Caleb M Fundanga: Monetary policy issues and the process of foreign
payments
Presentation by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Zambian Heads of
Missions Briefing Seminar, Lusaka, 19 July 2005.
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The Hon. Minister of Foreign Affairs, Lt. Gen. Ronnie Shikapwasha, MP
Hon. Deputy Minister of Foreign Affairs
Permanent Secretaries
Your Excellencies, High Commissioners and Ambassadors
Senior Government Officials
Distinguished Invited Guests
Ladies and Gentlemen
It is an honour for me to be here this morning to talk to you on the topic of "Monetary Policy Issues
and the Process of Foreign Payments". This topic provides me with an opportunity to explain the
role of the Bank of Zambia in the economy and the process of foreign payments which has been a
topical issue.
As you may be aware, the Bank of Zambia's mission is to formulate and implement monetary and
supervisory policies that will ensure price and financial system stability. However, in line with
the topic above, my presentation this morning will focus on the first aspect of the mission of the Bank,
namely, price stability.
There are generally three prices of major concern to the Bank of Zambia. These are general prices of
goods and services, interest rates and the exchange rate of the kwacha against major foreign
currencies. I will now deal with each of these in turn.
The central bank deals with general prices of goods and services in the context of inflation. In simple
terms, inflation may be defined as the change in the general price level of goods and services.
However, in every day usage, inflation may be defined as "too much money chasing too few goods".
Describing inflation this way makes it easier to link it to monetary policy which is the control of money
supply in an economy.
The Bank of Zambia is concerned that inflation has remained stubbornly high for quite sometime now.
As at end-June 2005, inflation was at 19.2% which we consider too high to foster sustainable
economic growth. The poor weather patterns over the last agricultural season resulted in low crop
output, particularly that of maize, which induced inflationary pressures. The unyielding rise in world oil
prices on account of high demand from China and India, due to high economic activity, disruptions in
supply, arising from war in the Middle East, as well as processing capacity constraints in many oil
consuming countries have also caused a general rise in the domestic prices of petroleum products
thereby increasing the cost of domestic production.
In order to moderate the inflationary pressures arising from low crop output, on a sustainable basis,
efforts should be directed at diversifying and improving agricultural output away from rain-fed
agricultural practices. Government's commitment to increased investment in the agricultural sector is
therefore commendable as this should assist in improving the supply of agricultural output, in particular
that of food items. This has an important bearing towards reducing consumer food inflation. Similarly,
although it is not possible to completely eliminate inflationary pressures stemming from rising world oil
prices, efforts are nonetheless needed to moderate their impact on the economy. To this end, such
efforts as conserving the use of petroleum products can go a long way in reducing the attendant
inflationary pressures.
Allow me now to turn to the issue of interest rates. As you may be aware, interest rates refer to the
price of money. Over the last few years the general trend in commercial banks' weighted average
lending rates has been largely downwards. As at end-June 2005, the weighted average base lending
rate had reduced to 28.6% from 36.2% in January 2004. The fall in lending rates has in large part
been induced by a fall in yield rates on Government securities as banks in Zambia have tended to use
yield rates as anchors.
However, at the current levels, lending interest rates are too high to contribute to sustainable
productive investment. This calls for concerted efforts among other key stakeholders, namely, the
Government, commercial banks and the borrowing private sector to continue playing their respective
roles effectively to bring about a further reduction in the lending interest rates. It has also to be
appreciated that inflation is another major contributing factor to high interest rates as banks set their
lending interest rates above the rate of inflation thus the need to reduce the high inflation that has
characterised the economy. On our part, we will do all we can, using all monetary instruments at our
disposal, to contribute to reducing inflation and therefore, interest rates.
As regards the exchange rate, this refers to the price of one currency in terms of another. In our case,
it refers to the relative price of the kwacha against other currencies. The price of the kwacha against
other currencies is directly determined by supply and demand conditions in the foreign exchange
market and indirectly through the conduct of monetary policy. To improve the operations of the foreign
exchange market, the Bank of Zambia developed the broad-based inter-bank foreign exchange
system where suppliers (traditional and non-traditional exporters) and users (importers) of foreign
exchange can trade transparently.
Following the introduction of this system, there has been a significant improvement in the supply of
foreign exchange on the market owing to the confidence in the system by market participants, efficient
flow of information among all players and improved external sector performance brought about by
increased copper output and unprecedented high world copper prices in recent times. These
developments have contributed to the relative stability of the kwacha against major currencies and
thus moderating inflationary pressures. In addition, the containment of growth in money supply has
contributed to this outcome. Furthermore, the anti-dollarisation campaign that the Bank of Zambia
waged some two and half years ago has had an equally important role to play in the observed relative
stability of the kwacha against major currencies.
However, continued relative stability of the exchange rate of the kwacha against major currencies is
heavily dependent on longer term initiatives for sustained improvement in the supply of foreign
exchange. Among these strategies is a sustained increase in export earnings through the stimulation
and maintenance of a strong export sector.
Ladies and Gentlemen, let me now turn to the other part of the topic, namely, the process of foreign
payments. The Bank of Zambia has issued Directives that put limits on cash transactions in foreign
exchange with authorised dealers. For instance, bureaux de change cannot transact in excess of US
dollars 1,000 or equivalent foreign currency per transaction per day with any one individual. This
arises from their primary purpose of being money changers. The corresponding limit for commercial
banks is US dollars 5,000 or equivalent foreign currency per transaction per day for account holders
and US dollars 1,000 or equivalent foreign currency for non-account holders. It is important to stress
that these limits for commercial banks pertain to cash transactions only. Account holders and
nonaccount holders alike wishing to transact above these limits can do so by choosing other modes of
payments, such as, direct transfers, drafts, etc.
Any remittance in excess of US dollars 5,000 has to be channelled through commercial banks and the
person remitting the funds is required to support the transaction with appropriate documentation for
statistical purposes, as well as guarding against money laundering and financing of terrorism.
The convenience of making foreign payments from Kwacha bank accounts has also been improved by
introduction of new products. One such product is the VISA based electronic debit card where holders
of such cards can access their kwacha balances from anywhere in the world where the card is
accepted. This has not only reduced the need for people to carry huge amounts of foreign currency
but also has made the kwacha a truly convertible currency. All these innovations have come about
because of the relative stability of the exchange rate of the Kwacha against major currencies.
Ladies and Gentlemen, in conclusion, I wish to emphasise that the role of the Bank of Zambia is to
formulate and implement monetary and supervisory policies that will ensure price and financial system
stability. We are committed to playing our part and will do all that is necessary to make an effective
contribution to a stable macroeconomic environment. In this regard, I call upon all other stakeholders
including Your Excellencies to promote and support these positive efforts in the countries of your
accreditation. I hope you found my short presentation useful in understanding the conduct of monetary
policy and the role that the Bank of Zambia plays.
I thank you.