Bank of Zambia holds countercyclical capital buffer at 0.00% as climate risks increase

The Bank of Zambia’s Financial Stability Committee maintained the countercyclical capital buffer at 0.00%, despite assessing financial stability risks as higher than in April 2026. Anticipated effects of an El Niño-induced drought and flooding in some areas are the main drivers. Systemic vulnerabilities remain manageable, supported by banks’ adequate capital and liquidity, but drought threatens economic growth and adds to fiscal pressures from exchange rate volatility and refinancing risks. Financial market stress eased as government securities yields fell, liquidity improved and exchange rate volatility declined. However, weak financial intermediation and foreign currency lending remain concerns previously highlighted in April 2025. Current vulnerabilities include concentrated loans and deposits, a rising share of foreign currency credit, and increased nonresident holdings of government securities relative to international reserves. Nonbank institutions remain broadly sound, although concentrated lending to public service workers exposes microfinance institutions to common shocks and liquidity pressures. Insurers, pension funds and collective investment schemes also face market, liquidity and climate risks. Stress tests indicated that a severe drought could raise inflation and tighten financing conditions, slowing deposit and credit growth while increasing nonperforming loans and weakening profitability and capital buffers. Even under that scenario, banking sector capitalization would remain well above the 10% prudential requirement. The committee will adjust its macroprudential stance if financial stability risks intensify. Its next statement is scheduled for April 2027.