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

digit inflation has been government ’ s goal for a long time. it is, therefore, encouraging to see inflation coming down in recent months, reaching a single digit level of 9. 4 % in april 2006 and dropping further to 8. 6 % in may and 8. 5 % in june 2006. this inflation out - turn has been largely due to the conduct of appropriate monetary policy aided by prudent fiscal policy and relative strengthening of the kwacha. the bumper maize harvest this season has helped to ease pressure on food prices and to keep food inflation and thus overall inflation low. distinguished ladies and gentlemen, with respect to developments in the money market, commercial banks lending interest rates have also been coming down, though not as fast as the decline in inflation and yield rates on treasury bills. commercial banks nominal weighted average lending base rate declined from 29. 8 % in 2004 to 27. 6 % in 2005. as at june 21, 2006, the weighted average lending base rate stood at 21. 6 %. clearly, there is an urgent need for commercial banks to do more to reduce lending rates in order to influence a substantial expansion of private sector credit. lower lending rates will contribute to the reduction in the cost of doing business in zambia. in the current environment of low inflation, sustainable lowering of lending rates by commercial banks should be a logical course of action. 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 : 1. increased copper output and exports as well as record high prices of the commodity. the volume of copper exports 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 metric tons in december 2005 from us $ 3, 134. 79 per metric tons in december 2004. the price of copper has since increased sharply and by may 2006 it had risen to over us $ 8, 000 per metric ton ; 2. increased non - traditional export earnings, from us $ 410 million in 2003 to us $ 576. 7 million in 2005 ; 3. improved economic confidence following the attainment of the enhanced highly indebted poor countries ( hipc ) initiative completion point in april 2005, which resulted in reduced external debt service