Impact Of The Global Financial Crisis On Zambia
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World Bank December 5, 2008
Effects of the Global Financial Crisis on Zambia
Jan-07
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Feb-07
Apr-07
Jun-07 Aug-07 Sep-07 Nov-07
Jan-08
Feb-08 Apr-08
Copper Price (US$/lb.)
Jun-08 Aug-08 Sep-08 Nov-08
Largest Effect on Copper Prices
The mild slowdown was the result of constraints on electricity output and rising food and fuel prices. Falling copper prices accelerated its fall in October. The largest concern is in the expected fiscal effect (of about 3% of GDP in lower fiscal revenues for 2009). And on the sharp increase in the current account deficit, that started in the third quarter of this year. Copper exports reached about 70% of total exports in 2007.
The economy was already decelerating in the second half o the year
3000
3500
4000
4500
5000
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Kwachas/US$
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
The nominal exchange rate has depreciated sharply
1.50 Jan-07
2.00
2.50
3.00
3.50
4.00
4.50
Apr-07
Jun-07
Sep-07
Kw acha/US$
Dec-07
Copper Prices (US$/lb.)
Mar-08
May-08
Aug-08
Nov-08
5,000
4,500
4,000
3,500
3,000
The exchange rate has followed closely changes in copper prices
The effects of the global crisis on the domestic financial sector have been small, in part due to its small size. Trade financing mostly in cash. Role of subsidiaries could become an issue. The central bank has already registered liquidity pressures, and difficulties on its OMO. High liquidity preference has already resulted in foreign portfolio outflows and reduced presence of pension funds and institutional investors.
The short term effects have been limited in the financial sector, but are expected to rise
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
Jan-07
May-07
Sep-07
Jan-08
T-Bill Interest Rate (average)
May-08
Sep-08
As a result, short term effects non-negligible: capital outflows despite rising interest rates
0
300
600
900
1200
1500
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
Gross International Reserves (US$ millions)
May-08
Jul-08
Sep-08
Nov-08
International Reserves have fallen by 25% since their peak in July 2008
The current account deficit is expected to double in 2008 (to 8% of GDP from 4% in 2007) and to 10% in 2009. The fiscal deficit has already worsened in 2008, led by lower copper revenues and to reach 3% of GDP in 2009. The government has few policy options (current spending) and no market access. Silver lining on non-traditional exports, but limited. Financial sector exposed to domestic and international downside risks.
Large negative effects are expected in output, fiscal and external accounts, and the financial sector
Effects of the Global Financial Crisis on Zambia
Jan-07
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Feb-07
Apr-07
Jun-07 Aug-07 Sep-07 Nov-07
Jan-08
Feb-08 Apr-08
Copper Price (US$/lb.)
Jun-08 Aug-08 Sep-08 Nov-08
Largest Effect on Copper Prices
The mild slowdown was the result of constraints on electricity output and rising food and fuel prices. Falling copper prices accelerated its fall in October. The largest concern is in the expected fiscal effect (of about 3% of GDP in lower fiscal revenues for 2009). And on the sharp increase in the current account deficit, that started in the third quarter of this year. Copper exports reached about 70% of total exports in 2007.
The economy was already decelerating in the second half o the year
3000
3500
4000
4500
5000
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Kwachas/US$
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
The nominal exchange rate has depreciated sharply
1.50 Jan-07
2.00
2.50
3.00
3.50
4.00
4.50
Apr-07
Jun-07
Sep-07
Kw acha/US$
Dec-07
Copper Prices (US$/lb.)
Mar-08
May-08
Aug-08
Nov-08
5,000
4,500
4,000
3,500
3,000
The exchange rate has followed closely changes in copper prices
The effects of the global crisis on the domestic financial sector have been small, in part due to its small size. Trade financing mostly in cash. Role of subsidiaries could become an issue. The central bank has already registered liquidity pressures, and difficulties on its OMO. High liquidity preference has already resulted in foreign portfolio outflows and reduced presence of pension funds and institutional investors.
The short term effects have been limited in the financial sector, but are expected to rise
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
Jan-07
May-07
Sep-07
Jan-08
T-Bill Interest Rate (average)
May-08
Sep-08
As a result, short term effects non-negligible: capital outflows despite rising interest rates
0
300
600
900
1200
1500
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
Gross International Reserves (US$ millions)
May-08
Jul-08
Sep-08
Nov-08
International Reserves have fallen by 25% since their peak in July 2008
The current account deficit is expected to double in 2008 (to 8% of GDP from 4% in 2007) and to 10% in 2009. The fiscal deficit has already worsened in 2008, led by lower copper revenues and to reach 3% of GDP in 2009. The government has few policy options (current spending) and no market access. Silver lining on non-traditional exports, but limited. Financial sector exposed to domestic and international downside risks.
Large negative effects are expected in output, fiscal and external accounts, and the financial sector
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