Introduction

Consistent with its forward looking monetary policy framework the Bank of Zambia (BoZ) is continuously enhancing the availability, accessibility and use of relevant economic data for policy analysis and research.  Following the implementation of a publication calendar for Balance of Payments (BoP) Statistics in 2018, BoZ will forthwith add Zambia's International Investment Position (IIP) Statistics to the Bank's statistical publications, including a release and revision calendar. This is aimed at providing stakeholders with extra information for the analysis of external sector performance. The first publication will cover annual data from 2015 to 2017 and quarterly data from Q1 2017 to Q2 2018. Thereafter, publications will follow the dates on the release calendar. The Bank's website at www.boz.zm is the primary platform for the publications.  

In the last decade, Zambia's exposure to the international capital and financial markets has increased, as evidenced by the issuance of Eurobonds and increased foreign direct investment flows. This has necessitated the need for quality statistics on financial flows and stocks between residents and nonresidents. To meet this challenge, the Bank has enhanced its capacity to compile and publish reliable and accurate International Investment Position (IIP) statistics with the support of the International Monetary Fund (IMF) through Technical Assistance (TA) missions.  In this regard, BoZ Staff have worked closely with the IMF personnel in redesigning survey instruments and implementing new robust methods of capturing and synthesizing external sector data used in the compilation of the IIP.

The Analytical Framework for Analysing External Sector Performance

External sector data are coherently summarized and presented in two accounting frameworks - the Balance of Payments (BoP) and the International Investment Position (IIP). The BoP is a statement that summarizes economic transactions between residents and non-residents during a specific period. On the other hand, the companion framework, the IIP is a statement that shows at a point in time the value of financial assets of residents of an economy that are claims on non-residents or are gold bullion held as reserves and the liabilities of residents of an economy to non-residents.

Zambia's IIP and BOP statistics are compiled in accordance with the International Monetary Fund's (IMF) Balance of Payments and International Investment Position Manual, sixth edition (BPM6).  In accordance with the BPM 6 manual, Zambia's foreign financial assets and liabilities are classified into five functional categories: direct investment, portfolio investment, other investment, reserve assets and financial derivatives. These categories cover position (stock) data of the following institutional sectors: The Central Bank; Deposit taking corporations except the Central Bank; the General Government; and Other sectors.

Further, each functional category has a set of financial instruments, these are equity and investment fund shares; debt instruments (including trade credits and advances, other accounts payable/receivable, currency and deposits, loans; insurance, pension and standardized guarantee schemes) and other financial assets and liabilities (including monetary gold and employee stock options). These instruments appear in some functional categories but not in others.

In terms of presentation, the IIP is structured to be concise, easy to understand and of analytical relevance. To achieve this, the IIP shows all the functional categories but in some instances, the data for some institutional sectors within these categories are aggregated. For example, in the other investments functional category, the IIP explicitly shows the stock of external loans of the General Government but aggregates the loans for the rest of the institutional sectors. The Government's external loans are shown because the stakeholders may need this information for the analysis of the Government's finances.

In addition to showing the financial asset and liability positions, the IIP states Zambia's net financial position with non-residents (See Table). The net position could be positive or negative or zero (when the assets and liabilities are in equal quantities). A negative net IIP position would entail that Zambia's financial liabilities to non-residents exceeds the holding of foreign assets by residents and the converse is true. Importantly, it must be noted that the IIP does not give the economic motivations behind the financial positions. However, the IIP and the BOP statistics provide stakeholders with information that can be used to analyse Zambia's external sector performance, when used with other data.

The Table 1 (below) shows that Zambia's net IIP position in the second quarter of 2018 was negative US$26,714.8 million compared to negative US$27,228.7 million in the first quarter of the same year. The outturn was mostly due to an increase in the holdings of foreign financial assets by residents, reflecting higher holdings of reserve assets, currency and deposits; and direct investment assets. An abridged version of the IIP is presented below and the detailed IIP can be accessed from the BOZ website (www.boz.zm).

Table 1: Zambia’s International Investment Position (US Millions)

Source: Bank of Zambia

In general, a negative net IIP position does not necessarily imply an unfavorable performance of the external sector; instead, it may signal that non-residents are increasingly holding higher amounts of financial instruments issued by Zambia. There may be a variety of reasons for this outturn. For instance, higher direct investments inflows and higher holdings of Government Bonds and Treasury Bills could be due to higher confidence in the domestic economy making non-residents acquire more of Zambia's financial instruments. On the other hand, this would also mean that residents are increasingly resorting to external financing. Thus, any analytical work must determine the underlying economic motivations behind these positions.

Key Issues related to the International Investment Position

Statutory Authority for Compilation of the IIP

The compilation and publication of the IIP by BoZ is drawn from the provisions of the Bank of Zambia Act (1996) which provides for the monitoring of BoP transactions. The Act contains provisions on data provider's disclosure requirements and obligation of the Bank of Zambia employees to observe confidentiality concerning the data.

Residents and Non Residents

As stated in the BPM6 manual, Zambia's IIP statistics takes account of only those assets and liabilities of Zambian residents that represent claims or liabilities to non-residents are recorded. Residents of Zambia include households, corporations and Government, and or, those that have a center of economic interest in the economy. This includes those that engage and intend to engage in economic activities on a significant scale from some location that is dwelling, place of production or other premises within Zambia. This is irrespective of their nationality. Students and employees of embassies are exempt from the residence requirement. Therefore, Zambian students and their families who reside abroad are considered residents and foreign embassy employees are considered non-residents. Non-residents mean all parties except residents.

Data Sources

The main source of the IIP data is the Private Capital Flows (PCF) surveys, conducted on a quarterly and annual basis by BoZ.  Other sources are Bank of Zambia Monetary and Financial survey which includes external assets and liabilities data of the central bank, commercial banks and other financial corporations. Ministry of Finance for assets and liabilities of general government and multilateral datasets mainly the International Banking Statistics (IBS) produced by the Bank for International Settlements (BIS). The data sources provide monthly, quarterly and annual information.

Valuation and Recording of Assets and Liabilities in IIP

Valuation is based on market prices for all assets and liabilities as such positions are regularly revalued to actual market prices (Bonds and Shares). However, nominal valuation is used for positions in non-negotiable instruments such as loans, deposits, other accounts payable/accounts receivable.  Equity holdings in the direct investment category are entered as own funds at book value in the books of the direct investment enterprise.

Since IIP represent data as of a specific point in time, the recording of the financial items is based on the principle of accrual accounting. That is claims and liabilities arise when there is a change of ownership between residents and non-residents evidenced by transaction where financial assets have been created, exchanged, transferred or extinguished. In case of change of ownership, the change is considered to have accrued at the time, the parties recorded the transactions in their books or accounts.

Classification of IIP

Individual statistical items are grouped according to functional type of investment (direct investment, portfolio investment, financial derivatives, other investment and reserve assets for assets only) and are broken down into various financial instruments. These are equity and investment fund shares; debt instruments (including trade credits and advances, other accounts payable/receivable, currency and deposits, loans; insurance, pension and standardized guarantee schemes) and other financial assets and liabilities (including monetary gold and employee stock options). These instruments appear in some functional categories and not in others. Further, the functional categories are separated by institutional sector and instruments are classified as long or short term depending on whether the original maturity is one year or more, or less than a year. The IIP and the Financial Account of the BoP take the same classification to make it easier for users to compare positions and transactions for items in question.

Definition of Functional Categories [I]

a.       Direct Investment

Direct investment indicates the lasting interest of a resident entity in one economy (the direct investor) in an entity resident in another economy (the direct investment enterprise). The term "lasting interest" implies an investor having a significant degree of influence in the management of the enterprise with ownership of a minimum of 10% of ordinary shares or voting power in the direct investment enterprise. This is classified by direction of investment meaning direct investment abroad and direct investment into Zambia as the reporting economy. The Direct Investment abroad includes claims and liabilities to Direct Investment Enterprises whilst Direct Investment in Zambia (reporting economy) includes its claims and liabilities to direct investors. Direct investment is made up of equity capital including reinvested earnings and other capital (intercompany debt).  The stock data in the IIP under Direct Investment cover all claims and liabilities between direct investors and direct investment enterprises with the exception of financial derivatives and affiliated financial intermediaries.

b.       Portfolio Investment

This covers financial instruments in the form of equity and debt securities usually traded or tradable in the financial markets. Debt securities are in the form of bonds and notes and money market instruments. Equity securities are classified as portfolio investment if the shareholding equals less than 10% in the company concerned. Equity holdings exceeding 10% are classified as direct investment. Investments in equity securities are usually short term and unlike direct investment are not intended to exert control over the management or policies of the company. Investment fund shares are financial instruments that give the investor a claim on a portion of a collective investment fund. All owners of the fund shares have the same right to the funds income and assets in proportion to their holding.

c.        Derivatives

 Financial derivatives are financial instruments whose value is dependent on the price of another underlying asset. Financial derivatives are different from other types of assets because they generally involve transfer of risk (for example interest rate risk, exchange rate risk, equity and commodity price risks, credit risks among others) rather than the provision of capital or other financial assets. Financial derivatives fall into the following categories Options and Forward contracts. Options give the purchaser the right to buy or sell the underlying asset at a specified price (the strike price) by a specified date. Forward contracts are unconditional contract wherein two counterparties agree to exchange a specified quantity of an underlying asset at an agreed strike price on a specified date.

d.       Other Investment

This is a residual category for items other than those covered in direct investment, portfolio investment, financial derivatives and reserve assets. Falling under this category are the following: other equity; currency and deposits; loans; insurance; pension, and standardized guarantee schemes; trade credit and advances; other accounts payable and receivable; and SDR allocations (SDR holdings are included under reserve assets).

e.        Reserve Assets

These are monetary assets that are readily available to and under the control of the central bank for BoP or other purposes. Classification distinguishes SDRs, reserve position in the IMF, foreign exchange currency and other claims. Foreign exchange positions is split into currency and deposits (broken into those held with Central Bank and those with Commercial Banks) and financial derivatives. Reserve assets must be foreign-denominated assets and claims against non- residents.

Integrity of Data

A comprehensive annual data collection exercise (the Private Capital Flows Survey) is undertaken for preparation of statistics and data are collected from the major economic entities. The reliability of the data is dependent on complete, correct and timely data submissions to the central bank. However, circumstances for data providers may vary and as such for example, some enterprises covered in the survey cannot provide final figures until after their annual accounts have been prepared usually 6 to 9 months after the end of their fiscal year. Therefore, there could be a 9-month lag before final numbers are included in the statistics. However, the Bank of Zambia collects quarterly data from large enterprises that have business with non- residents.

Schedule for Revisions

The statistics are revised as new information is received and outlined in a published release and revision calendar (Table 2). If new information of significance for the statistics is, received attempts are made to update the statistics as soon as possible. The revisions are shown in the Release Calendar below:

Table 2: Release and Revision Calendar

INTERNATIONAL INVESTMENT POSITION (IIP) STATISTICS RELEASE CALENDAR FOR 2022

[i] The functional categories (Direct Investment, Portfolio Investment, Derivatives, Other Investment and Reserve Assets) are explained as defined in the International Monetary Fund's (IMF) Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6).