The global financial and economic crises thus negatively impacted on economies around the world by adversely affecting trade and investment flows and the price of key export commodities. To respond to this crisis, several actions are being taken at global level by the major economies to address the root causes and the effects of the global financial and economic crises. These are fiscal and monetary policy stimulus measures aimed at boosting global consumption and investment demand in an effort to avoid a significantly sharper global contraction than that which has already occurred. Measures typically entailed reduction of interest rates, tax cuts and increased Government spending in form of bail-outs of strategic institutions and in some cases virtual nationalisation. Concrete steps are also now being taken to reform the regulatory and supervisory frameworks governing the financial sector. Further, increased resources have been provided to key multi-lateral institutions such as the IMF and the World Bank. These institutions have also been mandated to play a central role in leading the global response to the crisis and evaluating the efficacy of the various measures that are being implemented. Impact of the global economic crisis on Zambia The Zambian financial sector has so far not been directly adversely affected by the credit crunch as reflected in the continued stability of the banking sector with most banks being adequately capitalized and the inter-bank market operating as before. This is mainly due to the sector’s limited integration into the international financial markets.
A slide in both copper and cobalt export earnings owing to lower prices accounted for this outturn. Nonetheless, it should be noted that commodity prices on the international markets recently have been edging upwards. If this trend is sustained, Zambia’s external position may improve accordingly. Foreign capital inflow Your Excellencies, the global financial crisis has led to the decline in the foreign portfolio investment inflows as investors reduced their exposure to emerging market instruments. The risk aversion towards emerging markets has led to a reduction in foreign portfolio inflows and  2  BIS Review 86/2009  holdings in Zambia’s Government securities. This has resulted in a net outflow of foreign portfolio investment since funds that mature are not being rolled over and funds coming in have be en scaled down. For example, the foreign investor’s total holding of Government securities has reduced from K1,054.7 billion in the third quarter of 2008 to K446.2 billion by the second quarter of 2009. Similarly, the flow of foreign investments at the Lusaka Stock Exchange has switched from a net inflow of $ million during the period January to May 2008 to a net outflow of $ million in the same period this year. Exchange rate volatility and domestic inflation The global financial meltdown has caused a contagion effect to our foreign exchange market and has led to volatility in the exchange rate of the Kwacha against major currencies.