The effects of exchange rate volatility on private capital inflows in Zambia,1992-2012

This study investigated the empirical evidence on the effect of exchange volatility on private capital inflows in Zambia. The investigation used monthly time series data for the period 1992-2012 relating to exchange rate, gross domestic product, foreign direct investment and foreign portfolio investment. Exchange rate volatility was estimated using the generalized autoregressive conditional heteroscedasticity (GARCH) model while its effect on private capital inflows to Zambia was captured through the Johansen Maximum Likelihood for Cointegration and Error Correction Model. The findings show that the volatility of the nominal exchange rate exerted significant negative impact on the inflows of both foreign direct investment and foreign portfolio investment in Zambia. In addition, the results show that a stable exchange rate and the size of the market (GDP) are crucial determinants of foreign investment inflows to the country. It is also revealed that while both a stable exchange rate and size of the market (GDP) are likely to attract private capital, foreign investors inclined to long term investments (FDI) do not care much about the size of the market in making a decision to invest in Zambia. The results also suggest that supportive macroeconomic factors are imperative in enhancing the inflow of private capital in the country. This enquiry supports the commitment of policymakers to exchange rate and macroeconomic stability as key to private capital inflows thriving in Zambia.