In this respect, “original sin” is a specific term, which was first coined by Eichengreen and Hausmann 2 in 1999; and which means that countries without fully developed financial markets are obliged to borrow in foreign currencies since borrowing in their national currencies at longer maturities is almost impossible. The other main factor behind the dollarization is related to the market imperfections. Market distortions, fixed exchange rate regime accompanied with high inflation, low institutional quality, poorly developed domestic financial markets, currency-blind financial regulations and safety nets in foreign currency such as deposit insurance can all be evaluated under this framework. Due to those imperfections, moral hazard problems arise and this in turn results in a larger demand for foreign currency. As the studies 3 have showed, the low quality of legal and political institutions and the lack of legal protection for domestic creditor provide incentives for dollarization. Dear Guests, Now, the question is why we should care about dollarization. Before anything else, it increases a country’s vulnerability to shocks. Let me also mention the vulnerabilities of two major sectors in an economy: one arising from dollarization in private sector and the other one having to do with dollarized public debt dynamics. Beginning with the private sector, the dollarized financial systems and the companies’ balance sheets are obviously exposed to solvency risks, due to currency mismatch problem.
Michael Gondwe: Encouraging local content and business linkages – role of the financial sector Opening remarks by Dr Michael Gondwe, Governor of the Bank of Zambia, at the 2013 SME Local Content and Business Linkage Forum, Lusaka, 28 November 2013. *  *  *  •  The Guest of Honour, Minister of Finance, Honourable Alexander B. Chikwanda, MP;  •  The World Bank Country Director, Ms Kundhavi Kadiresan;  •  Senior Government Officials and Development Partners present;  •  Heads and Representatives of Financial Institutions;  •  Business Industry and Associations represented;  •  Distinguished Invited Guests;  •  Members of the Press;  •  Ladies and Gentlemen. On behalf of the Bank of Zambia and indeed on my own behalf, I wish to extend a very warm welcome to you all to this very important Forum. Some of you may recall that in June last year, together with the World Bank, we organised a strategic forum for small and medium enterprises (SME) on the “role of finance for unleashing the potential of local Zambian businesses”. The objective of that Forum was to facilitate strategic policy dialogue between the Government, Bank of Zambia, the financial sector and the private sector on issues central to facilitating access to finance by Zambian businesses including SMEs. As Bank of Zambia, we believe that it is important to sustain this dialogue to facilitate an inclusive strategy in the financial sector development.