BoZ’s financial stability committee reports lower risks, cautions on lingering vulnerabilities

The Bank of Zambia (BoZ) says its Financial Stability Committee (FSC) has observed a reduction in financial stability risks since the release of the October 2024 Financial Stability Report.

According to a statement published on the BoZ website and reviewed by Zambia Monitor on Sunday, the FSC meeting held in April 2025 attributed the improved outlook to reduced stress in financial markets and a more favourable macroeconomic environment.

Committee Chairperson and BoZ Governor, Dr. Danny Kalyalya, however, highlighted concerns about persisting vulnerabilities that could undermine financial stability.

These included the ongoing electricity supply deficit, low levels of financial intermediation, a high share of foreign-currency-denominated loans, and widening maturity mismatches in the financial sector.

The FSC also noted risks stemming from escalating global trade tensions, which have created significant uncertainty with potential negative implications for financial systems.

“Financial markets risk is assessed to have eased as asset valuations rose and market volatility declined,” said Kalyalya. “Yields on government securities fell as liquidity conditions improved, and equity prices rose in line with stronger economic activity.”

He added that improved liquidity also led to lower volatility in the money market, while exchange rate volatility subsided due to central bank interventions and reduced demand pressures.

Kalyalya further stated that macroeconomic risks had moderated as economic activity exceeded expectations and sovereign risk declined.

Additionally, the credit-to-GDP gap, a key indicator used in Basel III risk assessments, contracted further and remained below the 2.0 percentage point threshold, suggesting reduced risk from private sector credit growth.

However, he warned that sustained low private sector credit growth and limited financial intermediation could compromise financial stability.

On the banking sector, the FSC noted that institutions remain adequately capitalised and resilient to shocks.

But concerns remain over the quality of credit portfolios due to an increasing share of foreign-currency-denominated loans and heightened vulnerability to interest rate risk arising from maturity mismatches.

The non-bank financial sector also presents challenges. While insurance corporations saw revenue growth amid economic recovery, profitability remained low. Pension funds, meanwhile, continued to grapple with high levels of contribution arrears, posing liquidity risks.

Despite these concerns, the FSC maintained the countercyclical capital buffer (CCyB) at 0.0 percent, citing strong capital positions among banks and the subdued credit-to-GDP gap, which indicates room for further credit expansion.

The next FSC statement is expected in October 2025.

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