a saving deficit in the united states and a saving surplus in some asian and oil - producing countries. large parts of the saving surplus in countries like china were invested in us debt securities and contributed to low long - term interest rates in the united states. the imbalances and the low interest rates led to an increased demand for financial assets with a higher yield, which contributed to pushing down risk premiums to untenably low levels. low risk premiums and low interest rates in turn contributed to overheating in the us housing market. expansionary housing policy in the united states one important factor in triggering the crisis was the adjustment in the us housing market that began in autumn 2005. the housing market has been stimulated by an expansionary housing policy over a long period of time. the aim was that more households would own their own homes. to achieve this, targets were set for how much of the mortgage institutions ’ lending would be granted to wage - earners with medium and low incomes. these targets were then gradually raised. the demand for owning one ’ s own home increased, and thus housing prices and household indebtedness also increased. moreover, an increasing number of households had gained access to credit as a result of the deregulation of the financial markets. new financial products were created that enabled mortgages to be put together, repackaged and then sold on the financial markets. the idea behind these financial innovations was to spread the risks over more counterparties. unfortunately the new instruments also reduced the possibility to assess where the risks lay. when the housing market bubble burst and house prices began to fall, the underlying problems rose to the surface. an increasing number of households experienced problems meeting their payment obligations, which led to problems in the us mortgage market. the problems then spread quickly to other countries with banks that had invested in the new financial products. these banks were not able to estimate the contagion risks in full, as the risks in these products were difficult to assess and even the credit rating agencies underestimated them. uncertainty over the size of the problems led the banks to tighten their lending, which in turn impaired consumption and investment. inadequate supervision and regulation with regard to the supervision and regulation of the financial markets, there has clearly been a lot left to desire in several areas. supervision in the united states in particular appears to have been inadequate. the trade in otc derivatives 2 exploded and many new, complicated financial instruments were introduced onto the market. this made the banks ’ counterpart

and obligations ; and 4. 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. mr. chairman, 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 a way that would not compromise the low inflation objective. ladies and gentlemen, these achievements will have been impossible without the financial sector reforms. 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 and transactions. interest and exchange rates are now market determined, that is they are being driven by underlying demand and supply factors. 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. 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