August Inflation Quickens to 7.3% as Trade Deficit Contracts
August inflation ticked up to 7.3% from 7.1% the previous month. The upward move was led by an increase in the prices of non-food items such as fuel and transport fares and fees. The Government raised the pump price of fuel by an average of 13% in July whereas road user fees (road tax, license renewals etc.) were also raised by 50%.
The trade balance came in at a deficit of K958 million in July, down 20% from the previous month. This was the first contraction in the trade deficit this year.
Inflation will remain under upward pressure for the rest of the year from the effects of both load shedding and the continued depreciation of the Kwacha. Businesses in various sector of the economy have had to adjust to power outages by using supplemental energy (from mostly generator sets) and altering work hours. The cost of running a generator set has been exacerbated by the recent rise in fuel pump prices. At some point those additional un-budgeted costs will be passed onto consumers (if not already).
The Kwacha is down 32% year-to-date against the US dollar and currently stands at a spot rate of K8.56/$. Of Zambia’s K27.1 billion in first half 2015 imports, 69% were consumer (30%) and capital goods (39%). Capital goods imports are not going to slow down anytime soon because of the extent of current and future infrastructure projects. But consumer goods, especially food, can be curtailed by sourcing more locally. This would reduce pressure on the Kwacha.
The Ministry of Agriculture must play a key role, at a granular level, to ensure that production of certain products like meat, vegetables, potatoes etc. (i.e. things that the country can sustainably produce at high quality) are increased. As things stand, local producers – because of a lack of adequate capacity and capital – are only getting a small piece of the multibillion Kwacha food industry. Capacity needs to come first because capital will follow in abundance once there is consistent and high quality production.
High fuel pump prices
It is tragic that Zambian consumers will not get to see any relief from low fuel pump prices in light of the fact that global oil prices have declined to around $40 per barrel. Procurement of oil through the Ministry of Energy remains poor, inefficient and without any political impetus to reform. The Energy Regulation Board’s (ERB) ‘cost-plus pricing’ model also makes consumers pay for not only those inefficiencies but exchange losses (fuel is purchased using US$) resulting from a weaker Kwacha. This is one of the key areas where opposition parties should be pressuring the current regime to reform.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *