Africa’s second largest copper producer Zambia recorded a 90 basis point jump in inflation to 16.6% for the month of May. This is on account of an increase in both food and no-food prices in the month according to Zamstats. Zambia’s inflation forecast remains elevated given strained macroeconomic fundamentals in disease pandemic era. Currency weakness continues to exarcebate higher input costs while COVID related disruptions weigh the non food side of the consumer price index.
Key Drivers. Key drivers of the May inflation were rise in charcoal prices, household textiles, soaps and pharmaceutical products (cafe mol, aspirin, fansidar, cough syrup and asthma medications). Food and alcoholic beverages accounted for 9.3% while non food took up 7.3%. Lusaka (5.3%) and Copperbelt Provinces (3.4%) are the main contributors of the 16.6%.
Risks to inflation remain high. Earlier the central bank in announcing a 2.25% rate cut, remain alive to inflation risks that border on higher energy costs that keep operating environment of manufacturers elevated resulting in higher than usual selling prices. The Bank of Zambia have committed to bring back inflation within the 6-8% target band in the longer term (1Q22) through managing liquidity conditions in open market operations. The Kwacha remains vulnerable and volatile in this disease pandemic period characterized by weak reserves at $1.37billion reflecting 2.8months of import cover as imports constrict due to muted activity. Other drivers of inflation to watch will be the import leg from trade with South Africa given the parity in exchange rate between the Rand and the Kwacha which has depreciated 12.4% YTD.
Bumper harvest to reprieve food inflation. The food side of the CPI will have some reprieve as Zambia forecasts a 3.38million metric tons of maize harvest from 2.04million previous year. Agriculture Minister Michael Katambo in a speech announced exceptional crop yields for the 2019/2020 season. This will allow food inflation pressure to detente significantly.
The Kwacha Arbitrageur