As the world economy began feeling the brunt of the global financial crisis with the fall of Lehman Brothers in September 2008, public discourse in most countries called for a rapid and decisive policy response. In an unprecedented move, finance ministers from many OECD and emerging countries announced important fiscal packages in an attempt to revive the world economy. Chile was no exception, where the government implemented a fiscal expansion over 2% of GDP – in relative terms, among the largest in the world. Central banks, for their part, also implemented large monetary expansion measures to stimulate the struggling economy, first by lowering interest rates to their effective lower bound, and then, in many cases, by taking additional steps aimed at providing liquidity to seized financial markets. This was also the case of Chile, where we reduced interest rates to its lowest historical level, and then increase its expansionary stance by implementing nonconventional measures. This is a fundamental factor in Chile’s current strong recovery. The present challenge is the withdrawal of the monetary stimulus at an appropriate pace, which insures that inflation forecast is consistent with our target of three percent in a two year horizon. We are taking into account the different factors affecting the outlook, such as the behavior of the exchange rate, the strength of the expansion of demand and activity, and the perspectives of lower interest rates in the world, among others.
On the policy front, the central bank and Government in general will continue to pursue appropriate policies that promote financial sector growth so as to enable them to reduce the cost of financial intermediation and improve the delivery of high quality financial services. On its part the Government contributes to reducing the cost of capital through lower deficit spending. This frees resources for private sector borrowing. Chairperson, I wish to strongly encourage the accounting profession to join hands with the central bank and other Government organs in the task of reducing the cost of doing business. In answering the question: The Cost of Capital – Wither the Zambian Financial Markets? – I would say that Zambia has made significant achievements in making the financial markets as properly functioning as possible. In its current state, the banking system, being the dominant player in the financial sector, should embrace competition and offer products and services that can spun growth of the entire economy. The capital market has the challenging task of mobilising small number of participants and limited range of long-term investment products. Despite these challenges I am optimistic that working together, we can reduce the cost of finance in Zambia. The Bank of Zambia will continue to provide the required leadership and act as the catalyst for the emergence of viable and responsible markets to serve the interests of all investors. Ladies and Gentlemen, I wish you success in the deliberations of this conference and in the rest of your endeavours for 2010.