Inflation at Six Month High

The annual rate of inflation, as measured by the Consumer Price Index (CPI), has increased to 7.3% recorded in June from 7.0% recorded in May 2013. It began the year at 7% dropping to 6.9% in February but rising ever since. The long term trend has been on the up since 2011, which must be worrying for policy makers who are targeting 6% this year.

CPI led by Dearer Food

Central Statistical Office (CSO) Acting Director of Census and Statistics, Peter Mukuka said food products accounted for 3.8% (up 0.5%) while non-food products accounted for 3.5% (down 0.2%) of the 7.3% CPI figure.

Annual food inflation rate was recorded at 7.1% in June compared to 6.3% in May, and 6.1% in April 2013 having begun the year at 7%.

“Annual inflation increased for food and non-alcoholic beverages, alcoholic beverages and tobacco, health, transport and communication,” said Makuka.

The removal of subsidies on fuel undoubtedly contributed to the 1% rise in food prices over the last two months. The country ended fuel subsidies from May 1st, leading to a 21% increase in gasoline prices and 22% jump in the cost of diesel.

This is not imported food inflation but home grown. World food prices are below their 2011 highs and in line with 2012 prices according to the United Nations Food and Agriculture Organisation (see chart).

Makuka said the annual rate of inflation decreased for clothing and footwear, housing, water, electricity, gas and other fuels, furnishings, household equipment and routine household maintenance, recreation and culture, education, restaurant and hotel and miscellaneous goods and services. The actual non-food inflation figure was not reported.

Central Bank under Pressure

Rising prices may give the central bank reason to raise its benchmark interest rate for the second month when its monetary policy committee meets Friday. The Bank of Zambia lifted the policy rate by 25 basis points to 9.5% in May to help meet a year-end inflation target of 6% compared with 7.3% for June. Inflation has not been close to 6% since March 2012.

Pressures on food prices will be stoked by state plans to reduce subsidies for fertilizer for corn growers and the halt to its practice of buying the country’s staple food at higher prices than it sells to private millers.

Monetary policy makers may have scope for further tightening, Chris Becker, a Johannesburg-based African market strategist at ETM Analytics, said to Bloomberg.

“Rates may need to be hiked even faster in the future if they are not hiked Friday,” Becker said.

Trade Surplus Narrowing

Meanwhile, Zambia recorded a trade surplus valued at KR 267.8 million in May 2013 from KR 329.5 million recorded in April 2013 according to CSO.

The country has continued to record trade surpluses since January 2013 with the highest valued at KR 329.5 recorded in April 2013. The lowest trade surplus was recorded in February 2013, valued at KR 133.2 million.

What We Should be Worried About

1. Rising costs of mining production at home. They have endured regulatory and fiscal changes and political pressures on employment. The latest idea is to put all employees on permanent contracts with full benefits.

2. Declining export earnings from copper. The latest balance of trade declined by KR62 million in May, down nearly 20% on April. Copper prices have declined over 16% this year and account for about 80% of export earnings.

Dependence on declining copper income undermines confidence in the economy and the kwacha. If this is sustained, it will affect our ability to raise and service foreign debt. There are intentions to raise a further $1 billion Eurobond this year according to Miles Sampa, the ex-Deputy Finance Minister, now at the Ministry of Commerce and Industry.

3. The cost of money far from declining will ratchet back up for businesses ironically due to central bank action, the main proponent of cheaper money. We’ll have to see whether dollar remittances under SI55 put downward pressure on the kwacha thereby quashing imported inflation.

These are challenging times.

David Ryder MA MBA

Consultant. Commentator. Entrepreneur.

www.Viewonzambia.blogspot.com