Zambia’s Uphill Inflation Woes

As Africa struggles to respond to the deadly third wave of COVID-19, its month on month inflation is ultimately worsening the already depressed economic fortunes on the continent.

The Zambia Statistics Agency (ZamStats) recently announced that annual inflation for June, 2021 increased to 24.6% from 23.2% in May 2021.

According to the agency’s monthly bulletin announced by interim Statistician General Mulenga Musepa on 24th June 2021, stated that on average, prices of goods and services increased by 24.6% between June 2020 and June 2021.

Interestingly, Zambia became the second country in the world to increase its benchmark interest rate this year as it seeks to bring down spiraling inflation that’s at a five-year high. In this context, the Bank of Zambia decided to maintain the monetary policy rate at 8.5%.

“The Monetary Policy Committee (MPC) noted that, although inflation is projected to remain above the upper bound of the 6-8% target range over the forecast horizon, inflationary pressures are projected to ease faster than earlier anticipated, particularly towards the end of the forecast horizon. This is in view of improved supply of food, particularly maize and wheat following a strong crop harvest, higher than anticipated copper prices and improved external sector support,” Bank of Zambia Governor Christopher Mvunga said recently during the MPC of the central bank at its May 17-18 2021 meeting.

However, the Centre for Trade Policy and Development (CTPD) has charged that the MPR alone cannot be seen as the silver bullet to address Zambia’s inflation dynamics. Rather, in addition to robust monetary policy interventions, correcting the fiscal situation is of prime importance.

Topping the African list of inflationary pressure is Zimbabwe with a rate of 194% year on year, followed by South Sudan (46.8%), Angola (24.8%), the Democratic Republic of Congo (DRC, 20.4%) Ethiopia (19.2%), Nigeria (18.1%), Guinea (12.3%), Sierra Leone (10.9%) and Liberia (10.5%), according to the Economist Intelligence Unit’s (EIU) latest country analysis.

Financial experts say the spiking inflation rate in Zambia is due to a combination of complex factors such as the rise in food prices and depreciation of the kwacha which has in due course gulped the life out of the local economy.

Historically, the Zambian kwacha reached an all-time high of K22.61/US$1 in June of 2021 and global financial analysts expectations estimate it to trade at K22.85/US$1 in 12 months’ time. This has garnered public interest given the exchange rates’ link to other economic variables such as inflation.

“When you look at the reports from ZamStats, they point to the fact that food inflation is one of the major factors meaning that the prices of food have gone up and this entails that it is becoming more expensive to produce this food and with an import-based economy like ours where, for instance, agricultural inputs such as fertilizer and chemicals are imported, it is obvious that will continue to induce inflationary pressures,” Lusaka-based economist Mambo Haamaundu told Nkwazi.

Haamaundu further hinted that for as long as the high cost of production, widening fiscal deficits, unsustainable debt levels, low forex reserves, and tight liquidity conditions among others are not rectified, inflation will accelerate further.

As to whether Zambia’s inflationary pressures will get better or get worse, Haamaundu predicted, “I don’t see the rate of inflation going down in the next one or two months even before the year ends for as long as the country’s deepening macro-economic challenges are not addressed.”

With inflation up by 1.4% from 23.2% in May to nearly 25% for June, Private Sector Development Association (PSMD) Chairperson Yusuf Dodia has also charged that Zambia’s high inflation is unacceptable.

Dodia lamented that since Zambia is a net importer of goods and services, a continuous rise in its month on month inflation rate is an indicator of a struggling economy as consumers will continue paying the price due to high cost of doing business.

“We really need to deal with inflation at its root cause and two clear areas that we need to look at is to increase production of goods as a nation so that we can export more and to ensure that export earnings are returned into the economy,” Dodia stated. “Right now with a US$ 10,000 per metric ton of copper price on the international market, we are not benefiting from this in any way as a nation because once the export of copper is done, earnings are being kept outside Zambia, a situation that ought to be changed by government policy.”

Meanwhile, the EIU’s further glimpse in the sub region revealed that another anchor for price trends down south is low inflation in South Africa whose central bank, the South African Reserve Bank (SARB) expects inflation to stay well within its 3-6% target-range, at 4.3% for the year.

“We expect even lower inflation, of 3.7% based on softer economic growth than the SARB is projecting for 2021 (at 2% versus 3.8%), which makes its record-low policy rate of 3.5% sustainable,” the EIU stated adding that as South Africa is a leading trade partner for Namibia, Botswana, Lesotho and Eswatini which all have currencies pegged at parity to the rand low price growth in South Africa is reflected in these countries and provides their respective central banks with space to remain accommodative over 2021 at least.

Interestingly, despite the COVID-19 outbreak, Ghana remains a shining example on the continent for having recorded lower inflation to a record low of 7.5% in May of 2021 from 8.5% in the previous month, below the middle of the central bank’s target range of 6-10%. Food inflation reached an all-time low of 5.4% (vs 6.5% in April). Also, non-food inflation declined (9.2% versus 10.2%), according to that country’s statistical service.

“We need a policy that will stimulate and facilitate competition in the economy without government interference in pricing mechanisms as well as the need to digitalise the economy by lowering taxation among ICT businesses especially during the COVID-19 pandemic,” Dodia highlighted.

In this context, with existing vulnerabilities in the local financial sector and fragile economic growth, Zambia’s quest to restore and anchor macroeconomic stability is scheduled to implement its fiscal adjustment measures in line with the Economic Recovery Programme (ERP) and understandings reached in discussions with the International Monetary Fund (IMF) over an economic bailout programme.

Zambia, which last year became Africa’s first pandemic-era sovereign defaulter on its Eurobond debt, will likely be able to finalise the IMF deal once the dust settles following a general election which took place in August of this year. An agreement with the fund is indeed crucial under the Group of 20’s so-called common framework for debt restructuring that Zambia will use to rework its more than US$12.7 billion in external debt.

It is also worth noting that at the time of writing Zambia had just voted in a new government in August 2021. We wait to see what effects this will have on the country’s inflation and overall economy.