Africa’s red metal hotspot, Zambia kept its rates tad in its debut rate decision meeting of the year 2022 citing an inflation ebb as the trajectory continues towards attaining the 6-8% target. Deliberations commenced on 14-15th February with the announcement made today Wednesday 16th February 2022 in the Bank of Zambia auditorium. Governor Denny Kalyalya announced the monetary policy stance keeping rates at 9.0% supported by the current sharp easing trajectory but warned of brewing inflationary pressures from both endogenous and exogenous factors such as rising crude, electricity, food prices and supply chain bottlenecks.
READ ALSO: In Last MPC of 2021, Kalyalya Hikes Rates 50bps To Tame Inflation
ENERGY PRICE RISKS STILL INFLATIONARY
Zambia reorganized its fiscal purse in December 2021, partially exterminating subsidies to the energy sectors that saw a 25.0% fuel price hike and the more recent electricity connection fees upward adjustments. Coupled with the change in fuel price review by the Energy Regulation Board (ERB) cost push pressures are still anticipated with crude north of $90 a barrel. Other exogenous factors, arguably, the US Fed stance to aggressively hike rates as soon as March to curb excessive inflation could pose further pressure on the Kwacha.
Zambia faces an array of fiscal fragility autopsy related risks that have dictated the currency and money markets. Although political risks have significantly subsided the red metal producer is still in the labyrinth of debt restructure for which market seek clarity as to when exactly this will actualize in the wake of a moving IMF deal conclusion target.
FOREIGN EXCHANGE RISKS PERSIST
The foreign exchange market has seen currency depreciation as the left hand side of the market (supply) was muted despite inflows from mineral royalties until in the week when the central bank sold circa $41.5 million to ease pressure on the copper currency. Confidence triggered by a political regime change, IMF deal in sight and other positive developments have left players weary in the wake of the need for actualization of various pronouncements of key benchmarks. Markets are eager on when the IMF board will approve Zambia’s $1.4billion extended credit facility for which Ministry of Finance reached consensus with the Special Mission team of Washington based lender last year in the fourth quarter.
Despite a subsiding inflation trajectory to 15.1% (Jan) from highs of 22.3% (in 2021) strong base effects have supported the ebb but upside risks to consumer price index persist. The central bank targets 13.2% by end of 2022 before sliding lower to 7.3% by the end of 2023, the MPC communique stated.
The central bank sold a net $146.0 million in 4Q21 to ease currency pressures from petroleum demand, which saw a stronger exchange rate in the period. Zambia’s gross reserves were recorded at $2.8 billion (4.4 months of import cover) a slight drop from $2.9 billion (4.9 months of import cover as at end of September 2021).
The Southern African nations fiscal deficit is forecast to narrow to 6.7% in 2022, 6.3% in 2023 and further sag to 5.3% in 2024 as estimated by the Bank of Zambia.
The MPC committee note did cite recovery in key sectors of the copper producers economy despite the latest contract in private sector activity recorded in the January headlines at 49.9 a drop from 51.5 in December 2021 on the back of pandemic autopsy effects.
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