The financial crisis which began in the US last month and steadily spread to affect the whole world will adversely affect demand for Zambian copper and hurt the flow of foreign direct investments, the Zambian Central Bank has warned.
Addressing a workshop on the possible impact of the world financial crisis on emerging economies like Zambia, Bank of Zambia financial markets director Richard Chembe said that, although a mild recession could not dent the economy, a severe and prolonged financial crisis would affect demand for copper among major consumers like China and lead to a stagnation of growth in the copper mining industry.
“Any significant slowdown in global economic growth would adversely affect demand for exports, particularly copper and result in a reduction in the country’s direct foreign exchange earnings,” Chembe said.
He said Zambia was already working out ways of mitigating the potential crisis and strongly encourages communication between the government, the financial sector and the industries likely to be affected by the recession, which economists have already predicted will be worse than the 1929 to 1930 Great Depression.
“We need to understand the nature of the linkages of our economy to the world financial market, particularly of the Group of Seven (G7) industrialised countries which are at the centre of this crisis. A prolonged crisis may demand changes to the macro-economic policies of several nations across the world,” Chembe said.
The Zambia Chamber of Mines has also painted a bleak outlook for the mining industry during and soon after the current worldwide financial market slump. Chamber president Nathan Chishimba said the current financial crisis will lead to a slump in long-term investment in the mining industry.
He said the majority of mining companies relied heavily on capital input in the form of loans and guarantees from the world financial market, which he said always plays a leading role in facilitating mergers and acquisitions.
“The international financial system provides the bulk of capital for exploration works, predevelopment operations and overall mine development. They are a good source of capital but they are very sensitive. In such crises, the winner will always be the investments and countries that pose the least risk to investors in international markets,” Chishimba said.
He noted that the mining in Zambia is heavily dependent on the international capital market, with more than half of the ongoing exploration activities being funded by middle-tier producers and exploration companies.
“The effect of the current financial crisis would be a general weakening of demand for commodities, [a] slowdown in economic activity and eventually, depressed economic output,” Chishimba said.
The government of Zambia has already said it is watching developments in the international financial market closely with a view to working out quick intervention measures to save the economy and the mining sector in particular should the knock-on effects hit the country.