Title: Caleb M. Fundanga, Governor Bank of Zambia
1Bank of Zambia
THE CONDUCT OF MONETARY POLICY IN ZAMBIA
- By
- Caleb M. Fundanga, Governor - Bank of Zambia
- _at_
- The Philadelphia Federal Reserve Bank
- 14 October, 2008
2The Conduct of Monetary Policy in Zambia and
Zambias Investment Opportunities
- Table of Contents
- Basic Information on Zambia
- The Conduct of Monetary Policy in Zambia
- Conclusion
3I. Basic Information on Zambia
ZAMBIA Area 752,614 sq km Population Estimate
12.0 million 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
4II. 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.
5II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
6II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
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7II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
8II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
9II. The Conduct of Monetary Policy in Zambia
(contd)
- 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
10II. The Conduct of Monetary Policy in Zambia
(contd)
- The monetary policy framework uses a range of
instruments - Open Market Operations (indirect instruments)
- secured Loans (SEL),
- term deposits (TED)
- Treasury bills on the Banks 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)
11II. The Conduct of Monetary Policy in Zambia
(contd)
- Monetary Policy in the Period 2008 - 2010
- Monetary policy formulation and implementation
will continue to be guided by the Governments
broad macroeconomic policies. - This is as outlined in the Fifth National
Development Plan (FNDP) and the 20082010
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.
12II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
13II. The Conduct of Monetary Policy in Zambia
(contd)
- The table below shows growth in FDI in the recent
past.
FDI in Zambia, 2004 2007 (in US million)
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14II. The Conduct of Monetary Policy in Zambia
(contd)
- 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
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15II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
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16II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
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17II. The Conduct of Monetary Policy in Zambia
(contd)
- 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.
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18III. 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.
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