Being the first African nation to default on a coupon payment on its dollar bonds in COVID era, amidst economic woes, the continents red metal hot spot Zambia, grapples with rising input inflation fueled by an acute currency rout and rising international crude prices. Being Africa’s steepest currency slide in 2020 by a 43% margin, the Kwacha depreciation against the dollar has precipitated cost push inflationary effects which has continued to wane manufacturing pulse for most key players such as those in the cement and quary mining.
According to a notice of intention of price hike of cement by the country’s largest cement manufacturer Lafarge, a rise in energy, gypsum and exchange rate denominated costs were key drivers of the 18% proposed on its products.
“As a result of the aforementioned, our operational costs have significantly increased by 21%, putting significant pressure on the company’s ability to meet its objectives. In this regard, we write to inform you of this decision by Lafarge Zambia as key stakeholders,” the notice carried.
Zambia recently announced a zero rating in value added tax (VAT) on fuel products which is aimed at cushioning price hikes given a bearish currency trajectory and oil price bulls. The Southern African nation has for a year kept prices tad despite crude prices ebbing higher over 14% at $55bbl. offset by a steep currency slide exceeding the 2.5% energy regulation board trigger for upward adjustment.
This subsidy has been cited by analysts as counterintuitive to IMF expectations especially at a time Zambia is in the middle of talks for bailout assistance with the Washington based lender.
However the statutory instruments (SI) 125 and 106 respectively signed off, have the net effect of widening transportation costs for petroleum products across the supply chain.
PRIVATE SECTOR PULSE STILL CONSTRAINED
Private sector pulse as measured by purchasing managers index (PMI) has remained constrained for 22 months straight in contraction with the last headline print for December 2020 being 49.0 (<50) which is likely to remain under pressure in the first quarter of this year exacerbated by input inflation pressures. Real estate and construction costs are likely to hike to reflect a cost constrained environment.
Import costs on gypsum the key input used in cement manufacture as a result of depletion of local reserves, continues to be another cost driver for Lafarge Zambia.
The Kwacha Arbitrageur
