In Zambia, as in many sub-Saharan countries, inflation is something the central bank can influence only at the margins. Volatile food prices, dependent on harvest quality, can constitute more than half the consumer price basket. “The role of monetary policy is more about banking sector stability, promoting structural reform and financial market development,” says David Cowan, Africa economist at Citigroup in London.
In this context, the Bank of Zambia’s (BoZ) achievement in bringing inflation down to single digits in 2006, for the first time in 30 years, is already striking. To that should be added the extension of the domestic yield curve to a maturity of seven years, and the largest ever bank privatization, which attracted a strategic foreign investor. Caleb Fundanga, BoZ governor, is modest about the accomplishments, consistently underlining the importance of teamwork.
“Under the Financial Sector Development Plan, the Bank of Zambia has worked collaboratively with key participants to help redress deficiencies in the Zambian financial system. We also consult with the business community to know whether our open market operations are working,” he tells Emerging Markets.
Investment is the clearest vote of confidence, and Fundanga is understandably pleased with the decision of Dutch group Rabobank to buy 49% of Zambia National Commercial Bank in April 2007, the largest privatization to date. He is hopeful that they will help bring their retail expertise and professionalism to an underdeveloped Zambian banking sector, but the BoZ is also actively seeking ways to promote progress. Fundanga is looking to license credit derivatives to increase banking sector flexibility, and has also been modernizing regulations to bring down high loan default rates. He toured the country in 2007 to promote this message, accompanied by former South African supreme court judge Mervyn King.
Zambia’s growing bond market has also been the beneficiary of foreign investor attention, with foreign holdings of government bonds doubling in the two years to end-2006, to reach 209 billion kwacha. This carries risks – investors seeking to exit before the September 2006 elections caused yields in some sections of the curve to widen by more than 200 basis points in a few weeks.
In response, the BoZ has raised its own game, creating a database to monitor foreign participation and potential redemptions on a weekly basis and ensure sufficient local liquidity to cover outflows. And the governor points out that the in-depth research by western investment banks such as Lehman Brothers has helped enhance the quality of the monetary authority’s own market information. “For the same reason, we hope to have a sovereign credit rating by the end of 2007, which could also contribute to lowering the country risk cost for Zambian companies,” says Fundanga.
For Cowan at Citigroup, two other ongoing challenges for the BoZ are to manage uneven donor and concessional flows without causing liquidity in the system, and to maintain the pace of structural reform so that the benefits become more visible to the wider population. As that programme expands beyond the banking sector into the utilities, so the government will need to take a larger share of the leadership role alongside the bank.