Denny’s Dilemma
Economy, Opinion
Governor Denny Kalyalya. Photo from Zambian Observer

In August 2018, at his MPC briefing, Central Bank Governor made the following statement: “Annual overall inflation rose for the second consecutive quarter to 7.4% in June from the 7.1% recorded in March 2018, but remained within the 6-8% target range.” OK! The Central Banks target range has been 6-8%. Now, Central Statistics Office recently published their August 2018 monthly report that the year on year inflation rate for August 2018 increased to 8.1%.

The question that arises is “Did Denny’s analysts miss the mark?” We could also add another one, “Are there additional factors influencing inflation?”.

According to his MPC brief, the Governor identified three factors that were influencing the increase in inflation on the tail end of quarter 2. The first was a reduction in supply of selected food items. This is a parameter that the CSO puts into its equation when calculating inflation. This can include an item such as Maize meal or tomatoes. Needless to say, the latter experienced a surge in price in the first half of the year that saw boxes to tomatoes being priced north of K200 per crate.

The second factor is a general increase in transportation costs. For some time now, there has been talk of reigniting the railroad industry. Zambia railways and North Western rail currently have the mandate and are working towards addressing this. However, they will need the help of legislation that will compel transporters of heavy goods to use this “cheaper” form of transportation.

The last factor is the depreciation of the Kwacha against the United States Dollar. President Donald Trump has wage a trade war with China. In addition, after its meeting in June 2018, the Federal Reserve decided to hike its federal funds rate target range by a quarter point to 1.75%-2.00%. This is the surest ingredient in capital flight for investors.

Needless to say, Zambia is not alone in this financially perilous period. In a recent article by Satyajit Das of Bloomberg, “a textbook recipe for an emerging-market crisis requires a large dose of debt and an associated domestic credit bubble, including misallocation of capital into uneconomic trophy projects or financial speculation. Then add: a weak banking sector, budget deficits, current-account gaps, substantial short-term foreign-currency debt and inadequate forex reserves. Season with narrowly based industrial structures, reliance on commodity exports, institutional weaknesses, corruption and poor political and economic leadership”.

The aforementioned are the hallmarks that plague many emerging markets in the present economy. With it, comes the desperate demand on the private sector to remain the beacon of hope through it all. However, it is not that easy. With echoes of contagion, the risks to the economic ecosystem are real. Furthermore, some firms may consider pulling back on CAPEX projects as they assess the movements in cost of capital.

With subdued and fragile economic growth as well as the need to enhance the stability of the financial sector firmly on his mind, Denny and his economists will continue to closely monitor domestic and external developments. If need be, he and his team stand ready to implement appropriate measures to maintain price and financial system stability that they hope will ultimately support economic growth. The question remains however, if push comes to shove, will rates head northwards if exogenous (domestic and foreign) forces remain unabated.

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