Journal of Development Studies

ISSN: 0022-0388 (Print) 1743-9140 (Online) Journal homepage: http://www.tandfonline.com/loi/fjds20

Copper Boom and Bust in Zambia: The

Commodity-Currency Link

Elva Bova

To cite this article: Elva Bova (2012) Copper Boom and Bust in Zambia: The Commodity-Currency
Link, Journal of Development Studies, 48:6, 768-782, DOI: 10.1080/00220388.2011.649258

To link to this article: https://doi.org/10.1080/00220388.2011.649258

Published online: 11 Jun 2012.

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Journal of Development Studies,
Vol. 48, No. 6, 768–782, June 2012

Copper Boom and Bust in Zambia: The

Commodity-Currency Link
ELVA BOVA
School of Oriental and African Studies, University of London, London, UK, and International Monetary Fund,
Washington DC, USA

ABSTRACT Using Zambia as a case study, this article presents some of the challenges that small resource-
dependent economies faced during the commodity boom and the financial crisis. In particular, we investigate the
implications of having a price stability mandate when the scope for countercyclical fiscal policy is constrained
by limited resource revenues accruing to the budget. We show that, in Zambia, the inflation-focused monetary
framework exacerbated the effects of the shocks. The framework worked in favour of currency appreciation
during the copper boom, and it did not allow the accumulation of international reserves, which could have been
used to respond to the currency depreciation caused by the copper bust.

I. Introduction
Among the various transmission channels of the global financial crisis to the developing world,
the fall in commodity prices has been the most severe in resource-dependent economies. The
price slump that occurred in the second half of 2008 was particularly sharp for oil and metal
prices, with indirect effects on food prices. Following years of commodity price increases, the
price fall caused a sudden reversal in the trade balance of many commodity exporting economies
which had accumulating trade surpluses in the years of the boom. In addition to widening trade
deficits, the balance of payments of many of these countries was aggravated by large outflows of
capital that resulted from international investors perceiving greater risks in investing in these
economies.
In economies with floating exchange rates and inflation-focused monetary policies, the reversal
in the trade balance (aggravated by capital outflows) led the currency to depreciate. As a
consequence, domestic prices increased, moving monetary indicators well beyond the targets for
monetary policy. As the price fall occurred after the boom, depreciation followed a period of
currency appreciation, dramatically intensifying instability and uncertainty for exporters and
investors.
Taking Zambia as a case study, this article presents the difficulties that small resource-
dependent economies had in the macroeconomic management of shocks connected to the global
crisis. The main interest driving this study is to understand to what extent the macroeconomic
setting in place in the country allowed for policy measures to counter the shocks. These measures
refer to the policy mix whereby the central bank accumulates international reserves during a
commodity boom and sells them during a commodity bust to smooth the volatility of the

Correspondence Address: Elva Bova, International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431, USA.
Email: elvabova@gmail.com

ISSN 0022-0388 Print/1743-9140 Online/12/060768-15 ª 2012 Taylor & Francis

http://dx.doi.org/10.1080/00220388.2011.649258
 Copper Boom and Bust in Zambia 769

currency; and, at the same time, the government accumulates revenue from the commodity sector
during a boom and spends it during a bust for expenditure smoothing.
Particular attention is paid to monetary and exchange rate policy responses, with the objective
of understanding the implications of having an inflation-focused monetary framework during
sudden money demand shocks.
To assess exchange rate and monetary policies responses, this study examines the foreign
exchange interventions conducted by the Bank of Zambia. To evaluate fiscal policy responses, it
analyses the ownership structure and taxation regime in the copper sector. The latter provides an
indication of the amount of budget revenue that could be obtained from the sector and could
then be used for countercyclical fiscal responses.
The article is organised as follows. Section II briefly discusses monetary and exchange rate
regimes with a focus on small resource-dependent economies. Section III provides an overview of
the Zambian economy during the commodity boom and bust, while Section IV examines the
movements of the Zambian Kwacha currency and the functioning of the foreign exchange
market. Section V analyses and discusses the scope for countercyclical macroeconomic
management, and Section VI concludes the article.

II. Exchange Rate and Monetary Policies for Commodity Dependent Countries
In the early 1990s, Zambia adopted a flexible exchange rate regime with foreign exchange
interventions allowed only to smooth the volatility of the currency. In the same period, the Bank
of Zambia adopted a monetary target with price stability as the primary objective, to be achieved
through a target for broad money supply (M3) and an operational target for reserve money
supply (Bank of Zambia, 1991).
For countries subject to terms of trade shocks, like resource-dependent economies, a flexible
exchange rate arrangement is generally considered preferable to a fixed one since it allows for
rapid adjustments to shocks through movements in the nominal exchange rate. In contrast,
under a peg, the adjustment would take place through price movements, which could be sluggish
(Frankel, 1999; Mishkin, 1999; Mishkin and Savastano, 2002). While floats perform better in
case of terms of trade shocks, fixed exchange rates are considered to perform better under
portfolio shocks when financial markets are underdeveloped, as floats can be highly destabilising
in these circumstances (Obstfeld and Taylor, 2003; Adam et al., 2005). Hence, when a small
resource-dependent economy is exposed to both kinds of shocks, policy-makers are confronted
with a trade-off between letting the currency free to float to favour adjustments to terms of trade
shocks, or, opting for more management of the currency to cushion the country from portfolio
shocks.
Once an economy has opted for a float, the issue at stake becomes how to float. Abandoning a
peg implies abandoning a nominal anchor for monetary policy, namely, a credible commitment
for monetary policy that could orient expectations towards the objectives set by the central bank.
Central banks may choose as objectives for monetary policy price stability, growth promotion,
full employment, smoothing the business cycle, preventing financial crises and stabilising the real
exchange rate. As targets to achieve these goals, central banks usually consider the inflation rate,
the rate of growth of the money supply, the nominal gross national product, and indicators of
financial fragility (Masson, 2006). When growth and export competitiveness are at stake, as in
many developing countries, some authors suggest targeting the real exchange rate, as a measure
of the country’s competitiveness, rather than price stability (Nissanke, 1993). For commodity
dependent economies, a study by Frankel (2002) suggests pegging to the price of the main
exported commodity or to the price index of a basket of exported commodities. These
arrangements would avoid fluctuations in the exchange rate, while providing the same
accommodation to shocks usually provided by floats.
Despite the large range of possible objectives for monetary policy, many developing countries,
even commodity dependent economies, have adhered to inflation-focused monetary rules and,
770 E. Bova

where a fully-fledged inflation targeting was not possible, as in Zambia, they have adopted
monetary targets (Adam et al., 2004; IMF, 2006). For resource-dependent economies, however, a
strict mandate for price stability may not properly insulate the currency and the economy from
commodity shocks. Under such a regime, a positive commodity shock leads to a currency
appreciation, facilitating the achievement of a low inflation target and discouraging any
intervention to curb the currency’s appreciation. In contrast, when commodity prices fall, the
currency depreciates and this raises domestic prices, which will induce the central bank to
intervene in the foreign exchange market. Overall, the management of shocks under a price
stability mandate is biased towards letting currencies appreciate, with serious consequences on
export competing sectors.
When monetary policy is tied to its price stability mandate, countercyclical responses to shocks
can, however, be conducted by fiscal policy. The government can save revenue from the
commodity sector during booms and use it to face the effects of busts. To enable such a response,
the government should be able to receive part of the mining receipts and, to ensure that
expenditure be stable over the commodity price cycle, the use of resource revenue should be
regulated by a fiscal rule or framework.

III. The Copper Boom and Bust in Zambia

Ranking 153 out of 172 countries for the 2011 Human Development Index, Zambia has an
economy dominated by copper production: copper exports amount to more than 70 per cent of
the total exports and contribute to 70 per cent of the country’s total foreign exchange (IMF
International Financial Statistics data). Yet, the copper industry employs roughly 10 per cent of
the total workforce, against 70 per cent employed in agriculture.
Due to China and India’s ballooning demand for metals, metal prices experienced an
exceptional surge from 2003 to 2008, a period defined as a second commodity boom (Kaplinsky,
2010).1 Copper prices increased sharply from December 2002 to July 2008 (Figure 1), which led
to a substantial expansion in Zambian copper production (Figure 2). The boom, in turn,
attracted large foreign direct investments in the mining sector (World Bank, 2008).
The booming economy facilitated the achievement of the Heavily Indebted Poor Countries
Initiative completion point and favoured debt relief as part of the Multilateral Debt Relief Initiative.
The concession of debt relief in December 2005 led to a substantial decline in the country’s external
debt, it reduced pressure on domestic deficit financing, leading to a reduction in the supply of
domestic money. Since the debt announcement raised expectations of credibly lower inflation and
higher growth, large portfolio inflows accrued to the economy (Figure 3), and the domestic private
sector shifted its portfolio towards the Zambian Kwacha (Cali and te Velde 2007).

Figure 1. Copper price (2000–2008).

Source: London Metal Exchange.
 Copper Boom and Bust in Zambia 771

In July 2008, following a fall in demand for metals and owing to rising expectations of a global
economic slowdown (IMF 2009), the price of copper fell, losing two-thirds of its value by
December (Figure 4). As a result, exports declined quite substantially, and the country’s trade
balance sharply deteriorated (Figure 5).
The bust had major repercussions on the social welfare of the Copperbelt region, as mines had
to be closed or put on maintenance. In December 2008, the shutdown of the two Luanshya
plants, Baluba and Chambishi Metals Plc, made 1700 miners jobless (Shacinda, 2009). Estimates
by the Overseas Development Studies indicate that roughly 8000 miners, out of the total of
60,000, were made redundant in the few months between October and December 2008.

Figure 2. Zambian exports (2000–2008).

Source: IMF–Direction of Trade Statistics.

Figure 3. Capital flows (1997–2008).

Source: WB-CAS (2008).

Figure 4. Copper price (2005–2009).

Source: London Metal Exchange.
772 E. Bova

The fall in the copper price also caused government revenue to fall seven per cent below the
2009 budget target.2 The deterioration in the trade balance was then exacerbated by sudden stops
in foreign direct investments, a reversal in portfolio flows and a decline in the level of aid and
remittances (Ndulo et al., 2009). Foreign direct investments collapsed to US$ 938 million in 2008,
from US$ 1323 million in 2007; while the outflow of portfolio funds amounted to US$ 6.1 million
in 2008 against the inflow of US$ 41.8 million registered in 2007 (Fundanga, 2009). The
immediate result of the abrupt change in the country’s external balance was a dramatic
depreciation of the currency.

IV. The Zambian Kwacha

From the adoption of the floating exchange rate regime until 2003, the Zambian Kwacha had a
depreciating trend with respect to the US Dollar, reflecting the adjustment from the overvalued
level that the currency had before adopting a flexible arrangement. After few years of stability,
the Kwacha started appreciating in July 2005. In November 2005, the currency appreciated by 30
per cent in only a month, and then continued to appreciate more slowly until May 2006. From
May to October 2006, the currency depreciated and, then, it appreciated again until June 2008
(Figure 6).

Figure 5. Zambian Exports (2005–2009).

Source: IMF–Direction of Trade Statistics.

Figure 6. Exchange rate (2000–2009).

Source: IMF–IFS Statistics.
 Copper Boom and Bust in Zambia 773

The fluctuations in the Kwacha were largely linked to the copper sector (Figure 7), and, for the
sharp appreciation of 2005, they were also associated with the monetary effects of debt relief
(Cali and te Velde, 2007; Weeks, 2007).
The appreciation of the Kwacha had serious repercussions on the rest of the economy. As
documented by the Export Board of Zambia (2007), the Zambian National Farmers Union
(Fynn and Haggblade, 2007) and the UNDP (Weeks et al., 2007) non-traditional exports were
dramatically hit by the appreciation of the Kwacha. Producers of tobacco, cotton and coffee
experienced a 30 per cent fall in their earnings for the crop year 2005–2006. Of these, tobacco is
the second export sector after copper for its contribution to the country’s foreign exchange and
the second sector for number of people employed, at 180,000.3 Cotton is the largest sector in
terms of workforce, amounting to roughly 200,000 people.4 Given that non-traditional exports
are invoiced in dollars, while their costs of production (especially labour) are expressed in
Kwacha, the currency appreciation hit profits. This led either to a reduction in the area
cultivated, with consequent abandonment of land, or to shifts into the production of maize and
soybeans for local consumption.
From July 2008, as copper prices fell sharply, the Kwacha depreciated by 60 per cent over six
months. The depreciation reflected the deficit in the balance of payments, resulting from the
lower supply of foreign exchange by the mining companies and from outflows of portfolio
capital, as well as the reduction in foreign direct investments (Fundanga, 2009).
The impact of the changes in mining activities on the currency is also corroborated by data on
the changes in the foreign exchange market. At present the Zambian foreign exchange market
operates through three segments: the Broad Based Interbank Foreign Exchange market
(introduced in July 2003), commercial banks, and the foreign exchange bureaux market.
As reported in Figure 8, the share of the Bank of Zambia’s interventions was relatively small
as consistent with the framework for monetary policy. On the contrary, a large number of
transactions took place under the general category ‘others’, referring to economic agents outside
the banking system which provided large sums of foreign exchange in the years of the boom and
purchased foreign exchange in the months of the bust (Figure 9).
As reported in Figure 10, the largest group of economic agents that supplied foreign exchange
in the years 2007 and 2008 were, indeed, the mining companies;5 while the second supplier of
foreign exchange comprised foreign banks, followed by the manufacturing sector and the public
sector. Conversely, the sectors that purchased foreign exchange the most were the manufacturing

Figure 7. Kwacha and copper price (2000–2009).

Source: IMF–IFS and London Metal Exchange.
774 E. Bova

Figure 8. Foreign exchange sales and purchases.

Source: Bank of Zambia.

Figure 9. The foreign exchange market.

Source: Bank of Zambia.

sector and foreign banks, followed by transport and communications, and then wholesale and
retail trade.
These figures also show that during the boom the mining companies actually spent part of the
export receipts, given that they converted foreign currency into Kwacha. As accounted by the
literature on commodity booms (Collier and Gunning, 1999; Collier, 2002, 2007), the effects of a
boom depend primarily on the responses of the recipient of the foreign exchange inflow.
Therefore, to assess these effects it is important to examine whether the inflow is saved or spent.
When transnational corporations dominate the commodity sector, then the option of profits
repatriation should be added to the decision to spend or to save. The spending response of the
mining companies is confirmed by reports from the Bloomsbury Minerals Economics (2007,
2008) which document the extent of the mining companies’ investments in the country, largely
through plant expansions.
The dominance of the mining sector in the foreign exchange market explains the close link
between the Zambian Kwacha and the copper price: when the price of copper increases, the
currency tends to appreciate, while, when the copper price goes down, the Kwacha depreciates.
 Copper Boom and Bust in Zambia 775

Figure 10. Foreign exchange providers and buyers.

Source: Bank of Zambia.

V. The Scope for Countercyclical Policies

Exchange Rate and Monetary Policies
The International Monetary Fund (IMF) classifies the Zambian exchange rate regime as a
managed float. As indicated, the extent of foreign exchange interventions conducted by the Bank
of Zambia during the period under consideration was quite limited.
During the copper boom (2004–2008), we can distinguish four different periods of foreign
exchange interventions and currency movements (Figure 11).

. From 2004 to the first half of 2005, the Bank of Zambia intervened in the foreign exchange
market only through purchases of foreign currency (expressed as sales to BoZ in the chart).
Such purchases were limited to less than US$ 20 million. As these years coincide with the
beginning of the copper boom, the interventions may have been an attempt to soften the
appreciating trend of the Kwacha.
. From August 2005 to January 2006, no interventions were conducted, as the central bank
sought to stick to the tight monetary target. The high demand for Kwacha led to a sharp and
substantial appreciation of the currency. The appreciation was immediately followed by a
depreciation, which suggests some degree of short run exchange rate overshooting during the
appreciation, and indicates that the equilibrium in the money market had to be achieved
through currency depreciation.
. To curb the appreciation, the Bank of Zambia conducted some foreign exchange
interventions during the first months of 2006. Trying to stick to their money target, they
776 E. Bova

Figure 11. Foreign exchange intervention and the Kwacha.

Source: Bank of Zambia and IMF–IFS.

sterilised foreign exchange through the issuance of bonds. Bank of Zambia data indicate that
net government bonds sales amounted to Kwacha 193 billion for the period January to
March 2006, as opposed to ZKw 74 billion for the period from October to December 2005.
As foreign investors entered the government debt market attracted by high domestic interest
rates, the currency appreciated even further.
. Only from April 2006 was the stance of monetary policy relaxed and the central bank
conducted more aggressive foreign exchange intervention, building a reserve buffer. The
measure was not sterilised, net sales of government bonds declined, in fact, to ZKw three
billion from April to June 2006. As a consequence, the excess appreciation of the exchange
rate was eliminated, and the real exchange rate returned to its trend by early 2007.

The monetary policy response in 2005–2006, although very rapidly reversed, highlights a crucial
limitation of monetary frameworks focused on price stability during money demand shocks.
Under these frameworks, since an appreciation lowers the price of imported goods, thereby
easing the pressure on domestic prices, central banks will prefer to let the currency appreciate
without any intervention in the foreign exchange market. Conversely, as depreciations threaten
the price stability objective, central banks will prefer to conduct foreign exchange interventions
during commodity busts. As a result, overall monetary and exchange rate policy interventions
will be biased towards more intervention during depreciation.
Two implications arise from this. First, if the exchange rate pass-through on prices is low, then
the benefits arising from an appreciation on domestic prices are very limited, and may not
compensate for the potential damage on export competitiveness induced by the appreciation.
Second, and more importantly, letting a currency appreciate in periods of commodity booms
prevents the central bank from accumulating international reserves that may be used to buffer
the currency in periods of a price crash.
With respect to the first point: the focus on price stability in the management of the Zambian
exchange rate is not unfounded. The movements of the Consumer Price Index (CPI) inflation
rate and of the Kwacha reported in Figure 12 seem to suggest the existence of some degree of
pass-through from the inflation rate to the Kwacha. This is particularly visible in 2005, when,
during the currency appreciation, inflation finally attained a one digit level of 9 per cent, down
from rates of around 17 per cent in previous years. Furthermore, when the currency depreciated
in the second quarter of 2008, the country’s inflation rate rose to 16.6 per cent in December 2008,
from 8.5 per cent in September 2007, due to the increase in import prices but also because of
rising international food prices (Ndulo et al., 2009).
 Copper Boom and Bust in Zambia 777

With respect to the second point: as expressed in Ndulo et al. (2009), the risk of reserve
depletion made Bank of Zambia’s intervention very problematic during the copper bust. As
shown in Figure 13, the level of foreign exchange reserves in the country increased
substantially since 2000, raising import cover from around two months in January 2003
to almost five months in August 2008. In an effort to dampen the depreciation of the
Kwacha during the crisis, the Bank of Zambia made net sales of US$ 127 million to the
interbank market during the fourth quarter of 2008 (Ndulo et al., 2009). Gross international
reserves dropped by 23 per cent between July and December 2008 as a result (Bank of
Zambia, 2009).
An adequate monetary policy response in this context would have been what the central
bank actually undertook after April 2006: unsterilised monetary policy intervention during the
boom, which would have allowed for an easier counteraction of the currency depreciation
during the bust. This point is consistent with the results of a study by Adam et al. (2009),
where the authors assess that aggressive bond sterilisation does not play a key role in reducing
macroeconomic volatility induced by sudden aid surges; on the contrary, they indicate as
effective macroeconomic management of aid inflows unsterilised intervention conducted
through either a crawl or a buffer plus float rule, which ties the reserve target to the fiscal
absorption of aid.

Figure 12. Exchange rate pass-through on CPI.

Source: International Monetary Fund–IFS.

Figure 13. Foreign exchange reserves.

Source: IMF–IFS, IMF–DTS.
778 E. Bova

Fiscal Policy Responses

As indicated, the function of currency stabilisation need not be restricted to monetary policy,
since fiscal policy can also play a role. Any assessment of an exchange rate regime and monetary
framework has to be gauged with respect to the fiscal regime adopted by the economy. In
commodity dependent countries, a countercyclical fiscal policy entails the accumulation of
revenue from the resource sector during booms, and the use of this revenue in situations of
falling prices. On the one hand, the measure stabilises fiscal revenue; on the other hand, it
alleviates the pressure on the currency as export receipts accrue directly to the government and
the central bank, without being exchanged into the market. Since export receipts need to accrue
to the government budget in the first place, the scope of stabilisation policies is primarily defined
by the extent of revenue that the government receives from the commodity sector. This can occur
either through direct ownership of the resource sector, as is the case in Norway and Chile, or,
indirectly, through taxation.
To assess the extent of stabilisation fiscal policy in Zambia, we examine, hereafter, the degree
of government ownership in the mines and the level of taxation of the copper sector.
The privatisation of the Zambian copper industry was regarded as necessary to rescue the
former state monopoly from the dramatic crisis which saw a loss equal to one million US dollars
per day in 1998 (Andersson et al., 2000). Between 1997 and 2000, Zambian Consolidated Copper
Mines (ZCCM) was split into seven different units and sold off to seven multinational mining
companies (Fraser and Longu, 2007).
As stated in the Mine and Mineral Act adopted in 1995, the new companies have to be
registered in Zambia and are subject to monitoring from an interministerial group. The
government retains a share in each mine through direct ownership of ZCCM-International
Holdings, a joint venture whose 87 per cent is owned by the government and 13 per cent is in the
hands of private shareholders. However, until 2009 the government of Zambia did not receive
any dividend from ZCCM-IH, despite the boom, as the company had to repay liabilities
accumulated in the years prior to the privatisation.6
The Mine and Mineral Act greatly simplified the licensing procedures for the mining
companies, placing minimum constraints on exploration and exploitation activities. It
established a royalty, calculated as 2 per cent of the market value of minerals free on board
(f.o.b.), less the cost of smelting, refining and insurance, handling and transport from the mining
area (Ministry of Mines and Mineral Developments). According to the Act, copper exporters
were levied 35 per cent of taxable income whereas other mineral and non-traditional
commodities attracted a 15 per cent levy. The Act also granted deductions of 100 per cent to
companies’ capital expenditure in the year in which they were incurred, as well as exemptions
from paying customs, excise duties or import tax levied on machinery and equipment. The
mining sector was authorised to claim back from the Zambian government all of the VAT paid
on goods bought locally.
Despite what was established in the Act, the royalty rate negotiated by most mining companies
was only 0.6 per cent of gross revenue under the Development Agreements, which were secretly
signed between the companies and the government (Fraser and Longu, 2007). In addition, the
export tax was set at 25 per cent, instead of 35 per cent as prescribed by the Act, and carrying
forward of losses was allowed for periods of between 15 and 20 years. This meant that companies
could subtract the losses made in year one of operation from taxable profits in subsequent years.
The government undertook not to amend any of these tax regimes after the agreements were
made for as long as 20 years. It has been estimated that in 2007 the government would have
received at least US$ 50 million if the mines had paid a 3 per cent royalty.7
The publication of the Development Agreements in 2007 put pressure on the government to
modify the legislation of the mine taxation. In April 2008, a new fiscal regime for the mining
sector was introduced and the corporate tax was raised to 30 per cent, the mineral royalties to 3
per cent and the withholding tax to 15 per cent (OECD, 2008). A variable profit tax of up to 15
 Copper Boom and Bust in Zambia 779

per cent was introduced together with a windfall profit tax to be applied if copper prices reached
certain thresholds. Under the new regime, additional revenue was estimated to be US$ 415
million, equal to a nine per cent increase of government revenue. Yet, only one third of the
expected increase was realised in the 2008–2009 fiscal year (Green, 2009).
The collapse in copper prices reopened the negotiation with the mining companies and, in
January 2009, the mining tax regime was revised. The windfall tax which fell due when copper
prices exceeded a certain level was removed, also, because the copper price fell below that level
early in October 2008 (Green, 2009). The government allowed companies to include income that
derives from hedging investments in the mining income; this implied that any loss on hedging (as
largely occurred in 2009) would contribute to reduce the taxable income. Finally, the revised
regime allowed companies to deduct 100 per cent of any investment as depreciation in the year in
which the expense occurred.
Given such a taxation regime, the amount of revenue accruing to the fiscal budget in the years
of the boom was smaller than expected. The share of mining taxes out of the total taxes
amounted to nearly six per cent in 2001 and to more than 18 per cent in 2007 (Figure 14). As
indicated, the additional increase in taxes in 2008 was not as large as expected, while the 2009
mining revenue was even lower.
When so little export revenue accrues to the government’s budget, the scope for fiscal policy to
counteract a commodity shock is limited. Arguably, an adequate fiscal response does not only

Figure 14. Mining revenue (2001–2007).

Source: WB-WDI.

Figure 15. Mining taxes (2001–2007).

Source: Zambian Revenue Authority.8
780 E. Bova

require higher fiscal revenue from the mining sector, but also a fiscal rule or framework that
guarantees short-run expenditure smoothing.

VI. Conclusion
This article examined the scope for countercyclical policies in Zambia through an analysis of how
shocks during the copper boom and the financial crisis were transmitted to the currency and,
through the currency, to the rest of the economy.
During the last few years, the Zambian economy has been exposed to the largest surge in the
price of copper since the mid 1970s. The boom was suddenly followed by a deep slump caused by
the global financial crisis. The study illustrated how these fluctuations, exacerbated by
procyclical capital movements, were closely mirrored by corresponding changes in the Zambian
Kwacha, which appreciated during the boom and depreciated in the months of the bust.
Adhering to the price stability mandate, the Bank of Zambia let the currency appreciate
temporarily during the boom, although it rapidly corrected its policy response, aiming at some
stability in the exchange rate. The compliance to the price stability mandate had two major
repercussions on the economy. One was the negative impact the currency appreciation had on
export competing sectors of the economy; the second was the limited amount of foreign exchange
reserves that the central bank managed to accumulate, which posed problems during the
subsequent depreciation of the currency. Arguably, monetary policy should have considered
some degree of stability in the exchange rate and the accumulation of a significant reserve buffer
as additional objectives, as it did in the period after mid-2006.
This article then argues that if the scope for stabilisation through exchange rate and monetary
management was limited by the monetary target in place, the ownership structure of the copper
sector and the taxation regime did not allow for countercyclical fiscal policy. The Zambian
government saved very little from the boom which limited its spending during the bust. In the
light of these findings, this study highlights how the right policy mix and, more importantly, the
macroeconomic setting that makes a specific policy mix possible, is tantamount.
While this study focuses on short term challenges to macroeconomic policies, improving the
resilience to shocks for commodity-dependent countries works in the direction of the long-term
objective of economic diversification.

Acknowledgements
This study has been conducted during the author’s PhD programme at the School of Oriental
and African Studies. The views expressed herein are those of the author and should not be
attributed to the IMF, its Executive Board, or its management. The author is grateful to an
anonymous referee for valuable comments and suggestions.

Notes
1. For broader discussions on the determinants of the commodity boom see UNCTAD (2008) and IMF (2008).
2. Projections made early in 2008 on the basis of the new taxation regime, for all sources (company income tax, royalties
and windfall tax) were about ZKw 1.6 trillion or about 12 per cent of government revenue. Given the shortfall in
windfall tax, the impact on total government revenue was estimated to fall by seven per cent (Kryticous, 2009).
3. Interview with delegate from the Tobacco Association of Zambia, May 2008, Lusaka.
4. Interview with delegate from the Cotton Association of Zambia, June 2008, Lusaka.
5. Unfortunately, we could not get data prior to 2007. Yet, we believe that the 2007 share of mining could be a proxy even
for the period before. On this point, an interesting study by Cali and te Velde (2007) illustrates through a simple
regression that copper exports can explain 87.5 per cent of the variation in real effective exchange rate between January
2003 and April 2006; and they can explain even 90 per cent in 2004 and 2006.
6. The information comes from interviews with officials of the Ministry of Finance and National Planning.
7. The development agreements also disposed that if the global copper price increased significantly and exceeded US$
2700 per metric tonne then the government could actually claim back a percentage of each sale made (price
 Copper Boom and Bust in Zambia 781

participation clause). However, the impact of the price participation clause has been minimal since companies could
deduct payment to the government for income tax purposes (Fraser and Longu, 2007).
8. Interview with employee of the Zambian Revenue Authority, May 2008, Lusaka.

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