caleb m fundanga : improved economic and financial developments in zambia opening remarks by dr caleb m fundanga, governor of the bank of zambia, at the bank of zambia / deutsche bank workshop on capital markets, lusaka, 15 april 2010. * * * the deputy governor – operations at bank of zambia officials from deutsche bank officials from the ministry of finance and national planning distinguished resource persons colleagues from the bank of zambia ladies and gentlemen i am delighted to officiate at this important workshop on sovereign bond issuance. let me from the onset express my gratitude to our colleagues from deutsche bank who have demonstrated a desire and commitment to share with us their experiences in the area of international capital markets, particularly with respect to sovereign debt issues and ratings. i am particularly delighted that this workshop is a follow up to an earlier meeting with officials from deustche bank in december 2009. the willingness of the deutsche bank officials to come back four months later to further discuss the issues with a wider audience is truly heartening to us and commendable indeed. ladies and gentlemen, zambia like many other countries in sub - saharan africa is one of the countries that have for a long time relied on concessional funding and multilateral financial support in implementing her development agenda. whereas other parts of the world have enjoyed respectable growth rates supported by private capital flows, our region has lagged behind. several years of debilitating external debt, regional political instability, and doubtful macroeconomic management have all played a role in keeping private capital flows away from our economies. however, with endurance, progress in the region generally and zambia in particularly is certainly being recorded. a glimmer of hope is finally showing that we are once again being welcomed in the international capital market arena. as you are aware, the government has over the years set out programs to reform the country ’ s political and economic platforms. politically, zambia has been one of the most stable democracies in africa boasting peace since independence in 1964. on the economic front, zambia has made respectable progress in the area of macroeconomic management. over the recent past, the zambian economy has performed relatively well. this is reflected in positive growth rates of real gross domestic product ( gdp ), low inflation, relatively stable exchange rate, stable financial sector and improved banking services. in addition, zambia ’ s access to the highly indebted poor country initiative and the multi - lateral debt relief initiative resources drastically reduced the country ’ s onerous debt burden from around us $ 7

the rest of the world which experiences an exchange rate appreciation as capital flows to earn a higher yield. even if the global portfolio reallocation that comes about from this is small from the us ’ perspective, it can be large from the point of view of a small open economy that is the recipient of these flows. in the emerging market world, the concern is often that the capital inflows will become capital outflows. in australia ’ s case, an exchange rate appreciation that is not in line with the fundamentals, if persistent enough, can lead to dutch disease. this is the fundamental problem, be it a trilemma, or dilemma, as helene rey labels it. farhi e and i werning ( 2013 ), “ dilemma not trilemma? capital controls and exchange rates with volatile capital flows ”, paper presented at the 14th jacques polak annual research conference, washington dc, 7 – 8 november. bis central bankers ’ speeches but, you might say, isn ’ t a stronger us economy good for the rest of the world? or in other words, “ suck it up sunshine ”. that may well be true for the rest of the world as a whole, but it is not necessarily true for every other country. there is an income and a substitution effect at work here. the income effect is the boost from a stronger us in terms of greater global demand. the substitution effect is the negative effect of the exchange rate appreciation. the substitution effect can outweigh the income effect, particularly if you don ’ t trade that much with the us and / or if the capital flows are large relative to the size of your economy leading to a relatively large appreciation of the exchange rate. that is the fundamental problem that the authors are getting at in their paper. though, so far, mundell - fleming has done just as well in getting to this point as their more advanced technology. now let ’ s think about what happens when the capital flow reverses. ( i would note that the term “ sudden stop ” maybe isn ’ t the right term to use, being a hold - over from a fixed exchange rate world. ) in australia ’ s case, the exchange rate depreciates and the main concern is inflation. this is manageable if the appropriate macro framework is in place, such as an inflation targeting framework. this is one of the points of fischer ’ s 2001 lecture at the first incarnation of this conference. in the emerging markets world there