1. BY DENNY H KALYALYA, PHD GOVERNOR BANK OF ZAMBIA ’22 ND AFREXIMBANK GENERAL MEETING’ LUSAKA 11 JUNE 2015 DEALING WITH COMMODITY PRICE SHOCKS IN AFRICA

2. Outline Introduction Economic Growth and Trend in Commodity prices; SSA economic growth, Trends in Commodity Prices. Commodity shocks and Macroeconomic Performance; Growth and Commodity shocks, Inflation and commodity shocks, Debt and commodity shocks. Zambia’s Recent Experience with Commodity Shocks; Economic growth, Inflation, Fiscal performance. Responses to Commodity Shocks Way-forward

3. Introduction Macroeconomic Economic management under commodity shocks is relevant to everyone. For a Central Bank Governor it relates to his/her mandate to maintain price and financial system stability. At a broader level it also relates to issues of growth, job creation, financial inclusion. Commodity shocks are usually seen in a negative sense, but there could be positive elements to take note of. In the 2000s, we have experienced a commodity boom which have had a positive effect on growth, especially in Africa.

4. Introduction I will discuss the macroeconomic effects of commodity shocks as it relates to net exporters. However, the message I need to emphasize is that we need to have a closer look at our policy response to these shocks.

5. Economic Growth and Trend in Commodity prices SSA has experienced positive growth over the last 15 years. From 1997-2006, growth averaged 4.9% while 2013 and 2014, it averaged 5.2% and 5.0%, respectively. Much of this growth can be attributed to a boom in commodity prices which have seen a sustained rise since the 2000s.

6. Trends in Commodity Prices, 1970-2014

7. Economic Growth and Commodity Shocks

8. Inflation and Commodity Price Shocks

9. Public Debt and Commodity Price Shocks

10. Zambia Experience in the Recent Times Zambia’s Economic Growth Performance since 2000.

11. Zambia Experience in the Recent Times Inflation

12. Zambia Experience in the Recent Times Fiscal Performance

13. Responses to Commodity Price Shocks Given the outlined effects of commodity shocks positive or negative, we propose the following broad policy approaches:  Economic Diversification-remains the most viable option of dealing with vulnerability to shocks (this requires investment into productivity enhancing activities-education, health, infrastructure).  Fiscal policy Reforms-Need to move to rule based fiscal policy especially use of countercyclical policy in response short term shocks.  Need for structural Reforms- exchange rate flexibility as well as prudent debt management.

14. Conclusion and Way-Forward Evidence presented clearly shows that economic performance of commodity exporters closely track prices. Hence, as a way forward we recommend the following:  Enhance economic diversification,  Reform fiscal policy,  Enhance openness and exchange rate flexibility.