As a striking example to this argument, we can mention the 2008–2009 global crisis that was triggered by the financial sector and paved the way to deteriorating macroeconomic indicators such as production, employment, unemployment and budget balance in many countries. We need to underline the fact that financial stability is also crucial for the economies of developing countries as well. During the convergence process, these countries experience rapid financial deepening and integration with global financial markets, as a result of which financial transactions become an indispensable part of economic activity. It is essential for a sound economic outlook in these countries that this process is managed effectively and risks likely to arise from the financial sector are predicted so as to contain their potential effects on the economy. BIS central bankers’ speeches  1  Another potential threat to financial stability is the international capital flows. Free flow of capital enables it to contribute to the growth prospects by moving where it is the most efficient. Yet, when capital flows are not stable, economies are likely to face severe damage. While on the one hand, the surge especially in short-term capital inflows ensure easier access to credit and boost consumption; on the other hand, they lead to over-appreciation of local currencies and thereby widen the imbalance between domestic and external demand. Overall, this leads to deterioration in external balance and increases the domestic economy’s susceptibility to sudden changes in global risk appetite, and in turn, poses risk to macroeconomic and financial stability.

On the policy front, the central bank and Government in general will continue to pursue appropriate policies that promote financial sector growth so as to enable them to reduce the cost of financial intermediation and improve the delivery of high quality financial services. On its part the Government contributes to reducing the cost of capital through lower deficit spending. This frees resources for private sector borrowing. Chairperson, I wish to strongly encourage the accounting profession to join hands with the central bank and other Government organs in the task of reducing the cost of doing business. In answering the question: The Cost of Capital – Wither the Zambian Financial Markets? – I would say that Zambia has made significant achievements in making the financial markets as properly functioning as possible. In its current state, the banking system, being the dominant player in the financial sector, should embrace competition and offer products and services that can spun growth of the entire economy. The capital market has the challenging task of mobilising small number of participants and limited range of long-term investment products. Despite these challenges I am optimistic that working together, we can reduce the cost of finance in Zambia. The Bank of Zambia will continue to provide the required leadership and act as the catalyst for the emergence of viable and responsible markets to serve the interests of all investors. Ladies and Gentlemen, I wish you success in the deliberations of this conference and in the rest of your endeavours for 2010.