ECONOMIST Chibamba Kanyama says keeping the Monetary Policy Rate (MPR) at eight per cent, coupled with the country’s debt position, will push the annual rate of inflation higher and keep the kwacha weak.
In an interview, Kanyama observed that keeping the MPR at eight per cent was increasing pressure on inflation and negatively affecting the exchange rate because the cost of essential commodities will continue rising on account of a weak kwacha and excessive debt servicing.
“When the MPR was announced, not the recent MPR, the last one before Dr (Denny) Kalyalya [was removed], which was eight per cent, I stood strong personally to say, ‘look, this is good to unlock production, but we are not doing justice to the country.’ This is more like, it’s like you are running out of fuel, you are driving from Mumbwa to Lusaka and you are running out of fuel to the next filling station, you start cruising your car to reach the next filling station, that’s exactly what we have been doing because we have to unlock and leave the next breathing space, hoping that you will reach there fast. But in the process, you are even burning more fuel and this is what has happened. In my opinion, and as long as the MPR remains as low as it is today, we are not doing justice to the exchange rate, we are not doing justice to inflation,” Kanyama said.
“I predicted that we will see inflation still rise; I commend them (BoZ), that is really a lot of courage, the Monetary Policy officials, that’s a lot of courage because they are concerned about production and are concerned about increasing demand, that’s a good gesture. But at the same time, we have got this other guy I would call the devil, really, this one is affecting investment, is affecting stability in the long-run and as long as we are not facing the issue as it is, we may contend with the inflation rate for quite a while. But the real issue about all this is that it is linked to the debt issue, of course, the debt issue is partly linked to COVID-19 where we have a high fiscal deficit, unable to service our foreign obligations and as consequence, we are having reduced foreign exchange inflows.”
He said until Zambia reached a level of economic stability, the implications of debt on the exchange rate would continue being visible through high inflation and the increased cost of commodities.
“Much of the inflation is imported, that’s my take. It is imported and as long as the various fundamentals, what they call fundamentals, which is really about the debt, that’s the issue. As long as we are facing a crisis with debt, it has implications on the exchange rate and we may see that happen until we reach a level of stability. Now, it’s a little bit difficult to predict when that will happen because it hinges on how we handle the debt issue,” he said.
“The Corona factor is kind of subsided in view of the unlocking of the economy, as we see now, the economy, locally, is more or less unlocked because industry is back, people are producing, the output in terms of agriculture output, we have sufficient grain stocks. When you are at this time of the year, usually inflation reduces, inflation should reduce. So, it tells you that the food-related inflation is not contributing or having an impact on the rate of inflation as things stand now. So, we should discount, not really talk about food inflation, we should focus on one factor, which is the exchange rate.”
He noted that with a weakening kwacha, economic players were increasing prices of commodities due to the high import cost.
“The exchange rate continues to move; the rate continues to rise in favour of the US dollar in particular and as a result, everybody who is importing whatsoever, whether it is an input towards production of something or whether it is a finished product being imported, as you know, this unlocking has involved the borders, too. We are able to import from South Africa, China and wherever so whatever is landing into the country is not landing at the rate it was nine months ago because whenever you have an exchange rate move from K13 per dollar to K21 per dollar, it has to feed through consumption and this has happened within a nine-month period. It has had to feed through consumption, whether it’s input costs through raw materials being imported by local industry, whether it’s imported finished products, the prices are just shooting and everybody, now, is beginning to price in, everybody is pricing in, even those who are producing services are pricing in because you must match that and others already know that if you don’t price in, it’s a matter of time before other key inputs begin to go up, one of them being fuel,” Kanyama said.
He, however, warned that increasing fuel prices would only exacerbate the country’s inflation rate, which spiked to 17.4 per cent in November.
“It is not fair, but we all know this is a reality now that the cost of fuel is being subsidised because the exchange rate has really gone beyond the margin of the drop in the price of crude oil. This is higher now, it has almost wiped out that gain that ERB was benchmarking or equalising on. So, it can’t balance off now. So, we are really seeing a subsidy and I am not very sure for how long this will be the case that we will be paying the price of fuel at what we are paying now and the longer we maintain it, if we can maintain it here, the better because the moment you also unlock that valve and say, ‘can we increase fuel prices to relate to the exchange rate’ then we are now taking inflation where it will even go higher,” said Kanyama.
The annual rate of inflation, which shot up to 17.4 per cent in November, up from 16 per cent recorded in October, was mainly induced by huge price increases in food and non-food items, the highest on record since September, 2016.