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.