Dr Denny H Kalyalya

Governor, Bank of Zambia

After a long career in the finance industry, including a period at the World Bank, Dr Denny Kalyalya took over the reins of Zambia’s central bank in 2015 at a difficult moment. The price of copper – the country’s main commodity – was falling, drought was curtailing energy production and the government was already undertaking a massive infrastructure expansion. Here he explains the steps he has taken to put Zambia back on the right macroeconomic track to attract investors and pave the way for a bright, prosperous future


You were appointed governor of the Bank of Zambia in 2015 after a long career in the financial services industry. How has your experience helped you navigate the country’s economic challenges over recent years?

The experience I have has helped me tremendously to navigate the challenges the country has been going through. I am not new to the Bank – I was here before as deputy governor. When I rejoined, the situation was quite tough. The economy was under severe pressure, largely because of the prices of copper and other commodities fell in 2015. Our situation was made more difficult because there was a massive expansion in infrastructure going on with the expectation that there would be a lot of revenue coming in. The result was a huge depreciation in the exchange rate. We couldn’t deal with this through the supply side – that takes time to react. The only avenue we had was to try to restrain the demand side. While we were grappling with this, the electricity supply was also under stress. We depend heavily on hydropower; so when water levels came down, production of electricity was adversely affected. So, we tightened monetary policy quite strongly, particularly in November 2015, and that restrained the demand side. It wasn’t palatable, but we did our best to explain why we were doing what we were doing. Inflation peaked in February 2016 at 22.9 per cent, but we were confident with what we were seeing on a monthly basis that things were going to change. The challenge was to convince other players why this was happening. We continued tightening monetary policy until February of this year. We reached a point where things calmed down: the price of copper started to come up; the rains were above normal and agriculture output also improved. That’s what some of the growth we are seeing now is driven by: agriculture, energy and a bit of manufacturing. We are now at the stage where things look much brighter.


One of the reasons for this brighter outlook may be the strengthening of economic confidence as reflected by the participation of foreign investors in the government securities market. In what ways is the perception of Zambia a crucial factor for drawing in more foreign direct investment?

We are quite integrated into the international economy now, partly because we have gone in to tap the financial markets globally. We have had three issuances of Government Eurobonds. There is a lot of interest in what is happening here at home and we have had many enquiries from institutional investors. We are going to the annual meetings of the IMF and World Bank, and a lot of investors like to have conversations about what is happening here because they have a direct interest in their investment through the Eurobonds. We are no longer a peripheral country. On the other hand, we have the ratings agencies: they are constantly here and issuing reports, which are paid close attention to. So perception is important. The risks that are attributed to Zambia often have to do with perception. If one was to assess what the perceived risk is and what the actual risk is, the gap is huge. For those looking at medium to long term, the opportunities are huge because we have unexploited potential in all key areas: mining, agriculture, energy and tourism. Last April when I went to Washington for the IMF-World Bank Spring Meetings, one of the investors was saying that one of the interesting things now about emerging economies, including that of Zambia, was that the risk-return was much clearer than in other places. It’s a question of having that eagerness to invest.

“If one was to assess what the perceived risk of investing is and what the actual risk is, the gap is huge”

The UK is among the top five economies investing in Uganda, Zambia, Botswana and Nigeria. Out of these nations, UK FDI makes up the highest percentage of GDP in Zambia. How important would you say British investment is in Zambia?

There is one little-known fact about our relationship: the Department of International Development (DFID) was the entity that sponsored our first sovereign ratings. The oldest bank here has British origins – Standard Chartered – which started in 1906. The roots are very deep. The UK has helped the country in a number of ways and more can be done to strengthen this relationship. There’s a lot that can be harnessed and now there’s the question of whether they will engage more following Brexit.


When the Lord Mayor of London visited Zambia in September, he said London was the world’s leading financial services and fintech hub. Zambia is also focusing on innovating within its financial services industry. Do you see opportunities for increased knowledge sharing or cooperation in finance between the two countries?

Definitely. We are stepping up our financial sector reforms and we really want to step up in fintech. Already, we have digitised many of our services. There are still some issues in terms of cost, but we are confident these will be overcome. We run the payment system from the central bank. We think that’s the avenue that will give us more penetration and make us more inclusive. Financial inclusion is one of our strategic objectives, so linking up with those who have the knowhow is something we are always seeking to do.


Could you delineate your strategy for improving financial inclusion. Why is it so important to Zambia’s regional development goals?

If you look at the financial crisis of 2008-09, those who were informed from a financial point of view were better able to handle it. When another crisis strikes, will we be in a better position to withstand that? That’s what’s at the back of our minds. How do we make this happen? As a central bank, we don’t have the vehicles to do this, so we talk to other agents to raise their awareness of the importance of financial inclusion. With the banks, for example: if people are financially literate, they will save more, which is a vehicle for banks to raise money. If these become their clients on the borrowing side, they will be in a better position to manage their affairs; financial stability is also supported through that process. Our policy is to encourage them to do that. Our monetary policy will be more effective if more people are financially included.


We are also seeing Zambia moving towards becoming a cashless society – some areas such as mobile phone payments are already very advanced. How do you see this developing?

That’s a major campaign right now. Last July 5, we reduced the limit for cheque transactions to K25,000 with the aim of using more electronic means of payment. If you go around the country, you see a lot of payment streams whereby people can remit money. We have a lot of challenges with paper instruments – fraud, counterfeiting, the currency part of it – and so we’ll reduce that with electronic payment systems. We are the ones who issue the currency and distribute it, and the costs for doing that are quite significant. So, if we move away from the use of cash it will save us money. Yes, there are risks that we must be aware of and be able to handle – like cybersecurity – but the payment system is still a much safer platform to use.

“The opportunities are huge because we have unexploited potential in all key areas: mining, agriculture, tourism”

How would you describe the economic digitisation that Zambia is undertaking?

It’s catching on. The enthusiasm is there, particularly with young people. Not long ago, we didn’t have cell phones. Now if you go to literally any village in Zambia, you will find someone with a cell phone. Penetration is quite high, and remittance and the transmission of funds is much more readily available. We were in the Western Province recently and one of the things that surprised us was that people were excited about the fact that they could now send and receive money from their relatives electronically. We were about 600km from Lusaka and traditionally people spend a lot of time coming to urban areas to collect and spend money. The cost is still relatively high, so we are talking to providers to see how they can reduce that.


What impact will the lowering of lending and interest rates have for the Zambian economy?

With the new monetary policy framework we introduced in 2012, we want the policy rate – which is now at 11 per cent – to be what is used as a reference in deciding rates that are charged in the market. We set the policy rate paying attention to where inflation is and where inflation is going to be. The digitisation is also an effort to channel money into financial institutions. One of the key issues for banks is finding more affordable sources of capital. The policy rate is the wholesale rate, so if we can collect the money lying around in a much more affordable way, this rate will be more effective. All this modernisation is geared towards making that happen. Interest rates are also influenced by the government’s behaviour in terms of financing needs. We are a fiscal agent for the government – we issue paper on their behalf. When the government demands funds, it is competing with the private sector. And government paper is zero risk-weighted, which means that if banks are holding government paper, it is risk free, which frees their balance sheet to do other things. But if they concentrate their money into that, it means they cannot lend. When banks are concentrating on government paper, the private sector gets crowded out and that has pushed up interest rates on government paper and other interest rates in the process. Banks have a choice – do they lend to individuals, which is very risky, or to the government, which is not risky? You already know what their preference is. So, one of the things we are trying to do is to get the government to bring down its borrowing, and that’s what you’ve seen happening.

One avenue through which this also happens is that of portfolio investors. When they participate in our government paper, they do two things. One: they bring foreign exchange, because to participate in the government securities primary auctions they have to convert their foreign currency into the local currency (kwacha), which helps the foreign exchange market. Two: they increase the supply of funds for the government portfolio, which dampens interest rates for government securities. As this happens, we see the other interest rates also start falling. This is a very interesting and important relationship: if government paper is very expensive, interest rates will stay high.

We had also seen during this period that non-performing loans had gone up. From the tightening we did and the low economic activity going on, the government had accumulated arrears that they are now dismantling to try to ease the situation for government suppliers. In addition, with the relative stability of the exchange rate, we see that people are more encouraged to plan for the future. So it’s a combination of factors. Inflation has come down – we are at 6.3 per cent as of August 2017 – so we have reached our medium-term target of beng between six and eight per cent. Now the challenge is to maintain that posture for us to accrue more benefits.



“We are a central bank that listens. If anyone has any doubt about what is going on, we encourage them to see us”

Is there anything else you would like to highlight to potential investors about the Bank of Zambia?

We are a central bank that listens. We want to do things the right way and transparently. If anyone has any doubt about what is going on, we encourage them to see us. We are improving our website so that much of this information is available there. Our monetary policy conduct is an open book. Apart from that, the potential in this economy is huge. Oftentimes people look at the challenges. But by focusing too much on the challenges, you miss the opportunities. I would like to encourage those looking at Zambia to visit – there is a lot that is happening of a positive nature. We have highly qualified people in these institutions and the Bank is spending a lot of money training people. We have a very strong regional grouping here in the Southern African Development Community (SADC) – the Committee of Central Bank Governors meets twice a year, at a minimum, to deliberate on issues of regional integration – and we have undertaken a number of joint projects in areas such as payment systems, bank supervision and ICT. We think Zambia is on a sustainable path to becoming a prosperous middle-income country, and there is no reason why we can’t get there.

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