“Strategic Inflation Management”

… The central bank move in to tightened the monetary policy as a measure to combat escalating inflation.

By Francis Maingaila

Lusaka, Zambia24 (15 -05 – 2024) – In a move aimed at curbing the country’s spiraling inflation, the Bank of Zambia’s Monetary Policy Committee (MPC) has increased the policy rate by 100 basis points to 13.5%.

Governor Dany Kalyalya announced at a press briefing this morning that the decision to raise the monetary policy rate aims to rein in inflationary pressures and anchor inflation expectations, steering the economy towards the 6-8 percent target band.

He said the MPC cited the devastating drought as a key factor in the rate hike, acknowledging its significant impact on the domestic growth forecast for 2024. According to Dr. Kalyalya, the agriculture and energy sectors are expected to be the hardest hit.

The MPC warned that uncontrolled inflation would undermine macroeconomic stability, exacerbate current economic shocks, and hinder the creation of a conducive environment for productive investment and financial stability.

Dr. Kalyalya said the rate hike is seen as a decisive move to address these concerns and promote financial stability.

Market analysts expect the decision to have a ripple effect on the economy, influencing borrowing costs and consumer spending.

“The Bank of Zambia’s move is being closely watched by economists and financial experts, who are eager to see the impact on the economy in the coming months,” said Dr. Kalyalya.

He said the decision comes as Zambia’s inflation rate continues to rise, reaching 13.8% in April, driven by a weakening Kwacha and surging prices of staple foods and energy.

According to Kalyalya, the MPC cited persistent inflationary pressures and rising inflation expectations as key factors behind the rate hike.

The bank forecasts inflation to average 13.7% in 2024, up from its previous projection of 12.9%, before moderating to 9.8% in 2025 and 7.4% in 2026.

However, Dr. Kalyalya said the outlook remains uncertain, with risks posed by a potentially weaker Kwacha, geopolitical tensions, and prolonged global financial constraints.

“The interest rate increase is expected to have a ripple effect on the economy, with higher borrowing costs likely to impact consumer spending and business investment,” he explained.

Dr. Kalyalya suggested that the bank hopes the move will help stabilize the macroeconomic environment and guide inflation back towards its 6-8% target band.

“This is the second rate hike this year, following a 50-basis-point increase in February,” he said.

“The bank’s next MPC meeting is scheduled for August, where further adjustments may be made to address the evolving economic landscape.”

Dr. Kalyalya noted that the Kwacha has continued its downward trend, trading at 22.5 against the US dollar, while fuel prices have risen by 10% in the past month, exacerbating the inflationary pressures facing the nation.

He regretted that Zambia’s economy faces headwinds as the Kwacha depreciates and credit growth slows.

The Kwacha’s depreciation rate against the US dollar accelerated in the second quarter of 2024, with the exchange rate falling by 10.2% to K27.37 as of May 10, 2024.

“This development comes after a brief period of stability in the first quarter when the depreciation rate slowed to 10.6% from 17.5% in the last quarter of 2023,” he explained.

According to Dr. Kalyalya, the renewed pressure on the Kwacha is attributed to a sustained low supply of foreign exchange amid elevated demand from importers and individuals.

“The situation has been exacerbated by a decline in foreign financial inflows, leaving the country’s gross international reserves vulnerable,” he said.

Despite the Bank of Zambia’s market support of US$369 million, Dr. Kalyalya explained the Kwacha’s depreciation continues to pose significant risks to the economy, particularly in terms of inflation and the cost of living.

However, the Kwacha appreciated by 7.8% to K25.24 between May 10-14, 2024, following news of progress in external debt restructuring and improved supply from foreign financial institutions.

The country’s gross international reserves have increased to US$3.6 billion, equivalent to 3.9 months of import cover, up from US$3.3 billion (3.7 months) at end-December 2023. This increase is mainly attributed to net statutory reserves.

The development has raised concerns among economists and financial analysts, who warn of potential inflationary pressures and decreased economic competitiveness if the depreciation continues unchecked.

Furthermore, Dr. Kalyalya said the country’s domestic credit growth has experienced a significant slowdown, plummeting to 10.5% in March 2024 from 18.1% in December 2023.

“The drastic decline is attributed to a substantial reduction in lending to both the government and the private sector, indicating a marked shift in the credit landscape.

The slowdown aligns with the government’s ongoing fiscal consolidation efforts, which aim to curb borrowing and promote economic stability.

However, commercial banks’ accumulation of government securities has been hindered by tight money market liquidity conditions, exacerbating the credit growth slowdown.

The drought has severely impacted the agriculture sector, while inflation has weighed heavily on output in the manufacturing sector.

The energy sector, particularly electricity supply, is also expected to be severely affected.

Zambia’s economic growth prospects for 2024 have been drastically downgraded to 2.3% from an initial projection of 4.4%.

The devastating drought and escalating inflationary pressures, triggered by a weaker exchange rate, are blamed for the slump. The downgrade is a blow to the country’s economic development plans, with the government having pinned its hopes on a robust growth rate to drive economic expansion and job creation.

However, Dr. Kalyalya predicts a rebound in 2025, driven by the recovery in the mining and agriculture sectors, as well as sustained expansion in the ICT, financial, insurance, wholesale, and retail trade sectors.

The government is under pressure to implement effective measures to mitigate the effects of the drought and inflation and to stimulate economic growth.

The central bank is closely monitoring the situation, with analysts warning of potential long-term consequences if the situation is not addressed promptly.

In addition, the Bank of Zambia’s gold purchasing program has seen significant progress, with total purchases amounting to US$168.1 million since its inception. “This initiative aims to promote economic stability and support the country’s foreign exchange reserves,” he said.

The country’s economic outlook remains uncertain, with the ongoing drought and inflationary pressures posing significant risks to economic growth and development. However, with prompt and effective policy interventions, Zambia can mitigate these risks and promote a robust economic recovery in the coming years.

Key statistics:

  • Kwacha depreciation rate: 10.2% (May 10, 2024)
  • Exchange rate: K27.37 (May 10, 2024)
  • Gross international reserves: US$3.6 billion (March 2024)
  • Import cover: 3.9 months (March 2024)
  • Domestic credit growth: 10.5% (March 2024)
  • Economic growth projection: 2.3% (2024)
  • Inflation rate: 17.5% (2023)
  • Gold purchases: US$168.1 million (since inception)

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