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A N N U a L R E P O R T 2 0 A N N U A L R E P O R T 2 0 1 6 TABLE OF CONTENTS Vision Mission Statement ii Board of Directors iii Senior Management as at 31 December 2016 v Governor's Overview 1 Statement on Corporate Governance 4 1.0 Developments in the Global Economy 6 2.0 Macroeconomic Developments in Zambia 9 2.1 Monetary Developments and Inflation 9 2.2 Financial Markets 15 2.3 Balance of Payments 18 2.4 External Debt 23 2.5 Fiscal Sector Developments 24 2.6 Real Sector Developments 27 3.0 Financial System Regulation and Supervision 32 3.1 Banking Sector 32 3.2 Non-Bank Financial Institutions 41 4.0 Banking, Currency and Payment Systems 54 4.1 Banking 54 4.2 Currency 54 4.3 Payment Systems 57 5.0 Strategy and Risk Management 62 6.0 Human Resource Management 65 7.0 Bank of Zambia Financial Statements for the Year Ended 31 December 2016 68 i 8.0 2016 Annual Statistical Annexures 131 Mining, tourism, and the coming on stream of Mamba Power Plant contributed to improved economic performance in 2016 VISION To be a dynamic and credible central bank that contributes to the economic development of Zambia ii MISSION STATEMENT To achieve and maintain price and financial system stability to foster sustainable economic development REGISTERED OFFICES Head Office Bank of Zambia, Bank Square, Cairo Road P. O. Box 30080, Lusaka, 10101, Zambia Tel: + 260 211 228888/228903-20 Fax: + 260 211 221764 E-mail:[email protected] Website: www.boz.zm Regional Office Bank of Zambia, Buteko Avenue, P. O. Box 71511, Ndola, Zambia Tel: + 260 212 611633-52 Fax: + 260 212 614251 E-mail:[email protected] Website: www.boz.zm BOARD OF DIRECTORS* DR. DENNY H. KALYALYA MR. GILBERT K. TEMBA MR. ESAU S. S. NEBWE GOVERNOR AND VICE CHAIRPERSON iii CHAIRPERSON *All members of the Board are non-executive with the exception of the Chairman BOARD OF DIRECTORS* MS. SIPHIWE NKUNIKA MS. JACQUELINE MUSIITWA MR. FREDSON YAMBA iv *All members of the Board are non-executive with the exception of the Chairman SENIOR MANAGEMENT AS AT 31 DECEMBER 2016 DR. DENNY H. KALYALYA GOVERNOR v DR. BWALYA K. E. NG'ANDU DR. TUKIYA KANKASA-MABULA DEPUTY GOVERNOR – OPERATIONS DEPUTY GOVERNOR - ADMINISTRATION MR. CHISHA MWANAKATWE SENIOR DIRECTOR - SUPERVISORY POLICY SENIOR MANAGEMENT - OPERATIONS AS AT 31 DECEMBER 2016 DR. FRANCIS CHIPIMO DR. MULENGA EMMANUEL PAMU MS. GLADYS MPOSHA DIRECTOR - ECONOMICS DIRECTOR - FINANCIAL MARKETS DIRECTOR - BANK SUPERVISION vi MR. VISSCHER BBUKU MR. FABIAN HARA MR. LAZAROUS KAMANGA DIRECTOR - NON-BANK FINANCIAL DIRECTOR - REGIONAL OFFICE DIRECTOR - BANKING, INSTITUTIONS SUPERVISION CURRENCY AND PAYMENT SYSTEMS SENIOR MANAGEMENT - SUPPORT SERVICES AS AT 31 DECEMBER 2016 MS. NAMWANDI NDHLOVU DR. LEONARD N. KALINDE MR. SIMON SAKALA ACTING BOARD SECRETARY DIRECTOR - LEGAL SERVICES DIRECTOR - RISK AND STRATEGY vii MS. FREDA TAMBA MS. PRUDENCE MALILWE MS. ROSELINE SCOTT DIRECTOR - FINANCE DIRECTOR - INTERNAL AUDIT DIRECTOR - HUMAN RESOURCES MR. DAVID MWAPE MR. EVANS LUNETA DIRECTOR - INFORMATION AND DIRECTOR - PROCUREMENT COMMUNICATIONS TECHNOLOGY AND MAINTENANCE SERVICES GOVERNOR'S OVERVIEW GOVERNOR’S OVERVIEW GOVERNOR’S OVERVIEW This Report reviews developments in the global and Zambian economies as well as operations of the Bank of Zambia (Bank or BoZ) in 2016 in its quest to fulfill the price and financial system stability mandate. The Report also presents the Bank's financial statements for the year ended 31st December 2016 and provides statistical annexures. In 2016, monetary policy faced significant challenges of restoring stability in the foreign exchange market and containing the surge in inflation that began in the fourth quarter of 2015 and pushed annual inflation above 20.0%. In this regard, monetary policy focused on restoring single digit inflation, with an end-year inflation target of 7.7%, and anchoring inflation expectations in single digits over the medium-term. In implementing monetary policy, the Bank continued to be mindful of the need to avoid constraining domestic economic activity severely and to ensure that financial system stability was maintained. In line with the inflation objective, the Bank of Zambia maintained a tight monetary policy stance and kept the Policy Rate at 15.5% throughout the year. To contain the prevailing inflationary pressures during the first half of 2016, the Bank allowed the monetary operating target, the DR. DENNY H. KALYALYA interbank rate, to remain above the Policy Rate corridor. However, to GOVERNOR strengthen the forward looking monetary policy framework and improve financial intermediation to promote economic growth, the Bank removed some quantitative restrictions on commercial banks’ access to central bank liquidity in November, 2016. As liquidity conditions improved, the interbank rate fell and gradually trended towards the Policy Rate and ended the year at 15.8%, down from a high of 26.0% at end-December 2015. Annual overall inflation decelerated sharply to 7.5% in December 2016 from a peak of 22.9% in February 2016, having ended the year 2015 at 21.1%. The sharp fall in inflation reflected mainly the dissipation of the base effect in the fourth quarter, effects of the tight monetary policy stance, and the pass-through from the appreciation and relative stability of the Kwacha against the U.S. dollar. The strengthening of the Kwacha against the US dollar was mainly driven by the recovery in copper prices towards the end of the year, inflows from non-resident investors in Government securities, and constrained aggregate demand due to the tight monetary policy stance. Broad money and credit to the private sector contracted in 2016. The fall in broad money was largely due to the 1 decline in gross international reserves which reduced to US$2.4 billion in 2016 from US$3.0 billion in 2015 mostly on account of external debt service. At US$2.4 billion in 2016, the reserves were equivalent to 3.6 months of import cover. The reduction in lending by banks largely reflected constrained credit conditions on account of a relatively tight monetary policy stance, the removal of caps on lending rates, low risk appetite by banks and rising non-performing loans stemming from shocks to the economy. In this environment, commercial banks raised their lending rates and preferred to lock up funds in Government securities thereby reducing the amount of loanable funds to households and private enterprises. Yield rates on Government securities also edged up, attributed mainly to the increase in Government financing needs, especially higher spending on subsidies for fuel, electricity and agricultural inputs. As a result, the estimated fiscal deficit of 5.8% of GDP exceeded the target of 3.6%. Despite the rise in non-performing loans, the performance of the financial system, especially the banking sector, remained satisfactory in 2016. This was largely on account of a strong capital adequacy position and satisfactory earnings. The liquidity position of the banking sector improved in 2016 due to net Government spending, BoZ purchase of foreign exchange, and the removal of some quantitative restrictions by the Bank of Zambia, which eased access to central bank liquidity. The overall balance of payments deficit reduced to US$187.6 million in 2016 from US$393.3 million in 2015. However, the current account deficit widened to US$819.6 million from US$767.7 million. This was largely due to an increase in interest payments on both sovereign bonds and private sector external debt. The current account deficit was financed mostly by the financial account surplus that resulted from foreign direct investment inflows and the reduction in the acquisition of other investment assets abroad by the private sector. Export earnings, especially from copper, remained subdued largely on account of low export volumes and average realised prices, despite the increase in copper production in 2016. Merchandize imports fell mainly due to subdued domestic economic activity. The average crude oil and agriculture commodity prices declined, with the fall in oil prices being driven by excess supply by OPEC members. Global economic growth slowed down to 3.1% in 2016 from 3.2% in 2015, reflecting mainly lower economic activity in advanced countries. The uncertainty surrounding the impact of Brexit and weaker than expected economic growth in the United States of America, were among the major factors that constrained growth. GOVERNOR’S OVERVIEW Inflation generally trended upwards in advanced economies due to high energy prices, modest recovery in economic activity and the depreciation of the Euro as well as increased food prices. The weakening of domestic currencies of most Sub-Saharan African countries and high food prices due to the drought and unfavourable weather conditions, largely contributed to the rise in inflation in the region. Zambia's real GDP growth for 2016 was estimated at 3.4%, up from 2.9% registered in 2015. The mining, manufacturing, wholesale and retail trade, transport and storage and tourism sectors were the major drivers. Nonetheless, growth in 2016 was constrained by the electricity supply deficit, and the increase in fuel prices, following the removal of fuel subsidies, that raised production and transportation costs. However, the removal of fuel subsidies was expected to support fiscal consolidation and macroeconomic stability over the medium-term. During the year, the Bank of Zambia launched a new Strategic Plan covering the period 2016-2019 under the theme “Excellence in Execution”. The main objectives of the Plan were in the areas of price stability, financial system stability,
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