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SOAS International Workshop

SOAS International Workshop “ Challenges and Prospects for Commodity Markets in the Global Economy ” A Workshop in Memory of Alfred Maizels 19th -20th September 2008 SOAS, University of London, Room B102 Paper title: Economic affects of copper prices on the Zambian economy:

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SOAS International Workshop

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  1. SOAS International Workshop “Challenges and Prospects for Commodity Markets in the Global Economy” A Workshop in Memory of Alfred Maizels 19th -20th September 2008 SOAS, University of London, Room B102 Paper title: Economic affects of copper prices on the Zambian economy: Exchange rate regime and Kwacha appreciation John Weeks Professor Emeritus School of Oriental and African Studies University of London September 2008

  2. Appreciation of the Kwacha

  3. Index of the Kwacha-US$ Rate and the Relative Trade Balance, 2003-2008 (3 month moving average)

  4. Copper price and the Kwacha/US$ rate, 2003-2008

  5. Regression Analysis of the Nominal Exchange Rate, January 2003 - April 2008

  6. Regression-Estimated Effect of Bank of Zambia ForeignExchange Purchases for Different Copper Prices for Kwacha/US$ = 4000

  7. Policy conclusions: 1. A rising international copper price resulted in a dramatic appreciation of the Kwacha (over thirty percent in nominal terms from early 2005 to early 2008). 2. Bank of Zambia interventions were effective in reducing the appreciation, but too small to prevent major appreciation.

  8. Fiscal Effects of Appreciation Major effects of appreciation: 1. Trade taxes (negative) 2. Development assistance (negative) 3. Debt service (positive)

  9. Quarterly Trade Revenue, ODA and Debt Service Gains and Losses, 2003-2006, percentages of total public revenue

  10. Policy conclusions The appreciation of the Kwacha had a substantially negative impact on public revenue. The economic consequences of this were aggravated by the strict budget conditionality set by the IMF.

  11. Domestic Price Effects 1. Tradables and non-tradables 2. Monopoly power

  12. Price Indices of Maize and Petrol, 2005-2007 (June 20005 =100)

  13. Calculation of Exchange Rate Effect, Premium Petrol Price, 2005-2007 (June 2005 =100)

  14. External competitiveness Nominal Kwacha Exchange Rate for Major Trading (imports) partners, October 2004 – April 2007

  15. Nominal Exchange rates to the US Dollar, Zambia and Five Export Competitors, October 2004 – March 2007

  16. Nominal exchange rates Divided by the domestic price level, five export competitors relatively to Zambia, last quarter 2004 – first quarter 2007

  17. Closing comments 1. The rapid rise in the international price of copper resulted in a substantial appreciation of the Kwacha, which had negative fiscal effects, caused domestic welfare losses, and reduced external competitiveness. Short term management of the exchange rate was necessary, within a long term development framework. 2. Given the openness of Zambia’s economy and its sensitivity to the copper price, an appropriate policy would be a managed fixed exchange rate. Over the last two decades for governments followed a policy of ‘get the short term economic management right and the long run will take care of itself’. In a natural resource based country, this has been a recipe for slow growth and copper dependence.

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