harder to break. of course few people would believe that – after all things in malawi have never become that bad, except to remember that we remain among the poorest of nations after nearly 50 years of independence. mr president, ladies and gentlemen i very much hope that in our life time we will all manage to build an economy in which all citizens will have the opportunity to fully participate in the generation of income and enjoyment of fruits of their labour. public discourse will be about how to sustain development and the welfare of all citizens. we will have dispensed with windy and inconclusive debates on the negative impacts of devaluations and high interest rates on the man in the street. labour relations will be more constructive than destructive – employers and employees will be discussing how to improve productivity so that their company can beat the competition and all staff can get bonuses. the economic environment that i am describing is quite possible with a floating exchange rate, and a government that is totally committed to fiscal prudence. the kwacha exchange rate will have – for all practical purposes – adjusted fully to economic fundamentals and fluctuations will reflect inflation differentials with our major trading partners and the impact of exogenous shocks. in such a scenario i believe the level of foreign exchange reserves could exceed six months of imports. in today ’ s terms, that is almost equivalent to 100 % foreign exchange cover for the total money supply. mr president, ladies and gentlemen way before that, there will be no need for exchange controls that have hitherto crippled the ability of the citizens to protect the purchasing power of their savings and thus their ability to increase investments in productivity capacity. for instance, if you got your pension commutation on april 30, your plans to build a house or invest in a small business are now a pipe dream because the 49 % devaluation plus the 15 % depreciation since then have cut the purchasing power of your pension by over 60 %. perhaps you should be satisfied with an investment in a bicycle. bis central bankers ’ speeches however, for those malawians that have access to hard currency all the time, their story is totally different. by holding onto some dollars which they sold after the devaluation, they have become relatively richer. in others words, for most of us, exchange controls inhibit active risk management and foster social inequalities. instead of being a temporary measure to manage the oil price shock in late 1970 ’ s, exchange controls have become a permanent feature of

closely linked and malign effects : first, the crisis jeopardised the provision of those core financial services which banks provide and on which all of us depend ; and second, by so doing – and being too big or complicated to deal with as failed companies – they required the use of taxpayers ’ money to bail them out. that ’ s the story, and it explains why the public policy actions taken both immediately after the crisis ( bail - outs ) and the subsequent post - crisis reforms have been directed at protecting those or core financial services and seeking to ensure that taxpayers ’ money does not need to be put at risk. there is however more to the story than that. in the period between the early 1990s and the onset of the crisis, there was a remarkable and unprecedented evolution of the financial system which involved a major expansion of activity. banks moved from a traditional model of taking deposits and lending them out, to a model that involved far more the origination and distribution of loans – often known often as securitisation, in which these loans were substantially distributed to shadow banks. these shadow banks thereby took on more of the traditional core bank functions of credit assessment and maturity transformation ( the practice the financial stability board has defined ‘ shadow banking ’, as credit creation occurring partly or wholly outside the banking system. in this lecture, i use the term ‘ shadow banks ’ in the looser sense of those entities in the non - bank financial system that might pose systemic risks in any form, collectively or individually. bis central bankers ’ speeches of borrowing at shorter maturities than the maturities of the assets they held ). and, they did so, like the banks, with weak levels of capital. but, it would be a mistake to portray shadow banks as bad. there is good evidence that in the twenty years before the crisis they emerged as a stabilising force ( most notably in the us ) because they were able to expand their provision of credit at times when traditional bank lending underwent cyclical contractions ( meeks et al 2014 ). hat said, there were some troubling properties associated with the growth of shadow banking. for instance, quite a few were sponsored by banks as a means to reduce the amount of capital to be held against risk exposures. when the crisis hit, in a number of cases those banks found they had to stand behind their offshoots for contractual or reputational reasons, so the separation was illusory and led to greater leverage in the system.