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Impact of the Global Financial Crisis on Zambia

Julio Revilla's picture

The direct financial effects of the global financial crisis have so far been limited due to Zambia’s reliance in domestic funding and limited exposure to external credit lines. However, the central bank has increased interest rates sharply as a result of portfolio outflows.

The largest affect has been the sharp fall in global copper prices. Copper exports, which accounted for almost 80 percent of total exports in 2007, have played a major role in sustaining Zambia’s growth, averaging close to 6 percent in the last five years. The fall of copper prices has already resulted in a significant depreciation of the domestic currency and more than doubled the external current account deficit in 2008. Lower copper prices have also contributed to weakening the fiscal position due to the government relying heavily on increased tax revenues (including a windfall tax) introduced in April.

As the economy slows down, second round effects are expected to negatively impact not only the financial sector but also the rest of the economy. Lack of infrastructure development (roads and energy) is likely to reduce growth of non-traditional export sectors in agriculture which could benefit from the exchange rate depreciation.

Comments

Submitted by Murenzi Ivan on
What is the Impact of the Global Financial Crisis on Rwanda. what would be the issues to consider when evaluating that. Could we say that for most African countries the Impact is mainly on Trade? thanks Student at Center for Development Economics Williams College

Submitted by Milimo on
It is important to understand what triggered this financial crisis. It was primarily spured by the U.S. housing crisis - increasing defaults on subprime loans led to huge losses for financial instutions that had packaged these loans into secondary securities and marketed them off to third parties. Since many African countries, including Rwanda, Zambia etc, do not not generally engage in these kinds of reckless innovations, they have not been directly hit by the crisis. However, the financial crisis in the United States has led to a credit freeze. Banks are reluctant to fund just about anything including projects that benefit developing countries. In this regard, African countries will be affected by the financial crisis. With globalization, there is no doubt that the US Financial crisis' impact will be far reaching both from a geographical and fiscal perspective.

Submitted by Chola on
Indeed the impact on Zambia is less severe than it has been for other countries such as those in the eastern bloc of Europe. While a significant depreciation of the local currency has occurred alongside the slump in copper prices, the substitution effects may be dominated by the income effect of the crisis. Meaning that there is likely to be a net decline in exports this year. Also, the depreciation is likely to prolong inflationary pressures because of the strong pass-through between the exchange rate and domestic prices. Of course, prolonged inflationary pressure is likely to translate into higher lending rate that may not only slow down output in the formal sector but may have a negative impact on long-term lending (Already, Zambia has a low M2/GDP ratio even by SSA standards). The labor force has recently seen significant decline in employment, particularly in the mining sector. It can generally be expected that the many firms that depending in the mining sector is facing cut backs as well. An important strategy in the intermediate term is to diversify the economy beyond mining.

Submitted by Tatenda Goodwill Jange on
How are you doing?? I am an Economics undergraduate student at the Midlands State University (Zimbabwe. I am not answering to your posted question, but rather just wanted to be in touch hoping that in future you might be able assist me with some relevant stuff since you'r studying with well a established institution. I am a young man aged 22 and am currently under-going an industrial attachment with the Reserve Bank of Zimbabwe. I wish to hear from you in the near future. Take great care of yourself and God bless...

Submitted by lady han on
Thanks for trying to answer my question,but I am not at University level yet.I am 18, doing my last Grade in senior high school.I was just doing my assignment on global financial crisis.Good to know you are there,hope we keep in touch. Chao,God bless and goodnight.

Submitted by philippe on
Low prices for copper, caused by the global financial crisis - is only a temporary phenomenon. Actions by United States and other countries promise a new growth in copper prices. Zambian Government has already reduced tariffs on fuel to help mining companies, and also asked foreign investors to report on the areas with the highest production costs in order to help them reduce outcomes.

Frankly, I am totally against the increase in interest rates in times of crisis such as this that we are experiencing. I think an absurd increase the interest rates, which raise the costs of investments that added the current low demand in the market causes more unemployment and further reduces the consumption, entering a recessionary cycle. The correct action, in my view, would be a serious policy of containment of public spending, rationing of resources to enable the fall of interest rates, generating more consumption, employment and so, at least, mitigate the effects of the crisis. Thanks.

There are many issues that surround poverty. Ultimately the root cause can be attributed to a weak infrastructure (among many others). It's like trying to fill a bucket with water that has a large hole in the bottom. No matter how much water you add to the bucket, the bucket will never be full. This is the same with poverty. No matter how much money you give to poverty stricken environments, without securing a strong infrastructure the money will be wasted. Long term solutions are needed. Individuals have to realize their worth and be open to change and innovation. The cycle needs to be broken and the only way this can be done is to supply those in need with a new idea or way to conduct themselves; providing value to society. Hopefully we can all work together to help foster change. TJ

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