Based on the remarks of the Minister of Finance, Dr. Situmbeko Musokotwane and as is recorded on the Ministry of Finance (MoF) website, it is clear that excessive borrowing is one of the contributors of inflation. In one of his ministerial statements he stated: “Let me elaborate on one of the effects of excessive borrowing, namely inflation. It refers to the ever continuing rise in consumer goods and services. You will recall madam that for years, inflation was below 10 percent. However, as at end-August 2021, inflation was recorded at 24.4 percent which is too high and way above the 6.8 percent target band.” The Minister has been advocating for a restructuring of debt programme to better manage the debt situation and engage the process of undoing the effects of excessive borrowing, one of which is inflation. Therefore, the International Monetary Fund (IMF) was engaged by the government of Zambia which received 650 billion United States (US) dollars IMF Special Drawing Rights (SDR) general allocation. However, the gains made by the Zambian Kwacha against the US dollar are slowly shedding off through depreciation. The Zambia Daily Mail in the headline, “Now Kwacha depreciates marginally, sheds gains” on September 9, 2021 reported on the Kwacha’s continued shedding of marginal gains made in previous weeks. Since July 22, 2021 the Kwacha traded close to K23 per US dollar, and reached K15.50 until recently when it started trading between K16 and K16.32 and has continued to depreciate slowly.
In an article entitled, “Chibamba Explains Kwacha Depreciation,” on September 8, 2021 the economist Chibamba Kanyama attributed the Kwacha’s depreciation to the importation of crude oil and therefore a restocking of Indeni Refinery. As at Monday, September 7 2021, the Kwacha traded at K20 to 1 US dollar. He added that the importation of agricultural inputs ahead of the agricultural season was another factor in causing the Kwacha to depreciate. To further understand this process of currency depreciation leading to inflation, there is need to analyse the Monetary Policy Statement by the Bank of Zambia (BoZ) for the period January 2021-June 2021. The document stipulates that generally, inflation may be caused by sustained depreciation of a currency and reduced seasonal supply of certain goods. In these events, COVID-19 was associated with the initial Kwacha depreciation prompting the government to mitigate the situation by promoting health awareness and productivity while adhering to COVID-19 health rules. The importation of agricultural products denotes that reduced supply of certain agricultural products and the importation of crude oil causes inflation when the price of importing oil is high.
The Monetary Policy Statement for the period January 2021-June 2021 points out the Economic Recovery Programme as a remedy to inflation, on condition that the measures indicated are effectively implemented. In line with this, the new dawn administration plans to double copper output. The Daily Nation gave an insight in the headline, “New Govt Plans To Double Copper Output” on August 30, 2021. Dr. Musokotwane said the new administration would negotiate with all mining companies to promote a healthy working environment for the increase in production and revenue. The aspect of increasing production and revenue is meant to revive the government in terms of financial investments and future preparations to take on fiscal challenges that the country by virtue of debt is already involved in. That was why the Finance Minister in the Voice of America news article, “Zambia’s New Finance Minister Says IMF Deal Key to Fixing Debt Problems” on August 29, 2021 explained that the government has a US$ 750 million Eurobond due next year but for which it has no money to pay. He further stated, “We don’t have the money to pay back. This is why it is important that we get on an IMF programme so that we can re-arrange not to pay next year. I am 100 percent confident that it will be done.” Hence, it is clear why the government involved the IMF thus far. In this regard, fiscal measures will not only help curb inflation by increasing production and revenue but also in improving the supply of food and subdued aggregates.
Dr. Musokotwane has reiterated many times that inflation continued to rise in the previous ten years on account of excessive borrowing. The new dawn administration opted to involve the IMF to help restructure the Zambian debt. That is why it got the IMF SDR allocation in order to help with debt restructuring. At the same time encouraging prudent financial handling and engaging in economic activities that create more revenue. For example, the doubling of copper production is meant to increase the revenue base through more production of copper and hence more sales. The debt situation such as the Eurobond which needs repayment next year also encouraged the government to get a loan from the IMF. The Minister of Finance clearly stated that there was no money to service such a loan. The Monetary Policy Statement for the period January 2021-June 2021 points at depreciation of the currency, reduced supply of certain goods and increases in prices of crude oil as some of the causes of inflation. Thus, the government has to respond as already stated to avoid further inflation. The response is therefore to improve the supply of food and subdued aggregates and promote economic recovery whose measures are stipulated in the Economic Recovery Programme and are critical to reduce further depreciation of the Kwacha.