Address by Mr TT Mboweni, Governor of the South African Reserve Bank, at a conference to commemorate the Bank of Zambia’s 40th Anniversary, Lusaka, Zambia, 5 August 2004 1. Introduction Your Excellency, the President of the Republic of Zambia, Dear Colleague, the Governor of the Bank of Zambia, Excellencies, Management and staff of the Bank of Zambia, Retired former Governors of the Bank of Zambia, ladies and gentlemen. It is indeed an honour and privilege to make this presentation on the occasion of the celebrations marking the 40th anniversary of the Bank of Zambia. Indeed, the Government, the management and staff of the Bank of Zambia and the people of Zambia as a whole have every justification to be proud on reaching this historic milestone. I am truly overwhelmed by your invitation, not only to say a word or two today on the challenges of central banking in Africa, but also for providing me the opportunity to return to Lusaka which was my home in the late 1980s and early 1990s. Zambia’s contribution to the freedom struggle in Southern Africa is firmly embedded in our memories. So I have returned, this time in a central banker’s suit and tie, to my home here in Lusaka. Mr President, may I express our gratitude on behalf of my contemporaries who found a home here. As will be evident from my address, the challenges facing central banks are generally the same all over the world, but in some instances they are more pronounced in emerging markets than is the case in developed countries. 2. Price stability In a paper delivered at the Jackson Hole* conference in 2003, Professor Kenneth Rogoff, who was at the time the Economic Counsellor and Director of the Research Department of the International Monetary Fund (IMF), describes how over the last ten years global inflation has dropped from about 30% per annum to below 4 per cent per annum. This is indeed a remarkable achievement. In the economically advanced countries, inflation averaged 9 per cent in the first half of the 1980s and 2 per cent since the beginning of this decade. Following on this success, the developing world has performed even better. While inflation averaged around 30 per cent in the developing countries in the first half of the 1980s, it was on average below 6 per cent in the first few years of this decade. Recent estimates and forecasts by the IMF indicate that for the year 2003, inflation in Africa averaged 10,3 per cent and for 2004 it is expected to decline to 8,6 per cent. Bearing in mind that average inflation in Africa was around 40% in the early 1990s, this is quite an achievement. The African success in containing inflation is in reality even better. The higher inflation rate is occasioned by the impact of a few countries that still have very high inflation. Examples in this regard are Angola, Zimbabwe and the Democratic Republic of Congo. Nonetheless, if the average inflation rate of 10,3 per cent for Africa in 2003 is compared to 2,7 per cent for developing countries in Asia, it is clear that there is still room for improvement. Consequently, the pursuit of price stability is a major challenge for governments and central banks in Africa. The worldwide success in bringing inflation down to more acceptable levels cannot be ascribed to monetary policy alone. It is certainly also a consequence of other important factors such as more prudent fiscal policy, the easing of trade barriers, greater competition, productivity improvements and changing public expectations of inflation. While the causality regarding inflationary expectations is not totally clear, it does appear plausible that success in the quest for price stability is rewarded with further success as inflationary expectations adjust downwards, influencing the overall price setting mechanism or chain. These expectations also depend on the credibility of the central bank. Whatever other factors influence the inflation rate, one can hardly deny that the execution of monetary policy in pursuit of price stability is a core function of central banks in all modern economies. The credibility of cent