The International Monetary Fund has charged that Nonperforming loans (NPLs) among Zambian banks have risen and private sector credit growth has turned negative, due to the severe pressures of 2015–16.
In its Financial System Stability Assessment Country Report for Zambia, the IMF says the pressures included slower economic growth, sharply lower copper prices, electricity shortages, a very tight monetary policy, and mounting fiscal arrears and severe fiscal funding pressures.
According to the stress tests carried out by the IMF, as of December 2016, total loans amounted to 36.0 percent of total system assets and the NPL ratio was 9.7 percent of gross loans.
It showed that loan-loss reserves were high, at about 71.5 percent of NPLs and loan growth had reversed to 11.1 percent.
The Fund stated that monetary policy had contributed to the financial stress by very tight liquidity and use of administrative measures that shifted costs and risks to the banking system.
The IMF however noted that the pressures have eased considerably in recent months.
“Most of the administrative monetary measures were unwound in November 2016 and monetary policy has been considerably eased since March 2017. Recent good rainfall has eased electricity shortages and a bumper crop harvest is expected. Fiscal funding pressures have only been partly addressed,” the report said.
Looking ahead, the IMF said the Zambian the financial system faces considerable risks, owing to high dependence on copper exports, rising public debt and funding pressures, and an uncertain monetary policy regime.
It feared that a sharper-than-expected global slowdown may lead to copper price declines and additional pressures on government finance and the exchange rate.
The Fund says a lack of fiscal adjustment may worsen government payments arrears, further impacting asset quality.
“Portfolio capital inflows have recovered following the elections and expectations of a major fiscal adjustment. An outdated legal and regulatory framework has become an increasing handicap to the financial sector. Stress tests suggest that banks are resilient to credit and liquidity stress,” it said.
“In the scenario stress tests, where NPL ratios increased to about 24 percent, total capital adequacy ratios only fell to about 16 percent. However, the tests show that foreign-owned banks—which comprise some 80 percent of banking sector assets—place significant liquidity abroad (largely with their parent banks), which leaves them vulnerable to liquidity concentration risks.”
It added, “A 10 percent 5-day aggregate deposit outflow undermined the liquidity of 11 banks (79 percent of banking system assets), if funds placed with foreign banks are not immediately available due to home country ring fencing or bail-in rules.”
The IMF charged that financial supervision is not fully effective due to an increasingly out-of-date legal and regulatory framework, data limitations, and a severely under-resourced supervisor.
It also observed that staffing shortages at the Bank of Zambia (BoZ) have led to large gaps in timely onsite inspections at banks and deposit-taking nonbanks.
“These issues are now being addressed. Offsite supervision requires greater analytical content to inform risk assessment and guide onsite inspections. Further, there is insufficiently broad monitoring of concentration risk, especially as regards country and transfer risks of liquidity placed abroad by banks,” it said.