Sustainable lowering of lending rates by commercial banks should occur in the current environment of low inflation. Your Excellency, 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: •  increased copper output and exports as well as record high prices of the commodity. Copper exports volume 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 $ per tonne in December 2005 from US $ per tonne in December 2004. The price of copper has since increased sharply and had risen to over US $ per metric ton by May 2006,  •  increased non-traditional export earnings, from US $ million in 2003 to US $ million in 2005;  •  improved economic confidence following the attainment of the enhanced HIPC Initiative Completion Point in April 2005, which resulted in reduced external debt service obligations; and  •  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.
A Bank of Zambia review of interest rates determination in 2003, nonetheless, showed that the key determinants of commercial banks’ interest rates, particularly the lending rate, were the yield rates on Government securities, level of statutory reserve requirements, inflation, weak policy credibility and high default risks on loans obtained. 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. The financial sector reforms were aimed at improving the efficiency and intermediation of the banking system and also at enhancing competition amongst the players. The reforms entailed opening up entry of participants into the banking sector. 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, and 13 commercial banks, with a branch network of 159 as at end-December 2005 compared to 123 in 1990. •  Commercial banks have improved the range of products offered to customers, in line with global innovations. These include Automated Teller Machines (ATMs), foreign exchange accounts, Visa, mortgages, and leasing services.