Effects of the Global Financial Crisis on

Zambia

World Bank
December 5, 2008
 Largest Effect on Copper Prices

Copper Price (US$/lb.)

4.5

4.0

3.5

3.0

2.5

2.0

1.5
Jan-07 Feb-07 Apr-07 Jun-07 Aug-07 Sep-07 Nov-07 Jan-08 Feb-08 Apr-08 Jun-08 Aug-08 Sep-08 Nov-08
The economy was already decelerating in the second half o
the year

„ 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 nominal exchange rate has depreciated sharply

Kwachas/US$

5000

4500

4000

3500

3000
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08
The exchange rate has followed closely changes in copper
prices

4.50 3,000

4.00

3,500

3.50

3.00 4,000

2.50
Copper Prices (US$/lb.)
4,500
2.00 Kw acha/US$

1.50 5,000
Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 May-08 Aug-08 Nov-08
 The short term effects have been limited in the financial
sector, but are expected to rise

„ 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.
 As a result, short term effects non-negligible: capital
outflows despite rising interest rates

T-Bill Interest Rate (average)

17.0

16.0

15.0

14.0

13.0

12.0

11.0

10.0
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08
International Reserves have fallen by 25% since their peak
in July 2008

Gross International Reserves

(US$ millions)
1500

1200

900

600

300

0
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
 Large negative effects are expected in output, fiscal and
external accounts, and the financial sector

„ 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.