By Rafiq Raji, PhD
The monetary policy committee of the Bank of Zambia meets on 12-13 May 2016. I think the committee would keep the benchmark interest rate unchanged at 15.5 percent; raised to this level by 300 basis points in November 2015. Although headline inflation remains in the double-digits – and would probably remain so for most of the year (except probably in December), the monthly pace has slowed; 0.3 percent month-on-month in April from a monthly pace of above 1.0 percent at the beginning of the year. Headline inflation was 21.8 percent year-on-year in April from 22.2 percent in the prior month. Food supply is expected to ease and the kwacha has been recently stable. There is worry that upcoming elections in August and drought effects could accelerate prices. Additionally, power shortages remain. Zambia continues to import the supply shortfall – at least 300 mega watts (MW) – from South Africa and Mozambique. It is also feared that power tariff hikes reversed by President Edgar Lungu earlier in the year – clearly motivated by a desire to win the support of the electorate ahead of the August 2016 polls – may be reinstated after the elections. To ensure Zambia returns to a fiscally sustainable path, this is likely one of the measures to be insisted upon by the International Monetary Fund (IMF) when authorities start a programme with the Fund in the fourth quarter of 2016.
Last week, Zambian authorities also announced downward revisions to its growth forecasts. Authorities now see about 3.0 percent growth in 2016 – little different from the 2015 headline of 3.2 percent announced on 5 May 2016 – with the fiscal deficit for the year likely coming out just a little below the 2015 level of about 8 percent. In February, authorities had expected 3.7 percent growth in 2016 and above 4 percent for subsequent years. My 2016 growth forecast is 3.1 percent. Zambian authorities see economic challenges that emerged since 2015 enduring for the remainder of 2016, even as they work towards surmounting them. These challenges include a continued power shortage and likely lower for longer copper prices. In early May, ongoing load-shedding – 8 hours of power per day – worsened as a power connector in neighbouring Zimbabwe through which Zambia imports power from South Africa and Mozambique had technical faults. The power supply problems come as two major hydroelectric power stations are running below capacity. The Kafue Gorge power station with an installed capacity of 990MW is currently producing 600MW. The Kariba dam station with an installed capacity of 1,080MW is currently producing below 300MW, as water levels remain low. So the 300MW authorities import – that is even when there are no power connector problems – is inadequate. Authorities are building new power stations. They are due for completion years out, however. So growth would probably continue to come out below potential in 2016-17. Thus, I am a little skeptical about the authorities’ expectation of about 6 percent growth in 2017, when they believe improved power supply and cost-reduction measures by mining companies should begin to take effect. I agree that some improvements would be recorded. But a double acceleration in growth in just a year? That seems a little bit optimistic. Additionally, there is likely limited price pressure from the kwacha (relative to the currency’s volatile trend hitherto), which has been stable of late. In March, the African Development Bank (AfDB) approved a US$125 million loan for Zambia – I wonder about this though, considering elections are just months away. The August elections were a major reason why the IMF programme was proposed for the fourth quarter of 2016, after the elections. It would be somewhat curious if the AfDB chooses to disburse its loan before then. Incidentally, investor confidence has recovered somewhat. In March, Glencore – a global mining giant – announced a US$1.1 billion investment in new copper mines. The vote of confidence comes as authorities revised their royalty tax system to a price-based one, welcome relief for mining investors who hitherto had to contend with frequent and abrupt changes to the royalty tax regime by authorities. With copper output for 2016 put at 700 thousand tonnes in 2016 and 2017, a significant recovery in economic output is likely only evident in 2018 when copper production of 1 million tonnes is expected.
Fears about food shortages may be misplaced, in 2016 at least – albeit the risk of a prolonged drought remains. In early May, President Lungu announced a bumper maize harvest – 2.7 million tonnes – for the 2015/16 farming season. As the monthly maize consumption is put at 100 thousand metric tonnes, the harvest is more than sufficient to cater for the local population for the remainder of 2016. Authorities point to dubious millers for the artificial price increases for mealie meals – the local maize-produced staple food. In April, it announced that the Food Reserve Agency had since November 2015 distributed about 700 thousand metric tonnes of maize from the country’s grain reserves to millers at subsidized prices. It alleges that some millers instead chose to export the subsidized supplies, causing an artificial shortage and price hikes. This motivated an earlier maize export ban, which was lifted in April. These considerations suggest to me inflation may not likely accelerate as much as authorities expect – about 15 percent by year-end. Even as my model allows for some acceleration in the months around the elections – that is, July, August, and September – it doesn’t come out with that significant a number. My end-2016 inflation forecast is actually about 9-10 percent year-on-year. This underpins my view that the Bank of Zambia may find it suitable to ease interest rates at its monetary policy committee meeting in November, by 350 basis points to 12 percent say. For this meeting in May, I think holding rates would be more appropriate: hiking rates further even as real interest rates are negative may not be of much use. Thus, the Bank of Zambia may choose to keep its benchmark interest rate unchanged at 15.5 percent when it announces its decision on 13 May.
Also published in my BusinessDay Nigeria newspaper back-page column. See link viz. http://businessdayonline.com/2016/05/zambia-to-maintain-tight-monetary-policy/