Economist Chibamba Kanyama says Zambia’s annual rate of inflation should be expected to remain under pressure on account of the anticipated fuel price increase and poor rainfall.
And Kanyama has called for a Cost Benefit Analysis as to whether government should consider subsidising fuel with regards to the looming price hike.
Last week, the Central Statistical Office (CSO) announced that the year-on-year inflation rate as measured by the all items Consumer Price Index (CPI) for June, 2019, increased to 8.6 per cent from 8.1 per cent recorded in May, 2019.
In an interview with the News Diggers! Kanyama explained that if not checked, inflation would erode most of the country’s economic gains.
“Inflation still stands out as one of the top threats to Zambia’s economic growth now, and in future, and if not clipped effectively, it will erode most of Zambia’s economic gains, increase the cost of infrastructural investment, make it harder for government to mobilize sufficient resources for debt repayment, lower consumer and investor confidence,” Kanyama noted.
“Given the current environment where we anticipate cost-push inflation arising from projected energy and fuel price increases, low production due to poor rainfall and electricity load-shedding as well as the unstable exchange rate, we should end the year at the upper-most digital figures, possibly marginally below 10 per cent. The real challenge now is that the market can easily project inflation to be high, and as a result, everyone is adjusting prices even where it is not necessary. This is where it becomes difficult for counter measures to have effect. It is about market confidence, and this is where I commend the Bank of Zambia (BoZ) for timely adjusting upwards the Monetary Policy Rate (MPR). If that decision was not made a month ago (on May 22), inflation levels would be worse than they are now.”
He advised government to effectively compliment monetary policy with stringent fiscal policy measures in order to rein in inflation.
“The question though is whether the raised Policy Rate will hold for a while. Like I have said before, monetary policy is a short-term measure, and if our monetary policy response is not effectively complemented by stringent policy measures, we will not successfully rein in on inflation. We need to constantly signal to the market that despite the numerous economic pressures the country is facing, we are determined to keep inflation within the budget projections. This will come at huge cost to the economy, especially if the solution remains liquidity tightening,” he observed.
Kanyama also warned of increased poverty levels if inflation hit double-digit levels.
“We are already witnessing a rise in commercial bank lending rates, reduced economic activity and where this happens, the economy fails to grow at healthy levels. The other problem I foresee; if inflation grows to near double-digit levels is increasing poverty levels in the country. Inflation has its dumping ground among the most poor in society. It is the poor who first notice the increase in price levels and their only response is substituting consumables to only those products they consider essential. They stop consuming nutritious products, such as eggs, milk and meat so that they can still afford mealie meal and vegetables. Inflation, therefore, promotes inequalities, reduced household and price sector investments, lower savings and low growth rates,” Kanyama said.
And he has called for a Cost Benefit Analysis to show whether government should consider subsidizing fuel in helping to cushion the impact of high fuel prices.
“We should, therefore, have a Cost Benefit Analysis with regards to fuel price increases; are we better off government subsiding fuel for a little longer or just let it roll with the consequence of high inflation? Subsidising alone cannot work in the long-run, but at times, depending on country priorities, it pays for itself in the value chain, such as higher growth rates through which government collects its revenues,” said Kanyama.