By Caleb M. Fundanga, Governor - Bank of Zambia @ The Philadelphia Federal Reserve Bank

1. Bank of Zambia By Caleb M. Fundanga, Governor - Bank of Zambia @ The Philadelphia Federal Reserve Bank 14 October, 2008 THE CONDUCT OF MONETARY POLICY IN ZAMBIA

2. The Conduct of Monetary Policy in Zambia and Zambia’s Investment Opportunities • Table of Contents • Basic Information on Zambia • The Conduct of Monetary Policy in Zambia • Conclusion

3. I. Basic Information on Zambia ZAMBIA Area: 752,614 sq km Population Estimate:12.0million in 2007 Independence: 1964 GDP: US $12,292.5 m: 2007 estimate GDP per Capita: US $1,024.4 DR Congo Angola Tanzania ZAMBIA Malawi Mozambique Namibia Zimbabwe Botswana

4. II. The Conduct of Monetary Policy in Zambia Monetary Policy Before 1992 Economic Reforms • Prior to 1992, monetary policy targeted multiple objectives. • This was consistent with the multiple roles the Bank of Zambia played in the economy at the time. • In some cases this was in conflict with the mandate of price stability. • Monetary policy fundamentally engaged direct instruments, such as: • directed credit; • administered interest rates; • core liquid-asset ratios and reserve requirements and • fixed exchange rate regime.

5. II. The Conduct of Monetary Policy in Zambia (cont’d) • The effects of direct controls manifested in poor financial intermediation characterised by negative real interest rates. • Other effects included: • internal and external imbalances accompanied by structural and institutional deficiencies; • noticeable widening gap between domestic saving and investment; • unsustainable balance of payments position; and • broad macroeconomic instability.

6. II. The Conduct of Monetary Policy in Zambia (cont’d) Government budget deficits, which was financed by the central bank resulting in the increase in money supply. However, price controls caused inflation to be artificially lower than what the fundamentals could allow. This led to calls for a new agenda to improve the economy and improve citizens welfare. 6

7. II. The Conduct of Monetary Policy in Zambia (cont’d) Monetary Policy in the Post 1992 Economic Reforms • In the late 1991, a New Government, democratically elected came to power. • The new Government in early 1992 initiated economic reforms anchored on liberalisation of markets. • With Liberalisation, the design of monetary policy had to change in tandem. • The Bank of Zambia role in this regard was to create a stable macroeconomic environment largely by bringing down inflation.

8. II. The Conduct of Monetary Policy in Zambia (cont’d) • The Bank of Zambia undertook reforms which included: • Monetary policy instruments reforms: • Treasury bill auction (1993) and a primary market for Government bonds (1995). • Open market operations (1995), and • Was supplemented by foreign exchange auctions during the early stages of financial sector reforms • Liberalisation of the foreign exchange market and interest rates in 1992 and • Liberalisation of the current and capital accounts in 1994.

9. II. The Conduct of Monetary Policy in Zambia (cont’d) • Current monetary framework is operated as follows: • The central bank is given the inflation target • The Bank then programme: • the broad money supply and reserve money growth consistent with the inflation target and economic growth objective. • In this framework, Reserve Money is used as the operating target while Broad Money is the intermediate target • Inflation is the ultimate target. • The assumption is that there is stability in the relationship between reserve money and broad money

10. II. The Conduct of Monetary Policy in Zambia (cont’d) • The monetary policy framework uses a range of instruments : • Open Market Operations (indirect instruments) • secured Loans (SEL), • term deposits (TED) • Treasury bills on the Bank’s portfolio. • The Bank has also formalised the TED and SEL as Repurchase Agreements (repos). • Rediscount Facility • Bank Rate • Core liquid assets ratio • Moral Suasion • Statutory Reserve Ratio (direct instrument)

11. II. The Conduct of Monetary Policy in Zambia (cont’d) Monetary Policy in the Period 2008 - 2010 • Monetary policy formulation and implementation will continue to be guided by the Government’s broad macroeconomic policies. • This is as outlined in the Fifth National Development Plan (FNDP) and the 2008–2010 Medium-Term Expenditure Framework. • The Bank will continue to be guided by market-based principles in the formulation and implementation of monetary policy. • However, the framework will continue to be reviewed. To take account of developments in the financial markets and the real economy to enhance the efficacy of monetary policy.

12. II. The Conduct of Monetary Policy in Zambia (cont’d) • The changed framework of monetary policy in Zambia has scored a number of successes. • Inflation has fallen down remarkably. • However, inflation has trended upward in 2008 owing to rising oil and food prices. • The exchange rate has relatively stabilised. • The stable macroeconomic environment so achieved has made the country attractive to both foreign direct (FDI) and portfolio (FPI) investments.

13. II. The Conduct of Monetary Policy in Zambia (cont’d) • The table below shows growth in FDI in the recent past. FDI in Zambia, 2004 – 2007 (in US $’million) 13

14. II. The Conduct of Monetary Policy in Zambia (cont’d) Institutional Arrangement The conduct of monetary policy is done through the Monetary Policy Committee, which comprises: The Governor and two deputies Directors from core departments Economics, including Deputy Directors Financial markets, including Deputy Directors Financial Institutions Supervision Banking, Currency and Payment systems etc Secretary to the Treasury, from the fiscal side 14

15. II. The Conduct of Monetary Policy in Zambia (cont’d) The inclusion of the fiscal arm is for coordination purposes There is also the Monetary Policy Advisory Committee made up of Professionals from: Academia Central Statistical Office Capital market and Strategic sectors of the economy The Monetary Policy Committee meets every month while the Monetary Policy Advisory Committee meet twice in a year. 15

16. II. The Conduct of Monetary Policy in Zambia (cont’d) Challenges of Conducting Monetary Policy Impact of international commodity price impulses. The increase in copper prices has also led to increase in liquidity pressures. Global financial crises get transmitted to the domestic economy through: Slowing global demand may dampen export growth Adverse movement in the exchange rate. 16

17. II. The Conduct of Monetary Policy in Zambia (cont’d) Increasing complexity in financial engineering by the banking system requires a matching up-grade in supervision skills. Integration of world economies and financial markets requires exchange of information between mature and emerging markets. Exchange on the development and assessment of monetary policy instruments that can curb inflationary risks from the global developments into domestic economies would be helpful. Hence, the need for: technical collaboration in research for economists and supervisory staff between the BoZ and the Fed; Possible BoZ staff attachment and training in central banking issues. 17

18. III. Conclusion • The conduct of monetary policy in the post 1992 era has delivered macroeconomic stability in Zambia. • Inflation has fallen down remarkably • Interest rates have also fallen down in tandem • The exchange rate has stabilised. • However, in view of the integration of our financial market in the global financial system there is need to build capacity among our staff through technical corroborations with renowned central banks. 18