Macroeconomic circumstances

by: The Central Bank of Zambia
Extract from KPMG Banking Survey Africa, published by KPMG South Africa

The year was characterised by a number of adverse developments, both in the international economy and domestically, that impacted negatively on the performance of the economy. The decimal performance was largely attributable to the financial crisis that rocked South East Asia, which constitute the largest market of Zambia’s exports. The crisis led to a general decline in trade.

As a result of this general downturn in the global economy, prices for commodities such as base metals and agricultural produce, which are the main exports of a number of African countries such as Zambia, fell sharply. This led to steep reductions in export earnings for these countries, and ultily a decline in economic growth. Similarly, there was very little new investment in both private and public projects worldwide, and in most cases investment decisions were postponed. The declining commodity prices and uncertain global investment climate were some of the principal factors that affected decisions by prospective investors to enter the Zambian copper industry.

As a result of these adverse developments in the international economy, the economy was put under considerable strain. The steep fall in world copper and cobalt prices reduced the metal export earnings by US$310 million, and led to an over all decline of 11% in the mining sector’s contribution to GDP. In addition the low metal prices and uncertain global investment climate resulted in delays in the privatisation of the Zambia Consolidated Copper Mines (ZCCM), which depressed investment activity in the entire economy. Furthermore, the country experienced unfavourable weather largely attributable to the El Nino weather pattern, which resulted in a 6% decline in agricultural production during 1998.

The economy was put under further strain by the withholding of balance of payments support. Combined with the significant reduction of the export earnings, the withholding of balance of payments support put tremendous pressure on the exchange rate, and on the foreign exchange reserves. The Kwacha fell in nominal terms by 69% against the US dollar, and the foreign exchange reserves were drawn down to the barest minimum. The inadequate availability of foreign exchange in the economy also introduced severe inflationary pressures that drove the annual rate of inflation up to 30.6% by the end of 1998.

The GDP fell by 2% in 1998. This lowered the per capita national income by at least 5%. Formal employment also declined by 2% in 1998.

However, there was relatively good progress in the manufacturing sector, which recorded 3% growth. The transport and communication sector also grew by 8%, and the tourism sector expanded as new and better lodging facilities became available. The diversification of the exports and the development of the non-traditional export sector continued in earnest. Equally, the rehabilitation of the national road infrastructure through the National Roads Board, direct funding from the budget and support from the co-operating partners also continued.

The country stuck to the economic reform programme and continued implementing structural and other reforms and serviced the external debt — albeit to the detriment of the spending in social sector and on poverty alleviation.

Development of the banking system

The banking industry during 1998 was stable, except for a bank failure that occurred in the first month of the year. The failure was largely a spill over of a series of bank failures that occurred in 1997. This left the number of operating banks at 16 for the rest of the year.

Despite the adverse economic environment that prevailed in 1998, the banking sector registered a nominal asset growth of 31% from K1,132 billion at the end of December 1997 to K1,483 billion at the close of 1998. Similarly, the asset mix exhibited a slight variation in that balances (foreign currency deposits) with financial institutions abroad increased while investment in securities reduced. This trend was a result of the fall in Kwacha against the US dollar. The overall quality of bank assets was considered fair although a sizeable proportion of loans were considered to be poor quality. This was evidenced by the level of non-performing loans of K109,719 million (December 1997 K89,362 million) which accounted for 8% of the industry total assets, same as December 1997 and 22% (December 1997 24%) of the industry total loans. The later ratios indicate the extent of problems surrounding loan repayments in the sector.

The earnings performance of the industry remained satisfactory. For the year ended 31 December 1998, average return on equity was 30% (1997 28%) while return on assets was 3.2% (3.6% in 1997). Earnings before tax amounted to K47,587 million (December 1997 K40, 702 million) reflecting a nominal increase of 17% (K6,885 million) compared to that of 10% (K3,734 million) the previous year. This earnings record is however, mainly reflective of the performance of a few banks which made supernormal profits. The earnings strength of the sector can be traced to several familiar sources in the last two years, namely: continued strong asset expansion leading to increased interest income, and growing contribution from non-interest revenue sources. In addition, the industry’s net income received a boost of about K90, 000 million from non-recurring exchange gains which represented 36% of operating income.

Among the developments in the sector in 1998 is a pressing operational risk of the year 2000, which arises because some computer hardware and software will be unable to deal corectly with dates beyond 31 December 1999. Left unchecked, the problem would threaten dislocation within banks and in their dealings with customers and counterparties, with potentially serious disruptions to the financial system. For this reason, central banks and other prudential supervisors are taking a close interest in the issue. In this regard, the Bank undertook measures to ensure that banks have their computer systems ready for the century date change by 30 June 1999 to allow six months for testing within each bank and counterparties.

Furthermore, to ensure that banks in our market place are assessed using a common framework, directives were issued. The directives, premised on guidelines published by the Basle Committee under the auspices of the Year 2000 Council are designed to provide for a basis upon which banks should ensure utmost preparedness and a basis for assessment for compliance by ourselves as supervisors.

The Bank of Zambia has undertaken to modernise the payment system in the country. During 1998 significant progress was made towards the implementation of an electronic clearing house which will facilitate for speedier payments in the economy. Since banks are the main agents of national payments, its modernisation brings with it a wide range of risks to the banking sector. In this respect the Bank also began to design legislative framework to provide for integrity and certainty in the modern payment system.

Organisations (23)

BP Tanzania Ltd, Stanbic Bank Zambia Limited, African Commercial Bank Limited, ANZ Grindalays Bank International (Zambia) Limited, Bank of Zambia, Bankers Association of Zambia, Barclays Bank of Zambia Limited, Central Bank of Zambia, Citibank, Credit Union and Savings Association of Zambia, Development Bank of Zambia, Finance Securities Finance Bank, HSBC Equator Advisory Services Limited, Indo-Zambia Bank, Meridien Bank Zambia, Ministry of lands, National Savings and Credit Bank of Zambia, New Capital Bank, Standard Chartered Bank of Zambia Ltd, World Bank