Amidst a currency rout and spiraling inflation, Zambia faces a cost of living quagmire in a disease pandemic suppressed environment. In the last rate decision meeting held between February 15-17, the Monetary Policy Committee (MPC) raised rates 50 basis points to 8.5%, the first rate hike since November 2019. The central bank communique cited upside risks emanating from a Kwacha depreciation which has fueled cost push inflationary effects scaling prices higher. Market expectations in the buildup to the rate decision meeting, skewed towards remedies or cures to not only arrest the slide but build an effective sustainable reserve buffering mechanism.
Read also: BOZ hikes rates 50bps to curb ‘currency rout’ induced inflation, in COVID environment
WEAK BUSINESS PULSE, INFLATION SPIRAL AND CREDIT RISKS ALL POINT TO CURRENCY
Business pulse has been in the doldrums with Zambia in contraction for 23 straight months headlining below 50 as the business ecosystem continues to be suppressed by currency related risks. Input costs keep accelerating by the day while credit risks remain elevated on the back of dollar scarcity in widening backlogs. Arrears dismantling to absorb supplier and contractor pressures are still fueling dollar demand eventually. With currency being the biggest driver of transfer and convertibility risk, cost push inflationary pressures and a widening cost of living, market expectations were more skewed towards ‘a currency rout cure’ which the MPC communique was very vague on, despite acknowledging upside risks posed by a currency slide.
All fundamentals did point to a rate hike but for COVID exceptional times for which central banks globally have embarked of neutral to expansionary monetary policy. However Zambia grapples with falling reserves last reported at $1.2billion representing 2.5months of import cover. Fifty basis points (50bps) is arguably very infinitesimal to effect a rout arrest especially that the inflation is more cost push than demand pull.
COLLUSION AND DOMINANCE OR EXCHANGE RATE DEPRECIATION
Zambia’s Commerce Ministry authorities underscored working with competition regulator the Competition and Consumer Protection Commission (CCPC) to ascertain collusion between players that have recently hiked prices of cement, sugar, wheat flour and cooking oil. Drastic measures will be taken to curb price hikes. However other schools of though wonder if moral suasion through usage of regulators will be as effective seeing that price hikes are a clear reflection of the business operating environment dictated by foreign currency shortages and depreciation.
Read also: Input Price Inflation to weigh Zambia’s Cement Manufacturing Pulse – Lafarge
The commerce ministers stance on revision of the Bank of Zambia Act to address de-dollarisation in pricing will be counter intuitive as the copper producer has been on this path through historical statutory instruments that weighed investor sentiment. Zambia is one of Africa’s successful free currency floats that exchange controls as a solution would dent foreign direct investment.
Read also: Zambia’s central banking is due for an upgrade in legislative guidelines, BOZ Act requires an update
The copper producer is in a debt and disease pandemic labyrinth that has necessitated restructure strides and talks with Washington based lender IMF for balance of payment support. Zambia has so far skipped $99.1million worth of coupon payments on two dollar debts (2024 and 2027) collectively as fiscal fragilities persist. It remains a dry point of construction that key driver of economic woes is the deteriorated fiscal posture which markets are merely signaling.
The Kwacha Arbitrageur
