Chapter 17: Monetary Policy in Zambia: Experience and Challenges
Denny H. Kalyalya* INTRODUCTION 17.1 Since liberalization of the economy in 1991, the formulation and implementation of monetary policy in Zambia have been focused on correcting the macroeconomic imbalances that characterized the economy over the previous two decades. The period after 1991 has therefore witnessed a transformation of the economy through a series of reforms, including the move towards market-based instruments of monetary policy. Prior to 1991 monetary policy had multiple objectives without clearly defined targets and largely employed direct instruments for monetary control. The latter included interest rate and credit allocation controls, high core liquid assets and statutory reserve requirements. The national budget was predominantly financed through borrowing from the central bank. In other words, the fiscal budget deficits were being monetized, particularly after experiencing significant loss of government revenue from the mining industry following the slump in copper prices. As a result, the economy experienced fundamental internal and external imbalances as well as structural and institutional deficiencies (Kalyalya, 2001). In the period that followed, there was a general movement of the economy towards market-based structures and systems which included the deregulation of prices of real and financial assets alongside the introduction of market-based instruments of monetary policy. This chapter highlights major changes that have taken place in respect of monetary policy formulation and implementation following liberalization of the Zambian economy in 1991. The rest of the chapter is organized as follows: section 17.2 highlights the nature of monetary policy and the major changes in monetary policy from 1991...
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