The end of June saw a 0.5% increase in inflation from 8.1% in May to 8.6%. This reflects a 5th consecutive increase in inflation over the last 5 months which has taken inflation outside the central bank’s target range of between 6-8%. The increase in inflation showed an 8.6% increase year on year (between June 2018- June 2019) as the Consumer Price Index (CPI) had risen accordingly.
A number of reasons were attributed to this sharp rise in inflation. The major underlying driver being the weakening Kwacha which depreciated by over 14% in the months of April and May which contributed to rising costs particularly in the transport sector which saw a 6.9% increase(the largest individual increase in inflation amongst all sectors) as imported vehicles and fuel cost waned in on the value of the Kwacha.
A number of the items in the CPI basket (which is a basket of goods generally consumed by the Zambian population) are mainly imported i.e. furniture and motor vehicles which constantly contribute to rising inflation especially when the kwacha depreciates. Additionally, a decline in gross international reserves as cited in the MPC statement of May 2019 is bound to raise inflation going forward.
The currency depreciation led to central bank attempting to curb inflationary pressure by selling off assets in attempt to lower the money supply which led to an increase in the policy rate. This is meant to suppresses excess demand for goods such as fuel and imported cars which tend to drive inflation up. Also increasing the policy rate was intended to strengthen the Kwacha as foreign investors demand more of the currency due to the higher rates offered in the country. However, this comes at a cost as BOZ was not able to keep inflation within their set out target range.
Now Why is the Kwacha depreciating…
Based on what we see, the value of the Kwacha plays a significant role in determining the level of inflation in Zambia and its been the one variable over the years that has continued to depreciate which doesn’t reflect a positive outlook for the level of inflation going forward. The Central Bank governor, Denny Kalyalya had cited reduced dollar supply in the country, along with weaker demand for government securities, especially Treasury bills which had a dampening effect on the Kwacha.
The servicing of external debt has further exacerbated the kwacha with over $10 billion still to service with heightened fiscal deficits bound to further increase inflation. Negative sentiment round the nations credit rating downgrade lowered investor confidence and played a part in the depreciation of the currency. The reliance on imports for a number of goods particularly within manufacturing requires conversions to US dollar/ Chinese Yuan which has made it difficult to stabilize the kwacha. The general slow-down in the global economy with growth expected to whine down to 3.3% from the initial 3.6% due to US- China trade tensions along with Brexit uncertainty in Europe makes forecasting the impact on Zambia’s long term economic growth challenging. Although assurances about sustainable medium to long term growth have been given, determining just how big the impact of inflation will be as a result remains to be seen.
Sources
Zambia Business times. Kwacha depreciation weighs down on economy as inflation raises to 8.6%. Availlable at: https://zambianbusinesstimes.com/
Zamstats Inflation report June 2019. Available at: https://www.zamstats.gov.zm/phocadownload/Monthly/2019/Vol%20195%202019%20The%20Monthly%20June.pdf
Trading Economics(2019). Zambian Kwacha. Available at: https://tradingeconomics.com/zambia/currency
Bank of Zambia(2019). Monetary Policy committee statement 1st quarter 2019. Available at:
Bank of Zambia(2019). Monetary Policy Committee statement 4th quarter 2018