The global financial crisis in Zambia: the commoditycurrency link By Elva Bova PhD candidate SOAS, University of London
Presentation outline Overview of the Zambian economy: copper dependence the copper boom the copper bust
The Zambian Kwacha as a commodity currency: some evidence: cointegration EGARCH analysis
how the forex market works in Zambia: Exchange rate regime Mine ownership
Policy question: what policy mix for commodity shocks in developing countries, given the new context of: -liberalisaed foreign exchange markets - privatised commodity sectors - open capital flows - comovement of commodity prices
Copper dependence
Zambia is ranked as 163 out of 179 in the UN’s HDI. 64% of the population below poverty line in 2006 (Oxfam2009)
Copper production:
constitutes < 60% of total exports; contributes to 70% of the foreign exchange; contributes to 10% of the GDP in 2006 (refining of metals included[1]) (CSO 2008); the sector as a whole employs 60,000 people, i.e.10% of the total workforce (Chambers of Mines), as opposed to 70% of agriculture
Historical notes: nationalised in the early 1960s, in 1972 public companies were grouped under ZCCM. In the 1990s, the country opted for privatisation due to high losses in the mining sector (poor investments in the 1980s, low prices in the 1990s) After years of negotiation, ZCCM was finally split in seven units in 2000, each belonging to a transnational corporation The Government of Zambia retained 15% share through ZCCM-IH de jure but not de facto
The boom 2003-July 2008 •Copper price: 1,800 10000 US$ MT (2002) 8000 8,000US$ MT (2006) 6000 •Copper production: 25,000 MT (2002), 4000 2000 52,000 MT (2006) •Trade balance 0 positive but very volatile U S $ p er M T
250 200 150 100 50 0 -50 -100 2003m 01 2003m 05 2003m 09 2004m 01 2004m 05 2004m 09 2005m 01 2005m 05 2005m 09 2006m 01 2006m 05 2006m 09 2007m 01 2007m 05 2007m 09 2008m 01 2008m 05
U S $ M illio n s
Copper prices and trade balance (2003-2008)
Trade balance
Source: IMF-IFS
Copper prices
Macro-adjustment in the early 2000s Political stability Economic stability (reduction of inflation through fiscal adjustment) Privatisation reform in the copper sector (increasing FDIs) Portfolio flows since 2005 Aid and debt relief
GDP growth Gross Domestic Product (1990-2007) 8 6 4 2 0 -2 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 -4 -6 -8 -10
GDP % growth
Source: WB-WDI
GDP per capita % growth
The copper bust: July 2008-2009 10000 8000 6000 4000 2000 0
tradebalance Source: IMF-IFS, IMF-DTS
copper prices
U S$ per M T
250 200 150 100 50 0 -50 -100
20 06 20 m 01 0 20 6 m 04 06 20 m 07 0 20 6 m 10 07 20 m 01 0 20 7 m 04 0 20 7 m 07 07 20 m 10 0 20 8 m 01 08 20 m 04 08 20 m 07 08 20 m 10 09 m0 1
US$ M i llio n s
Copper prices and trade balance (2006-2009)
Copper production: 35,000 October 2008, while 52,000 in 2006 Trade balance: +US$ 160 mil in June; - US$30 mil in Nov Mine closures: Chambishi in Oct 2008, 1,800 made redundant. 8,000 job losses registered in December 2008 from October (Oxfam 2009, ODI 2009)
Mining tax regime: the debate Changes in the taxation system prior and post the bust: Mining code in 1995 Development agreements 2000 (Lungu & Fraser 2007), secretly signed by GoZ and companies, exemptions and deductions (royalty 0.6% vs. 2%, exp tax 25% vs. 35%, carrying forward losses for a period of 15-20 years) The scandal 2007 and new regime in 2008 (Oxfam 2009): 9% predicted increase in gov revenues out of mines, not realised January/May 2009 new concessions to the mines (Reuters), like removal of windfall tax
The currency 10000
6000
8000
5000 4000
6000
3000
4000
2000
2000
1000 0
20 0 20 0 m 0 0 1 20 0 m 0 0 9 20 1 m 0 0 5 20 2 m 0 0 1 20 2 m 0 0 9 20 3 m 0 0 5 20 4 m 0 0 1 20 4 m 0 0 9 20 5 m 0 0 5 20 6 m 0 0 1 20 6 m 0 0 9 20 7 m 0 0 5 20 8 m 0 08 1 m0 9
0
copper price
Source: IMF-IFS
ZKw to US$
ZK w per U S$
U S $ per M T
Zambian Kwacha and copper prices (2000-2008)
•Appreciation by 30% end 2005 [negative impact on non trad. exports- Weeks 2007, Weeks et al. 2008] •Nov 2008 depreciation by 40% [negative impacts on imports, mainly food prices]
The Zambian Kwacha as a commodity currency
Commodity currency as indicating a long run relationship between the commodity price and the currency [empirical literature Cashin et al. 2002; Chen and Rogoff 2002] Evidence on long run relationship: Cointegration analysis between ZKw and copper, through Johansen test proves the existence of a long term relationship with a lag of 4 months and a coefficient of 0.746177 (0.02486) between the ZKw and the copper price (see Annex) Evidence on short run volatility: Analysis of patterns of volatility through EGARCH to check for patterns of asymmetry in the volatility from positive and negative shocks. The theory of storage explains asymmetric volatility in the copper price: the copper price explains the asymmetric volatility in the Zambian Kwacha (see Annex)
The foreign exchange market •Explanation for the commodity currency behaviour in the Kwacha: how the foreign exchange market works Volume of transactions (purchases-sales)
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
-50000
Sep-04
0
May-04
50000 Jan-04
Million US$
100000
-100000 -150000 BoZ
Source: Bank of Zambia
Interbank
Bureaux
Others
Main players in the market (2007-2008): Foreign exchange sales
Foreign exchange purchases
350,000
200,000
300,000 150,000 U S $ '000
U $ 000
250,000 200,000 150,000 100,000
100,000 50,000
50,000 0
0 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Foreign Bank
Mining
Agriculture
Wholesale and Retail
Source: Bank of Zambia
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Foreign Bank Manufacturing Mining Transport and communications
A framework for the interpretation 1- The exchange rate regime: a market determined rate monetary target price stability objective
2- The ownership structure of the commodity sector largely private owned trans-national corporations minimum government share
The behaviour of the currency in cdcs is related to the exchange rate regime and the kind of ownership of the commodity sector. The latter provides a measure of the degree of revenues from mines that accrue to the government and it indicates the scope for fiscal policy response to commodity shocks.
BoZ Management Bank of Zambia transactions of forex (2004-2008)
J an Ma 04 yS e 04 pJ an 04 Ma 05 yS e 05 p-0 J an 5 Ma 06 yS e 06 pJ an 06 M a -0 7 yS e 07 pJ an 07 Ma 08 yS e 08 p-0 8
m i ll i o n U S $
100000 75000 50000 25000 0 -25000 -50000 -75000 -100000
sales to BOZ
Source: Bank of Zambia
purchases from BOZ
•Weeks 2007, little intervention from BoZ during the boom: fear of inflation 1. low monetary transmission mechanism 2.high pass-through, of 12% [especially on food prices, 20%] •During the bust, no too much intervention to avoid depreciation [reserves-non trad. Exports]
Ownership structure Largely privatised commodity sector. ZCCM-IH no dividends even despite the boom, due to accumulated debts Equinox
ZCCM-IH
J&W Holding Vedanta
Glencore
First Quantum Co-Africa
Source: anMbendi 2007
Tax revenues Revenues in Zambia (in ZMK) 8000 Billions
7000 6000 5000 4000 3000 2000 1000 0 2001
2002
2003
Mines taxes
Source: Zambian Revenue Authority
2004
Revenues
2005
Taxes
2006
Conclusive points
Under a market determined rate and a highly privatized commodity sector, commodity shocks are passed on to the economy through the nominal exchange rate. A more managed exchange rate regime (in a countercyclical way) could be an option, as long as commodities do not exhibit co-movement, since Zambia is a large importer of commodities (oil and food) and as long as the country has large reserves Alternatively, an expansion of government shares into the commodity sector may provide more scope for fiscal policy’s intervention in a counter-cyclical way. [stabilization funds for example]
Open issues….
“I want you to know that the drop in metal prices has hit all hard in Zambia” Banda, President of the Republic of Zambia, “While our people here in Luanshya may have gone without food, your government has also been robbed of revenues in the form of taxes” (Reuters May 2008) Proposal to increase government shares Obiagel Ezekwesli WB vice president for Africa “the populist reaction is to say let’s take a stake, but do you want to risk capital in a sector where the private sector can take risks? (…) this is an industry better left to the private sector to run” (Reuters 23 April) Is it? Evidence from the GCC, Chile, Botswana, Canada, Malaysia..
Future research Fiscal management of commodity shocks (stabilisation funds) Capital flows along the commodity price cycle
Annex
Johansen cointegration test
Series: LRER LCOP Unrestricted Cointegration Rank Test (Trace) Hypothesized
Trend assumption: Linear deterministic trend Lags 1-4 Trace
No. of CE(s)
Eigenvalue
Statistic
0.05 Critical Value
None *
0.170668
26.21973
17.49471
0.0009
At most 1
0.012930
1.704818
3.841466
0.1917
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
Normalized cointegrating coefficients (standard error in parentheses) LRER
LCOP
1.000000
0.746177 (0.02486)
Prob.
Annex
• EGARCH for price of copper Dependent Variable: RCOP
Method: ML - ARCH (Marquardt) - Normal distribution
LOG(GARCH) = C(1) + C(2)*ABS(RESID(-1)/@SQRT(GARCH(-1))) + C(3)*RESID(-1)/@SQRT(GARCH(-1)) + C(4)*LOG(GARCH(-1)) Coefficient
Std. Error
z-Statistic
Prob.
C(1)
-0.090670
0.029421
-3.081108
0.0021
C(2)
0.044417
0.009270
4.801923
0.0000
C(3)
0.017482
0.007100
3.427812
0.0006
C(4)
0.993381
0.002996
331.7942
0.0000
R-squared
-0.000082
Mean dependent var
0.000124
Adjusted R-squared
-0.001786
S.D. dependent var
0.013678
S.E. of regression
0.013669
Akaike info criterion
-7.784870
Sum squared resid
0.372770
Schwarz criterion
-7.773664
Log likelihood
7787.977
Hannan-Quinn criter.
-7.780777
Durbin-Watson stat
2.186347
Annex
• EGARCH for Zambian Kwacha Dependent Variable: KWACHA
Method: ML - ARCH (Marquardt) - Normal distribution
LOG(GARCH) = C(1) + C(2)*ABS(RESID(-1)/@SQRT(GARCH(-1))) + C(3)*RESID(-1)/@SQRT(GARCH(-1)) + C(4)*LOG(GARCH(-1)) + C(7)*PRICE Coefficient
Std. Error
z-Statistic
Prob.
C(1)
-0.723774
0.018910
-38.27718
0.0000
C(2)
0.270177
0.006060
41.28076
0.0000
C(3)
-0.043467
0.004712
-9.633682
0.0000
C(4)
0.977248
0.001176
813.7737
0.0000
C(7)
-12.64126
3.276087
-3.878647
0.0001
R-squared
-0.001611
Mean dependent var
7.63E-07
Adjusted R-squared
-0.002937
S.D. dependent var
0.001402
S.E. of regression
0.001404
Akaike info criterion
-10.69470
Sum squared resid
0.007978
Schwarz criterion
-10.68476
Log likelihood
16191.42
Hannan-Quinn criter.
-10.69112
Durbin-Watson stat
1.972379
References
Cashin, P, L Cespedes, R Sahay (2002), "Keynes, Cocoa, Copper: in Search of Commodity Currency", IMF Working Paper n.223. Chen, Y C. and K Rogoff (2002), "Commodity Currencies and Empirical Exchange Rate Puzzles", IMF Working Paper n.27. Fraser A and J Lungu (2007), “For Whom the Windfalls. Winners and losers in the privatisation of Zambia’s copper mines”, www.minewatchzambia.com. Fynn, J and S Haggblade (2007), “Potential Impact of the Kwacha Appreciation and proposed Tax Provision of the 2006 Budget Act on Zambian Agriculture”, Food Security Project, Zambia National Farmers Union, Working Paper n.16. Green, D. “A copper-bottomed crisis? The impact of the Global Economy. Meltdown on Zambia”, Oxfam GB March 2009-05-29 OECD 2008, Zambian Economic Outlook Weeks, J., V. Seshaman, A. C.K. Mukungu, S. Patel 2007. “Kwacha Appreciation 2005-2006: Implications for the Zambian Economy”. Report prepared for the United Nations Development Program, Lusaka. Weeks, J. 2008 “Economics Effects of Copper Prices on the Zambian Economy: Exchange Rate Regime and Kwacha Appreciation”, paper presented at the International Workshop on Challenges and Prospects for Commodity Markets in the Global Economy, A Workshop in Memory of Alfred Maizels, 19th -20th September 2008.
Source: IMF-IFS CPI inflation rate
2008m09
2007m05
2006m01
2004m09
2003m05
2002m01
2000m09
1999m05
1998m01
1996m09
1995m05
1994m01
1992m09
1991m05
1990m01
1988m09
1987m05
1986m01
CPI inflation rate (1986-2008)
250 200 150 100 50 0
Source: BoZ, IMF-IFS Discount rate Exchange rate
2008m09
2007m04
2005m11
2004m06
2003m01
2000m03 2001m08
1998m10
1997m05
1995m12
1993m02 1994m07
1991m09
1990m04
1988m11
1987m06
1986m01
140 120 100 80 60 40 20 0 6000 5000 4000 3000 2000 1000 0 Kwacha per US$
Exchange and interest rates (1986-2008)
Capital account (1998-2007) 300
Millions US$
250 200 150 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -50 portfolio flows
Source: IMF-IFS, BOZ
Direct investment
M illio ns U S $ (cur r ent)
Official Development Assistance (196-2002) 1000 800 600 400 200 0 1996
Source: OECD-DAC
1997
1998
1999
2000
2001
2002
Foreign Debt/GDP (2000-2007) 200 150 100 50 0 2000
2001
2002
2003
2004
2005
2006
2007
Revenues from the boom 20 20 19 19 18 18 17 17 16
8000 7000 6000 5000 4000 3000 2000 1000 0 2001
2002
2003
2004
Revenues as % of GDP
Source: WB-WDI
2005
2006 Revenues
B illion s of K w acha
Revenues as % of GDP in Zambia
Prior to the copper boom 1996-2002
The reforms in the 1990s
More political and economic stability
Low copper prices and trade deficit
80 60 40 20 0 -20 -40 -60 -80 -100 -120
2500 2000 1500 1000 500 0
Trade balance Source: IMF-IFS
Copper prices
US$ per M T
3000
1996m01 1996m07 1997m01 1997m07 1998m01 1998m07 1999m01 1999m07 2000m01 2000m07 2001m01 2001m07 2002m01 2002m07
M illions US $
Copper prices and trade balance (1996-2002)
The behaviour of the Kwacha
The foreign exchange market in Zambia
the main players
The Broad Based Inter-Bank Foreign Exchange market (introduced in July 2003) Commercial banks The foreign exchange bureaux market;
Additional flows Aid flows Debt relief FDI and portfolio flows
1600 1400 1200 1000 800 600 400 200 0
19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07
Millions US$ (current)
Official Development Assistance (1996-2007)
Source: OECD-DAC