by administrative controls on interest rates and the exchange rate. although the banking act of 1965 was created to enable the implementation of monetary policy, in the preliberalization era monetary policy involved multiple objectives, such as, financing agriculture and parastatal companies, and providing guarantees for export marketing, which at times presented the bank with conflicting roles as a monetary authority. to the contrary, during the current liberalization period, which commenced with vigor in 1992, the bank, in conformity with market reforms, has steadily moved towards the use of market - based structures and systems as opposed to direct instruments in the conduct of its monetary policy. in this regard, and beginning 1993, deregulation of interest rates, removal of capital controls and freeing of the foreign exchange market were implemented as part of the broader financial sector reforms. as a result, through the use of mainly market - based instruments of monetary policy, the bank has made several notable achievements. amongst these, has been its contribution to the reduction of annual inflation to 17. 2 % in december 2003 from 197. 0 % at the end of december 1992. further, inflation has remained just under 20 % in the first half of 2004 and it is the bank ’ s desire to see single digit inflation within the foreseeable future. the benefits of lower inflation in single digits can not be over - emphasized, especially with regard to the fight against poverty. madam chairperson, last october the bank took a bold stand of effecting a down - ward adjustment in the statutory reserve ratio to 14. 0 % from 17. 5 % on both kwacha and foreign currency deposit liabilities. this was intended to release funds to commercial banks. the outcome of this policy action has been increased loanable funds being available to commercial banks. this in turn has greatly contributed to the downward trend in lending rates in the economy. for instance, the weighted average lending base rate dropped to 29. 8 % in june 2004 from 39. 6 % in august 2003. this action was consistent with government ’ s objective to ensure increased credit to priority sectors such as agriculture. i am glad to inform the conference participants that a noticeable increase in credit to key growth sectors namely agriculture, tourism, manufacturing and mining has been recorded since this policy action by the bank. this process has been greatly assisted by a significant reduction in government borrowing from the banking sector. in its continued effort to develop a fully functional foreign exchange market, in july last year the bank established a broad - based inter - bank

number of registered domestic and domestically incorporated international banks has led to augmented credit creation to local businesses compared to pre - liberalisation levels. previously, credit facilities were scarcely availed to local businesses. efforts are currently being made to establish a credit reference bureau, which should result in reduced information asymmetries and contribute to the further lowering of lending rates. it is also hoped that the bureau will provide an objective assessment of potential private sector borrowers and improve credit culture. timely, adequate and affordable credit is required in the economy to effectively facilitate economic growth, create employment and reduce poverty. mr president, ladies and gentlemen, financial stability which forms part of the bank ’ s mandate is a critical component of macroeconomic stability. our banking sector experienced an unprecedented structural evolution during the latter part of the 1990s when new bank entrants and eventual quick exits characterized it. the implications of a volatile banking sector speak for themselves. no doubt, the bank of zambia had met yet another daunting challenge in its role as a supervisory authority. even in the aftermath, the bank continues to deal with aspects of institutions in liquidation. however, one welcome outcome from this experience is the consolidation of the banking sector, which is much more aware of the constant need for prudent risk management and good corporate governance. from our end, the bank has also undergone a significant re - orientation of its supervisory techniques and approaches. these are now largely in line with international best practices and also constitute a platform on which we shall meet the future challenges facing the financial sector in the 21st century. ladies and gentlemen, from time to time developments are associated with setbacks and the bank of zambia is no exception. here i am referring to the issue of polymer notes which were introduced sometime last year. the introduction of these notes as we have explained at several fora was meant and is still meant to have cleaner notes in the economy and more importantly to have notes with a relatively longer life - span before replacement, than the traditional paper notes. with a relatively longer life - span, the nation would save resources because the frequency of replacing the notes would greatly be reduced. however, due to technical problems experienced by the printer, most of the notes have been fading faster than expected. may i re - assure the nation that we have continued to work with the printer and a solution is being worked out in the quickest time possible. needless to say that this problem has posed a big challenge for all of us at the bank of zambia. madam chairperson