A Bank of Zambia review of interest rates determination in 2003, nonetheless, showed that the key determinants of commercial banks’ interest rates, particularly the lending rate, were the yield rates on Government securities, level of statutory reserve requirements, inflation, weak policy credibility and high default risks on loans obtained. To enhance the role of the market in the determination of exchange rates, the Interbank Foreign Exchange Market (IFEM) trading system was introduced in July 2003. The entrenchment of the IFEM trading system has been characterised by increased interbank foreign exchange liquidity flows, particularly from mineral exporters. The financial sector reforms were aimed at improving the efficiency and intermediation of the banking system and also at enhancing competition amongst the players. The reforms entailed opening up entry of participants into the banking sector. With the liberalisation of the financial sector, several bank and non-bank financial institutions were established. The financial sector has expanded remarkably over time and the services provided have been improved. •  The number of commercial banks has more than doubled to 13 from 4 banks prior to 1990. Currently, the banking system is made up of the Bank of Zambia, which is the central bank, and 13 commercial banks, with a branch network of 159 as at end-December 2005 compared to 123 in 1990. •  Commercial banks have improved the range of products offered to customers, in line with global innovations. These include Automated Teller Machines (ATMs), foreign exchange accounts, Visa, mortgages, and leasing services.

To continue reducing debt vis-à-vis the rest of the world, sustained external surpluses must be run. And that in turn calls for the maintenance of gains in competitiveness, which throughout the recovery have been based on the moderation of labour and financial costs and which, hereafter, should hinge to a greater extent on productivity gains. Indeed, in the recovery to date, the increases in total factor productivity continue to be smaller than those in other developed economies. That is in response to numerous institutional, regulatory and structural factors that public policy should seek to correct. These factors include certain shortcomings in the labour market – such as excessive turnover and temporary contracts – and in the education system; scant generation and dissemination of technological advances; competition-curbing regulatory elements; and the improvable quality of business management. In this respect, it should be borne in mind that, during the expansionary phase prior to the crisis, the loss of competitiveness in terms of the surplus per unit of output was on a similar scale to that mentioned for ULCs. However, the subsequent correction has been much smaller, which explains why the current level of the value-added deflator has grown 10 pp more in Spain than in the euro area as a whole in cumulative terms since the monetary union began functioning. The design of a regulatory framework more conducive to competition should allow for a greater contribution of business margins to gains in competitiveness visà-vis the euro area.