Exports, imported intermediate inputs and exchange rate volatility in Zambia

• Zambia's economy and exports remain undiversified, and its economy vulnerable to commodity price swings. Increasing exports is one path to divesification of the economy.
• This study examined how imports of intermediate inputs and exchange rate volatility influence Zambian exports at a trader (or firm) level
• Zambian export value is dominated by a small group of continuous exporters who also import.
• However, there is also a large number of sporadic traders. This sporadic trade participation may be a response by firms to short-term arbitrage opportunities created by exchange rate volatility, rather than long-term stable trading relationships.
• For Zambia to diversify its exports, deliberate policy steps should be taken to promote production and trade in higher quality products.

Zambia’s export revenue is heavily dependent on the price of copper. Consequently, the Zambian kwacha is affected by the copper price and this, and exchange rate volatility, may in turn hamper the development of non-traditional exports. The diversification of exports will make the economy less vulnerable to commodity price swings.

We found that approximately 80% of export value is accounted for by a small group of continuous exporters which also continuously import. However, there are a large number of firms that can be considered sporadic traders. The product varieties from both sporadic exports and imports tend to be of lower quality, and importing is not associated with higher quality products for exporters. This suggests that Zambian exporters are not importing the types of products that enable them to improve their product quality.

Surprisingly, we found that a more volatile currency does not decrease the entry of exporters into the market, but rather increases it. This suggests that sporadic trade participation may be a response by firms to exchange rate volatility as they seek out short-term arbitrage opportunities rather than long-term stable trading relationships.

Policy should therefore focus on enlarging the pool of firms that can become continuous exporters. Sporadic traders seem unlikely to become continuous exporters on a large scale because of their different endowments. New firms would likely have to be the source of this new pool.

The secnd area of policy focus should be exchange rate volatility. Growing non-traditional exports – an important objective for Zambia’s diversification agenda – will require a stable macroeconomic environment alongisde productivity enhancing policies for firms. A more stable exchange rate could encourage these firms to become fuller participants in the export market.