in zambia. sustainable lowering of lending rates by commercial banks should occur in the current environment of low inflation. your excellency, the next issue i would like to address is that of the appreciation of the kwacha against major currencies. the appreciation has occurred mainly due to the higher supply of foreign exchange on the market than demand. the key factors underlying the increased foreign exchange supply include : • increased copper output and exports as well as record high prices of the commodity. copper exports volume has in recent years registered sustained growth, increasing from 353, 000 metric tons in 2003 to 423, 000 metric tons in 2005. the price of copper rose to us $ 4, 572. 0 per tonne in december 2005 from us $ 3, 134. 79 per tonne in december 2004. the price of copper has since increased sharply and had risen to over us $ 8, 000 per metric ton by may 2006, • increased non - traditional export earnings, from us $ 410 million in 2003 to us $ 576. 7 million in 2005 ; • improved economic confidence following the attainment of the enhanced hipc initiative completion point in april 2005, which resulted in reduced external debt service obligations ; and • increased foreign direct and portfolio investments, reflecting increased market confidence in the economy occasioned by the greatly improved prospects for the copper sector, the cancellation of the bulk of zambia ’ s external debt, and anticipated continued commitment to implementation of prudent fiscal and monetary policies. your excellency, from this, it is clear that the current strengthening of the kwacha has been caused mostly by changes in economic fundamentals. i recognise the concerns by some of our exporters of non - traditional commodities that they are losing external competitiveness. i wish to point out that not all has been lost as a result of the appreciation of the kwacha. some non - traditional exporters have benefited through, among other things, the reduction in the cost of capital goods and imported raw materials. in addition, may i mention the fact that the exchange rate alone does not determine external competitiveness of exports. exporters should look at those areas in their production processes where they can attain efficiency gains and improve productivity. these efforts need to be complemented by government through directing investment in infrastructure and structural reforms, including labour laws, so as to reduce the cost of doing business in zambia. on its part, the bank of zambia will carry out its function of smoothing the movements in the exchange rate in

caleb m fundanga : banking in zambia and the kwacha appreciation speech by dr caleb m fundanga, governor of the bank of zambia, at the german ambassador ’ s working lunch, lusaka, 7 june 2006. * * * • your excellency, the germany ambassador to zambia, dr. ireen hinrichsen ; • representatives of german banks in south africa ; • the german business community ; • representatives of local banks ; • distinguished ladies and gentlemen. on behalf of the zambian people and indeed on my own behalf, it gives me great pleasure to welcome our german visitors to zambia. i am deeply humbled to be invited for this business luncheon hosted by your excellency. this interaction, distinguished ladies and gentlemen, is very important to foster and enhance mutual co - operation between our two great nations. your excellency, with your permission, i will begin my address by discussing banking in zambia and then proceed to give some highlights on the recent economic developments in the country. distinguished ladies and gentlemen, in the early 1990s, zambia embarked on economic liberalisation, of which reforming the financial sector was a major part. specific measures which were undertaken included, among others, the removal of all restrictions on interest rates and elimination of controls on foreign exchange rates. interest and exchange rates are now market determined, principally based on demand and supply. 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