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Caleb M. Fundanga Governor - Bank of Zambia

23 January, 2009, Siavonga

Bank of Zambia

FINANCIAL SECTOR DEVELOPMENT AND POVERTY REDUCTION

Presentation to the Zambia UN Country Team Annual Retreat

Table of Contents

I. Introduction

II. Recent Economic Developments

III. Financial Sector Developments

IV. Implications for Poverty Reduction

V. Collaboration with United Nations

VI. Conclusion

Bank of Zambia

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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

I. Introduction Bank of Zambia

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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.

II. Recent Economic Developments(Real GDP) Bank of Zambia

II. Recent Economic Developments (Real GDP)

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2001 2002 2003 2004 2005 2006 2007

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

GDP Growth Rate % GDP Per Capita US $

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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.

II. Recent Economic Developments(Inflation) Bank of Zambia

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II. Recent Economic Developments(Inflation) Bank of Zambia

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

Country Jan 08Feb08

Mar 08

Apr 08 May 08Jun 08

Jul 08

Aug 08

Sep 08

Oct08

Nov08

Dec08

USA 4.3 4.0 4.0 3.9 4.2 5.0 5.6 5.4 4.9 3.7 1.1 *

EURO ZONE 3.2 3.3 3.6 3.3 3.7 4.0 4.1 3.8 3.6 3.2 2.1 1.6

UK 2.2 2.5 2.5 3.0 3.3 3.8 4.4 4.7 5.2 4.5 4.1 *

JAPAN 0.7 1.0 1.2 0.8 1.3 1.9 2.4 2.5 2.1 1.7 * *

SOUTH AFRICA 9.3 9.8 10.6 11.1 11.7 12.2 13.2 13.6 13.1 12.1 12.3 *

BOTSWANA 8.4 9.0 9.8 11.1 12.1 14.5 15.0 15.1 14.0 13.1 15.1 13.7

KENYA 18.2 18.9 19.1 26.6 31.5 29.3 26.5 27.6 28.2 28.4 29.4 27.7

TANZANIA 8.6 8.9 9.0 9.7 9.1 9.3 9.5 9.8 11.6 11.8 12.3 *

UGANDA 7.4 7.8 8.5 10.7 11.8 12.0 13.7 15.6 15.2 14.5 14.9 14.2

GHANA 12.8 13.2 13.8 15.3 16.9 18.4 18.3 18.1 17.9 15.2 17.4 18.1

MOZAMBIQUE 10.6 13.0 12.1 11.2 10.1 10.4 10.5 10.6 10.0 * * *

NIGERIA 8.6 8.0 7.8 8.2 9.7 12.0 14.1 12.4 13.0 14.714.8 *

ZAMBIA 9.3 9.5 9.8 10.1 10.9 12.1 12.6 13.2 14.2 15.215.3 16.6

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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.

II. Recent Economic Developments(Interest Rates) Bank of Zambia

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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.

II. Recent Economic Developments(External Sector)

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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)

979.7 1,209.9

1,843.7 2,209.8 3,826.7 4,448.5 4,592.8

Metal ExportsCopperCobalt

611.4521.4

90.0

794.7609.8184.8

1,358.81,074.6

284.2

1,644.21,485.9

158.2

3,084.12,380.0

146.1

3,621.93,406.5

215.4

3,709.33,407.2

302.1

Non – Traditional Exports (NTEs)

368.3 415.2 484.9 565.7 742.6 826.6 883.5

II. Recent Economic Developments(External Sector:Table 3: Major Non-Traditional Exports in US $ million (CIF), 2007

Q1- 2008 Q3)

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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

II. Recent Economic Developments(Fiscal Performance)

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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)

III. FINANCIAL SECTOR DEVELOPMENTSOverview

Bank of Zambia

Bank Branch Distribution by Province as at 31st December 2008

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

LuapulaBBZ (1)Cavmont (1)FBZ (1)Zanaco (3)

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

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

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

WesternBBZ (1)FBZ (2)Stanchart (1)Zanaco (2)

North WesternBBZ (1)Cavmont (1)FBZ (3)Investrust (1)Stanbic (1)Stanchart (1)Zanaco (2)

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

LusakaAccess (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)

ATMs Distribution by Province as at 31st October 2008

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25

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146

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71

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NorthernBayport (1)Blue (2)

LuapulaBayport (1)Blue (1)Microfin (1)

EasternBlue (1)Microfin (1)

CentralBlue (1)Unity Finance (1)

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

WesternBayport (1)Blue (1)Microfin (1)

North WesternBayport (1)Blue (1)Microfin (1)Nedfin (1)

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

LusakaBayport (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)

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

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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 stable, sound and market-based financial system that will

support the efficient mobilisation and allocation of financial support the efficient mobilisation and allocation of financial resources necessary to achieve economic diversification, resources necessary to achieve economic diversification, sustainable growth and poverty reductionsustainable growth and poverty reduction.’

III. FINANCIAL SECTOR DEVELOPMENTS FSDP

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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.

III. FINANCIAL SECTOR DEVELOPMENTS FSDP

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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).

IV. IMPLICATIONS FOR POVERTY REDUCTIONBank of Zambia

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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.

IV. IMPLICATIONS FOR POVERTY REDUCTIONBank of Zambia

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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.

V. SUGGESTIONS ON HOW TO WORK WITH UN PROGRAMMES

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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.

VI. CONCLUSIONBank of Zambia

END

For more information on the Zambian economy, visit the Bank of Zambia

Website on:

www.boz.zm

THANK YOU

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Bank of Zambia