Zambia 23 January, 2009, Siavonga

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Table of Contents

Bank of Zambia I.

II.

III.

IV.

V.

VI.

Introduction Recent Economic Developments Financial Sector Developments Implications for Poverty Reduction Collaboration with United Nations Conclusion

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I. Introduction

Bank of Zambia  The Zambian economy has performed relatively well in recent years.

 Economic reforms have yielded macro-economic stability  Further financial deepening and inflow of capital needed to expand productive capacity  Challenge remains to uplift living standards of Zambians

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II. Recent Economic Developments

Bank of Zambia

(Real GDP)

 Real GDP averaged about 5.1% per annum between 2001-2007.  Growth driven by mining, tourism, construction, transport and agricultural sectors.

 GDP per capita rose from US$360.5 in 2001 to US$934.5 in 2007  Due to the global financial crisis and subsequent recession, GDP growth is projected at 5.8% in 2008.

4

II. Recent Economic Developments (Real GDP)

7 6 5 1 0 4 3 2

Chart 1:GDP Growth Rates (%) and GDP Per Capita US $

2001 2002 2003 2004 GDP Growth Rate % 2005 2006 2007 GDP Per Capita US $ 1000 900 800 700 600 500 400 300 200 100 0

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II. Recent Economic Developments

Bank of Zambia

(Inflation)

 Zambia attained single digit inflation in 2006 and 2007 after 24 years.

 Appropriate monetary and fiscal policies credited for this achievement.

 However, due to external shocks (food, fertiliser & fuel and financial crisis effects), inflation rose to 16.6% in 2008.  This was the general trend in other countries as well.

6

II. Recent Economic Developments

Bank of Zambia

(Inflation)

25 20 15 10 5 0 65 60 55 50 45 40 35 30

Chart 2: Annual Inflation and Commercial banks Average lending rate ( %)

Annual Inflation Avg Lending Rate

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Table 1: CPI Inflation for Selected Countries / Regions, Jan 08 - Dec 08 Country

USA EURO ZONE UK JAPAN SOUTH AFRICA BOTSWANA KENYA TANZANIA UGANDA GHANA MOZAMBIQUE

Jan 08 Feb 08 Mar 08 Apr 08 May 08

4.3

3.2

2.2

0.7

9.3

8.4

18.2

8.6

7.4

12.8

10.6

4.0

3.3

2.5

1.0

9.8

9.0

18.9

8.9

7.8

13.2

13.0

4.0

3.6

2.5

1.2

10.6

9.8

19.1

9.0

8.5

13.8

12.1

3.9

3.3

3.0

0.8

11.1

11.1

26.6

9.7

10.7

15.3

11.2

4.2

3.7

3.3

1.3

11.7

12.1

31.5

9.1

11.8

16.9

10.1

NIGERIA ZAMBIA 8.6

9.3

8.0

9.5

7.8

9.8

8.2

10.1

9.7

10.9

Jun 08

5.0

4.0

3.8

1.9

12.2

14.5

29.3

9.3

12.0

18.4

10.4

12.0

12.1

Jul 08

5.6

4.1

4.4

2.4

13.2

15.0

26.5

9.5

13.7

18.3

10.5

Aug 08

5.4

3.8

4.7

2.5

13.6

15.1

27.6

9.8

15.6

18.1

10.6

14.1

12.6

12.4

13.2

Sep 08

4.9

3.6

5.2

2.1

13.1

14.0

28.2

11.6

15.2

17.9

10.0

13.0

14.2

Oct 08

3.7

3.2

4.5

1.7

12.1

13.1

28.4

11.8

14.5

15.2

* 14.7

15.2

Nov 08

1.1

2.1

4.1

* 12.3

15.1

29.4

12.3

14.9

17.4

* 14.8

15.3

Dec 08

* 1.6

* * * 13.7

27.7

* 14.2

18.1

* * 16.6

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II. Recent Economic Developments

Bank of Zambia

(Interest Rates)

 BoZ has taken measures to reduce the high cost of borrowing over the years  Reduction of statutory reserve ratios  Containing inflation  In addition, Govt. also adopted prudent fiscal policies  Consequently, Commercial Bank lending rates have been declining (54.6% in 2001 to 24.4% in 2007)  With rising inflation in 2008, Av. Lending rates increased to 26.9% at end-December 2008.

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II. Recent Economic Developments (External Sector)

Bank of Zambia  Strong improvement in external sector performance exhibited by:  Build-up of GIR to 3.6 months of import cover in 2007 from 0.9 months in 2001.

 Surplus trade balances & reduction in current account deficits as % of GDP  Relative stability in Kwacha exchange rate  Good performance attributed to :  High copper earnings  Increased NTEs  HIPC Debt relief  Increased budget support from donors  However, overall BoP narrowed in 2008 and a sharp depreciation in the exchange rate was observed in the second half.

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II. Recent Economic Developments

(External Sector:

Table 2: Trade Statistics

)

Bank of Zambia

2002 2003 2004 2005 2006 2007 2008

Total Exports (US$’m) Metal Exports Copper Cobalt Non Traditional Exports (NTEs) – 979.7 1,209.9

611.4

521.4

90.0

368.3

794.7

609.8

184.8

415.2

1,843.7

484.9

2,209.8

1,358.8

1,074.6

284.2

1,644.2

1,485.9

158.2

565.7

3,826.7

3,084.1

2,380.0

146.1

742.6

4,448.5

4,592.8

3,621.9

3,406.5

215.4

826.6

3,709.3

3,407.2

302.1

883.5

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II. Recent Economic Developments

(External Sector:

Table 3: Major Non-Traditional Exports in US $ million (CIF), 2007 Q1- 2008 Q3

)

Copper Wire Cane Sugar Burley Tobacco Cotton Lint Electrical Cables Fresh Flowers Cotton Yarn Fresh Fruits Vegetables Gemstones Gasoil/Petrol eum Oils Electricity Other Exporter Audit Adjustor

Total NTEs 2007 Q1

36.8

13.7

10.5

7.0

30.3

12.0

4.1

4.9

5.7

3.3

3.3

52.1

-22.7

161.1

2007 Q2

53.4

14.7

18.9

7.5

42.8

7.0

3.5

7.6

11.4

8.6

1.7

67.6

-22.7

221.8

2007 Q3

59.0

21.5

18.2

14.5

31.3

6.6

2.8

8.2

6.8

4.9

1.3

84.8

-22.7

237.0

2007 Q4 2007 Total

46.2

24.5

15.6

8.2

46.1

12.6

2.1

3.9

4.8

4.1

1.0

60.4

-22.7

195.4

74.4

63.2

37.1

150.5

38.3

12.4

24.6

28.6

20.9

7.3

265.0

-91.0

2008 Q1

4.6

2.7

6.0

0.8

101.9

-6.6

28.1

14.3

4.2

6.6

8.1

6.3

4.5

206.7

826.6

181.5

2008 Q2

10.2

4.2

10.1

0.7

96.3

-6.6

58.7

1.5

21.8

6.1

27.1

6.5

2.1

8.1

12.6

4.1

0.6

125.4

-6.6

46.7

34.5

25.2

8.8

9.5

4.0

1.0

2008 Q3 2008 Q4

30.3

18.8

25.2

14.9

8.7

7.4

1.0

3.3

5.9

10.8

1.0

118.2

-6.6

2008 26.2

25.3

31.0

3.0

392.1

-26.3

163.8

69.1

76.4

36.5

53.4

24.2

8.7

238.8

274.0

238.9

883.5

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II. Recent Economic Developments (Fiscal Performance)

Bank of Zambia  Govt. budget has continued performing well in recent years:  Lower budget deficits  Reduced Govt. borrowing  However, unexpected expenditure such as presidential by-elections put enormous pressure on budget in 2008  Prudent budget execution results in release of domestic resources for poverty alleviation programmes

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III. FINANCIAL SECTOR DEVELOPMENTS Overview

Bank of Zambia  Since 2002, financial sector has been stable and experienced growth:   No bank closures Satisfactory performance  Adequate capital positions, earnings and liquidity  Branch network expansions (223 in 2008 from 173 in 2004)  Increased ATM installations (295 in 2008 from 54 in 2004)  (see Chart and maps)  Govt. has restructured or re-capitalised most state owned NBFIs  Micro Finance Iinstitutions increasingly filling the financing gap for SMEs (See Maps)

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Bank Branch Distribution by Province as at 31st December 2008

Luapula

BBZ (1) Cavmont (1) FBZ (1) Zanaco (3)

Northern

BBZ (3) Cavmont (2) FBZ (8) Stanchart (1) Zanaco (3)

Copperbelt

Abc (1), BBZ (13) Cavmont (3), Citi (1) FBZ (6), FAB (2) Indo (3), Intermarket (1) Investrust (2), Stanbic (5) Stanchart (6), Zanaco (9)

17 6 North Western

BBZ (1) Cavmont (1) FBZ (3) Investrust (1) Stanbic (1) Stanchart (1) Zanaco (2)

10 52 15 Eastern

BBZ (4) Cavmont (1) FBZ (2) Indo (1) Investrust (2) Zanaco (5)

Western

BBZ (1) FBZ (2) Stanchart (1) Zanaco (2)

6 15 71 Central

BBZ (4) FBZ (2) Indo (2) Stanbic (1) Zanaco (6)

31 Southern

BBZ (10) FBZ (6) Indo (1) Stanbic (1) Stanchart (3) Zanaco (10)

Lusaka

Access (1), ABC (1), BOC (1) BBZ (15), Cavmont (4), Citi (1) FBZ (14), FAB (1), Indo (5), Intermarket (2) Investrust (4), Stanbic (4) Stanchart (5), Zanaco (13)

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ATMs Distribution by Province as at 31st October 2008

5 9 25 4 71 15 146 9 11 16

Microfinance Institutions Branch Distribution by Province as at 31st December 2008

Luapula

Bayport (1) Blue (1) Microfin (1)

Northern

Bayport (1) Blue (2)

Copperbelt

Bayport (5), Blue (2) Microfin (2), Nedfin (5) Cetzam (3), Meanwood(3) Unity Finance (2)

3 3 North Western

Bayport (1) Blue (1) Microfin (1) Nedfin (1)

Eastern

Blue (1) Microfin (1)

4 22 2 Western

Bayport (1) Blue (1) Microfin (1)

3 2 18 Central

Blue (1) Unity Finance (1)

6 Southern

Bayport (2) Blue (2) Cetzam (1) Elpe Finance (1)

Lusaka

Bayport (1), Blue (1), Microfin (1) Nedfin (1), Butala (1), Bomach (1), Capital Solutions (1) Cetzam (1) Elpe(1), Finca (1) Letshego (1) Meanwood (1), Unity (1) Mtawila (1) Microbankers (1) Royal MFI (1) Pulse (1), Yakabutal (1), Pelton (1)

III. FINANCIAL SECTOR DEVELOPMENTS FSDP

Bank of Zambia  The World Bank/IMF led FSAP of 2002 highlighted various weaknesses.

 Consequently, Govt. launched the FSDP in 2004  FSDP aims at achieving a 

‘stable, sound and market-based financial system that will support the efficient mobilisation and allocation of financial resources necessary to achieve economic diversification, sustainable growth and poverty reduction .’

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III. FINANCIAL SECTOR DEVELOPMENTS FSDP

Bank of Zambia  Achievements under FSDP:  Attainment of macro-economic stability;  Increase in number of financial institutions;  Sovereign rating sought;  Credit reference bureau established;  Law review; and  Assessment of levels of financial access in Zambia (Fin Scope Demand Side and Supply Side studies).

 Main challenges in implementation of FSDP have been funding constraints and lengthy tendering processes.

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IV. IMPLICATIONS FOR POVERTY REDUCTION

Bank of Zambia  Zambia aims to attain middle income country status by 2030.

 Vision 2030 and FNDP are instruments to attain this goal.

 Growth of financial sector is vital in order to facilitate increased private and public sector investments.

 Hence current Financial Sector policies are aimed at enhancing economic development and poverty reduction.

 A strong financial system will provide increased and affordable access to finance (financial inclusion).

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IV. IMPLICATIONS FOR POVERTY REDUCTION

Bank of Zambia  Domestic savings needed for increased private investment.

 Greater impact on poverty requires higher employment.  BoZ is encouraging banks and MFIs to develop more innovative services to suit the needs of the informal sector.

 BoZ is encouraged with response particularly of commercial banks in reaching out to the previously unbanked.

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V. SUGGESTIONS ON HOW TO WORK WITH UN PROGRAMMES

Bank of Zambia  There is scope for the BoZ to collaborate with the UN in enhancing the contribution of the financial sector to poverty reduction.

 Some of the areas of possible cooperation include: a) Assistance in development of inclusive financial system strategies; b) Collaboration in financial literacy campaigns; and c) Access of Zambian micro finance institutions to the MicroLead Fund under the United Nations Capital Development Fund.

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VI. CONCLUSION

Bank of Zambia  Attainment of sustainable development and poverty reduction remains a major challenge for Zambia.

 A strong financial system is vital to the economic empowerment of the vulnerable in society.

 A lot has been achieved so far in the development of the financial sector but much more remains to be done.

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END Bank of Zambia

For more information on the Zambian economy, visit the Bank of Zambia Website on: www.boz.zm

THANK YOU

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