requires that all key stakeholders play their part. the government reduction of domestic borrowing contributes to lowering of yield rates on government securities, which are sometimes used as anchors by commercial banks. the commercial banks should also respond to changing macroeconomic indicators consistent with low interest rates, while borrowers need to improve their credit culture. as for the bank of zambia, we continue monitoring financial conditions and take appropriate actions to contribute to lowering of interest rates. ( iii ) a relatively stable and competitive exchange rate has a positive impact not only on inflation, but also on the performance of the external sector. in this regard, policies for stabilising the exchange rate must aim at increasing the export earning capacity of the country through stimulation and maintenance of strong export sector by, among other things : • developing a diversified and competitive export base ; and • ensuring food self - sufficiency to reduce food imports. in addition, continued implementation of appropriate monetary and fiscal policies, particularly the reduction in the fiscal deficits, is critical to maintaining stability in the exchange rate. ( iv ) external debt should be contracted to finance the productive sector so as to lessen the burden of debt service. otherwise, it will result, as we have seen in the last 40 years, in huge outflows at the expense of expenditures on social and economic infrastructure development, which are pre - requisites to sustainable poverty reduction efforts. ( v ) the need to diversify the economy, including the external sector, cannot be overemphasised. diversification is a sure way of preventing external shocks to the economy and will contribute to maintenance of macroeconomic stability. dependence on one or a few products leaves the economy susceptible to external shocks. ( vi ) in the financial sector, the key lesson is that liberalisation of the industry is not tantamount to relaxing of regulatory and supervisory measures. in fact the legal, regulatory, and supervisory frameworks should be strengthened to deal with any excesses arising from entry of institutions with poor management or governance practices due to the attractive liberal environment. ( vii ) legal and operational framework requires continuous reviews to remain relevant in this technologically fast moving world. ladies and gentlemen after learning the lessons from the past 40 years, the following are some of the challenges we have to confront : • achievement and maintenance of price stability, i. e. low and stable single digit inflation ; • maintenance of a stable and competitive exchange rate ; • diversification of the economy and the export base ; • enhancing economic policy credibility. policy

##ous shocks. financial conditions then affect policy rates only to the extent that they have an impact on the forecast of inflation and resource utilization. 4 now, is there any reason to modify this view of monetary policy given the experience of the financial crisis so far? let me approach this question by first asking what the causes of the financial crisis were, whether monetary policy contributed to the crisis, and whether a different monetary policy was warranted and could have prevented or reduced the size of the crisis. the financial crisis was not caused by monetary policy many have claimed that excessively easy monetary policy by the federal reserve after 2001 helped cause a bubble in house prices in the u. s., a bubble whose inevitable bursting proved to be a major source of the financial crisis. 5 however, as i see it, the crisis was mainly caused by factors that had very little to do with monetary policy and were mostly due to background macro conditions, distorted incentives in financial markets, regulatory and supervisory failures ( also when central banks have been responsible for regulation and supervision ), information problems and some specific circumstances, including the u. s. housing policy to support home ownership for low - income households. 6 the macro conditions preceding the crisis included low world real interest rates associated with global imbalances, as well as the great moderation, with a long period of very stable growth and stable low inflation, which led to a systematic underestimation of risk and very low risk premia in financial markets. there were distorted incentives for commercial and investment banks to increase leverage that were made possible by lax regulation and supervision and the lack of an appropriate bank resolution regime. there were also distorted the idea that inflation targeting implies that the inflation forecast can be seen as an intermediate target was introduced in king ( 1994 ). the term “ inflation - forecast targeting ” was introduced in svensson ( 1997 ), and the term “ forecast targeting ” in svensson ( 2005 ). see woodford ( 2007a, b ) for more discussion and analysis of forecast targeting. several central banks that do not call themselves inflation targeters effectively do conduct flexible inflation targeting, although they may not be quite as transparent about their inflation target, the role of stability of the real economy, etc. see, for instance, taylor ( 2007 ). see bean ( 2009 ) for an extensive and excellent discussion of the crisis, including the credit expansion and housing boom, the macroeconomic antecedents, the distorted incentives, the information problems, the amplification and propagation