Zambia

Zambia started with its exchange rate fixed to the USD and then the SDR. But it soon moved to a currency basket and small but frequent adjustments, with monetary control relying mainly on reserve and liquid assets ratios, in a context of fiscal indiscipline and dominance. When fiscal control was attained in the early 2000s monetary policy became more active and more focused on price stability, and began to move slowly towards indirect instruments. That movement was sharply reversed in 2014-15 and the near crisis of 2016, but resumed in 2017.

Years	Targets and attainment	Classification
1974-82	currency fixed to USD, but devalued with SDR vs USD early 1973; small number of banks, mainly foreign-owned; central bank uses reserve and liquidity ratios, calls for special deposits, credit controls and interest rate limits, lends directly to mining sector, and prioritises credit to government over lending to private sector; treasury bills issued but most held by commercial and central banks, no secondary market; economy and tax revenues heavily exposed to fluctuations in copper prices which have trend decline, diversification is aim but little progress; import and price controls, tightened on average over time; 1976 currency fixed to SDR, with devaluations 1976 and 1978	augmented exchange rate fix AERF
1983-2017	early 1983 devaluation, mid-1983 peg switched to trade-weighted currency basket, with rate adjusted at intervals to maintain competitiveness; 1980s reform and stabilisation efforts repeatedly undermined by fiscal slippages, SOE weaknesses and related monetary expansion; 1985-6 treasury bill auctions; late 1985 weekly forex auctions; mid-1986 exchange rate slides more sharply, authorities try various means to stabilise it (including tighter controls, suspension of auctions, dual exchange rates, peg to USD 1987-8, peg to SDR 1988-9, major devaluations and small frequent adjustments) but without sustained success, large but varying parallel market premium; 1991 multi-party constitution adopted, presidential elections, change of government, renewed emphasis on stabilisation and reform; 1991-2 forex liberalisation and policy of frequent small devaluations succeeded by market-determined exchange rate, unified end-1992; 1992-3 interest rate liberalisation, treasury bills at shorter maturities issued by tender (in place of tap issues), monetary policy focus now on reserve money; some structural reforms, but erratic fiscal discipline, central bank accommodates government and SOEs (especially copper mining, whose privatisation is heavily delayed), and efforts to counter various shocks repeatedly undermine stabilisation efforts; mid-1990s some rise in foreign exchange deposits; major underlying governance issues; monetary policy operated via variations in cash and liquid asset ratios, plus interest rates on loans to commercial banks and OMOs in treasury bills (bought mainly by banks to satisfy liquidity requirements), with exchange rate floating (but subject to smoothing and reserve targets); recurring problem of depreciation aimed to improve competitiveness fuelling inflation; second half of 1990s banking failures, 2000 largest (and state-owned) commercial bank reported insolvent; 2000 main mining company finally privatised; improvements to treasury bill market operations 2001, including repos; corruption under previous president exposed; high incidence of HIV/AIDS with serious economic effects; interbank forex market 2003; as of 2005, better fiscal control means central bank can operate more active monetary policy based on primary government security issues and OMOs, but absence of coordination between forex interventions and domestic actions makes for volatile reserve money growth, inflation expectations remain high and exchange rate fluctuates; medium- and long-term government bonds issued 2005-7, but all secondary markets remain shallow; forex sales (in context of aid inflows) as well as OMOs used to absorb excess liquidity; 2009 standing overnight lending facility; 2012 policy rate, with wide target band for overnight interbank rate, becomes primary monetary instrument, but aimed partly at reducing bank lending rates (and ceiling on such rates introduced late 2012, but abandoned late 2015); from 2013 falling copper prices plus wider loosening of fiscal control which monetary policy finds hard to counter (even with reversion to direct controls), large depreciations 2014 and 2015, higher inflation 2015 and near-crisis (with collapse of credit growth) 2016: overnight interbank rates go well above corridor in 2014 and 2016, policy rate loses its status as key signal and efforts to control exchange rate displace trades from interbank forex market to bilateral dealings; tighter monetary policy eventually stabilises exchange rate and lowers inflation, but at heavy cost in terms of activity and banking system stability; 2017 central bank resumes movement towards forward-looking, indirect-instrument-based, monetary framework; statistical database has significantly improved by end of period	loosely structured discretion LSD

Selected IMF references: RED 1974 pp44, 58; SR 1974 pp7-9; RED 1975 pp50; RED 1977 pp26, 28, 30-2; SR 1977 pp11-12, 19; RED 1978 pp36, 38, 55; RED 1983 p48; RED 1984 p58; SR 1984 pp3-4; SR 1985 pp19-20; RED 1988 pp49-52, 67-70; SR 1988 pp3-15; SR 1989 pp37, 51-2; SR 1991 pp 5-16; RED 1993 pp26-8, 33-6, 38-9; SR 1996 pp8, 14; SR 1997 pp6-9; SR 1999 pp9-10, 19; SR 2000 pp6-8, 12; SR 2001 pp6, 14; SR 2002 pp12, 15, 22-3; SR 2004 pp7, 9, 19-20; SISA 2005 pp27-32; SR 2005 pp9-10, 19-20; SI 2007 pp37-8; SR 2007 p13; SR 2009 pp6, 8, 9, 13; SR 2012 p17; SR 2013 pp7, 13-15; SR 2015 pp6-7, 15-16; SI 2017 pp25-43; SR 2017 pp5-10, 16-18.

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