Caleb M' Fundanga, Governor Bank of Zambia

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Bank 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

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The 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

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I. 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
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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.

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II. 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.

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II. 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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II. 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.

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II. 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.

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II. 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

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II. 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)

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II. 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.

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II. 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.

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II. 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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II. 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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II. 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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II. 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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II. 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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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.

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