By Nawa Mutumweno – The Zambian financial sector was not adversely affected by the global financial crisis mainly due to the limited integration of the sector into the international markets. Most banks remained adequately capitalized during the turbulent economic blues.
The stability enjoyed in the financial sector was also attributed to the Central Bank’s enhanced vigilance and interaction with the domestic financial system to ensure that there was strict adherence to its supervisory guidelines.
Primarily, the objective of the monetary policy in 2009 was to achieve an end-year inflation target of 10 percent. The Bank of Zambia (BoZ) identified the challenges which may cause inflationary pressures and derail the Bank’s objective on inflation.
To minimize the inflationary pressures, the Bank of Zambia undertook to:-
– implement appropriate monetary policy and keep money supply growth within the programmed path
– use indirect instruments for monetary operations, namely open market operations and auctioning of Government Securities
– coordinate fiscal and monetary operations; and maintain relative stability in the foreign exchange market.
Global economic and financial crisis necessitated the review of the monetary policy framework with a view to shifting from the strict use of monetary aggregates to short term interest rates as the anchor for the monetary policy.
BoZ is in the process of introducing an overnight lending facility to commercial banks to increase liquidity and improve the effectiveness of monetary policy. Other measures include the introduction of a framework to facilitate secondary market trading of Government and other debt securities to provide additional liquidity to members; commencement of the second phase of the Financial Sector Development Programme (FSDP) which is expected to improve access to credit and reduce the high cost of borrowing; and revision of the lender of last resort policy by BoZ so that the policy remains effective and relevant under prevailing circumstances.
Financial inclusion was incorporated in the Performance Assessment Framework (PAF) of the Budget Support Programme under the FSDP.
Another milestone is the introduction of a treasury single account this year which will further improve budget execution and cash management of public finance.
Expansion of access to financial services in rural areas was undertaken by Government through the Rural Finance Programme.
The Government continues to view fiscal policy as the foundation stone of its overall macroeconomic framework. During 2009, the Government renewed its commitment to maintaining a prudent fiscal regime through the reduction or elimination of non-priority expenditures. Thus, the savings from these reductions were diverted towards key priority expenditures such as infrastructure development, education and health.
Furthermore, domestic and external borrowing levels continue to remain within
sustainable limits. In enhancing this policy, the Government will constrain the fiscal deficit to 2.9 percent in 2010 and below 2 percent in the medium term.
Over the medium term, on the assumption of a stable exchange rate and normal harvest season, the inflation level is expected to fall to single digit at the end of 2010. Further, assumptions of a stable and potentially appreciating local currency will help control import inflation, an influential factor in the overall price level. Key risks to these projections would include a poor agricultural season and rising fuel prices as a result of higher international oil prices.
The major challenges encountered in 2009 can be summarized as follows:-
– The first half of 2009 witnessed a deepening of the global financial crisis and economic downturn with a more pronounced impact on the domestic economy than anticipated
– Grant inflows were erratic and below target
– Creation of more fiscal space for priority programmes was constrained due to higher than budgeted expenditure such as the 2009 wage award to the civil service, maize procurement and interest payments on domestic debt
Government continues to explore ways by which existing monetary policy tools can be improved and new tools introduced to provide a more robust and resilient monetary policy framework that will better manage inflation and interest rates.