Bank of Zambia should cut rates

By Rafiq Raji, PhD

In my column of 9 August 2016 (“Zambians and their central bank decide”), I made a case for the Bank of Zambia (BoZ) to cut rates in November, by 350 basis points to 12 percent, say. That remains my view – its monetary policy committee (MPC) meets this week (14-15 November). Then, with the meeting scheduled just days before the 11 August presidential election, there were uncertainties about a potentially violent election aftermath and what that meant for the inflation outlook. There were fears the result of the Zambian election might not be accepted by the opposition. True, that came to pass. Still, much have mellowed in Lusaka, the capital city, and elsewhere. There were also concerns about a populist streak on the part of the incumbent, Edgar Lungu, who though thought likely to win – barely, was facing significant competition from the leading opposition candidate, Hakainde Hichilema. These concerns are no longer significant. The transition was relatively smooth, albeit there were pockets of violence here and there. But not so significant as to be concerning. And since then, the Lungu administration has said all the right things, with plans to embark on structural reforms under the guidance of the International Monetary Fund (IMF), which though having signalled its willingness to extend aid had rightly waited till the election was decided. More significantly, earlier fears of a populist tilt ahead of the election now seem thankfully misplaced: authorities plan to be fiscally responsible. Still, there is an urgency to boost growth. A desire for fiscal discipline and economic-stimulating policies are not necessarily cross-purposes. Was the scheduled August MPC meeting deliberately delayed to discount the influence of concerns about violence around the elections? Understandably, it was probably not fitting that the meeting take place with the election top of mind. With things now clearer, the delay seems quite wise. The decision this week could be one of easing. Why though?

Inflation has slowed, and should some more. 
Annual consumer inflation declined by a hefty 6.4 percentage points to 12.5 percent (my forecast was 12.7 percent) in October, albeit it picked up pace on a monthly basis, accelerating by 0.5 percent from 0.1-0.3 percent in the prior six months. By my reckoning, the annual headline could be about 8 percent in November and probably about 6 percent in December; broadly in line with my musings in an earlier column on 10 May 2016 (“Zambia to maintain tight monetary policy”) when I wondered if the headline might not slow to single digits before year-end. Food prices are likely to be stable over the course of the next few months to about a year, at least those for the ubiquitous mealie meals. Not only are the authorities building white maize reserves, they announced only last week that they had started exporting the priced staple food to neighbouring Malawi, some 100,000 tonnes. There are also indications that such would be the sufficiency that a subsisting ban on private sector exports of maize may be lifted in early 2017; the agriculture ministry says by January. Before then, authorities hope to have boosted the strategic grains reserve to 500,000 tonnes from 280,000 tonnes currently. So to that extent, negative drought effects on food supply would be largely mitigated. That is not the case for its ongoing biting effects on cheaper hydroelectricity production, though, which is all but diminished. Alternative but more expensive power supply sources are filling the gap. And they are now going to be dearer for consumers: tariffs are likely to be increased, as authorities now desire that they reflect actual costs, by end-2017, authorities say – it could be earlier if the IMF has its way.

2017 budget points to prudence
In his first budget speech on 11 November, newly appointed Zambian finance minister, Felix Mutati, signalled as much. Authorities plan to cut the fiscal deficit to about 7 percent of GDP in 2017, from about 10 percent projected for 2016. In September, Mr Mutati did point out that some pain would need to be endured by Zambians, ahead of an IMF package in Q1-2017. Populist polices, aimed at winning over the electorate ahead of the August election, would need to be rolled back in the event of a programme. Poor Zambians are likely to be hard-hit in regard of their electricity bills especially. The IMF is particulary insistent that fuel and electricity subsidies be removed. The authorities, eager for the aid package, are likely to comply, announcing as early as October, that it would gradually cut as much as $1 billion in subsidies, with the $600 million in fuel and electricity subisdies likely casualties. These, the IMF, in addition to needed structural reforms – like the sale of loss-making state-owned enterprises, would be crucial towards accelerating growth.

Growth could be higher
Authorities reckon growth would be 3.4 percent in 2017, from an estimated 3 percent this year. It could be higher, though. Yes, power shortages are likely to remain for another year at least. And true, government finances may still be relatively strained. But maybe not as much as expected. As at early November, copper futures prices had edged up for about 10 consecutive trading sessions, as hedge funds took bullish bets just days before the American election. In its aftermath, with a Donald Trump (an ultra-nationalist) victory, a rally ensued, as market participants reckoned planned infrastructure spending by his administration would boost demand for copper. Prospects of supply disruptions in Chile, the metal’s largest producer, also underpin sentiments, with major players believing the current supply glut may give way to a medium-term scarcity eventually. So, copper prices could recover significantly enough over the course of the year to boost the finances of the Zambian government. If these were to occur in an atmosphere of fiscal prudence under the watchful eye of the IMF, there is good reason to believe growth may be higher than the level authorities currently project.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz.

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