Zambia’s inflation decelerated to 15.8% in July 2020 from 15.9% in June 2020. This was mainly attributed to the reduction in prices of maize and related products as well as those for seasonal vegetables. The dismal reading of 15.8% mostly reflects the country in partial lockdown, as prices have been rising from the peak of the first wave of the pandemic and things are still getting worse during the second wave of pandemic.
According to data from the Zambia Statistics Agency, food prices drove the inflation spike – with food and non-alcoholic beverages accounting for 8.6 percentage points, while non-food items accounting for 7.2 percentage points. The monthly overall inflation rate increased and this was mainly due to the general price movements of food items. On the other hand, monthly non-food inflation decreased and this was mainly attributed to price movements of purchase of motor vehicles. Lusaka and the Copperbelt, the two provinces with the highest number of COVID-19 cases, made the highest contributions to the overall annual inflation in July 2020.
It is clearly visible that the prices of goods and services have gone up and this has been so even before the pandemic. The average prices of goods and services increased at a faster rate in 2020 compared to the same period in 2019. According to the Monetary Policy Committee Statement of August 2020, annual overall inflation continued on an upward trend rising to an average of 16.1% from 13.5% in the previous quarter. This was mainly on account of the pass-through from the depreciation of the Kwacha against the US dollar. Average food inflation rose by 1.4 percentage points to 16.9% while non-food inflation increased to 3.9 percentage points to 15.1%. At 15.9% inflation ended in the second quarter, 1.9 percentage points higher than at the end of the first quarter. Expectations are that inflation is to steadily decline but will still be above the upper bound forecast horizon of 6-8% medium-term target range.
Although reaching the 6-8% inflation target band is somewhat unrealistic, measures to address inflation should be contractionary; that is, slowed-down growth but under the current economic circumstances, the economy is already expected to contract or go into a recession due to the Covid-19 pandemic. The issue now is to determine whether it is still appropriate to implement contractionary measures or rather to adopt expansionary measures to alleviate the suffering induced by COVID-19. The last address by the Monetary Policy Committee, MPC, prioritized expansionary measures though there is cause for caution as regards to the injection of liquidity.
The central bank has been emphasizing bank lending capacity during this pandemic and has a broader set of measures initiated to mitigate the impact of the pandemic observed through the establishment of a K10 billion Targeted Medium-Term Refinancing Facility; revision of rules governing the operations of the interbank foreign exchange market; revision of loan classification and provisioning rules; extension of the requirement of mining companies to pay all their statutory obligations in US dollars; initiated arrangements to engage domestic and non-resident financial institutions in foreign exchange swaps; stepping up the sensitization on the use of digital channels and contactless mobile payment mechanisms; and implementation of business continuity protocols.
Zambia – a producer of copper (60% of exports), and accounts for 70% of Africa’s copper production – has recorded over 9,000 confirmed coronavirus cases with an increase in the number of deaths in the second wave. Given the crisis, not much economic growth is expected and a substantial decline in consumer and investment spending due to disruptions in business operations are expected to continue to constrain economic growth.
Zambia’s closed land borders and the seasonality in agricultural output could cause some disruption to supply chains and pose an upside risk to food inflation in the third quarter of the year. Owing to the lockdowns imposed from neighboring countries and the partial lockdown being experienced by Zambia itself, it is expected that we will experience continuous pressure on the inflation figures in the upcoming months. However, the relief packages could provide some relief for the general public.