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Wednesday, 3 December 2008

Banda's Challenges : Rising Inflation

We continue our series, drawing from the challenges I identified in A memo to President Banda. The last piece identified a potentially weaker Kwacha going forward . Linked to this is the possibility of rising inflation. Consumer prices have been on the rise driven principally by high food prices and higher oil prices. The latter has now abated, but the fall in oil prices is unlikely to be passed onto consumers (as I observed in my brief interview with the Post) because of the continuous depreciation of the Kwacha. In short, expect inflation not just to rise as we go forward due to current high mealie meal prices, but this effect is likely to be reinforced by further weakening of the Kwacha as we see higher cost of imports. Rising food prices will increase the political pressure on RB, and may force the government to offer more costly subsidies going forward, further eroding our already precarious fiscal position after the excess of the Presidential bye-elections (see IMF on Zambia's Economic Outlook).

[Note : for ease of reference, I am banking the posts in this series together - so posts will inevitably be moved forward in time as new posts become available, as I have done with the "falling copper prices" post]

4 comments:

  1. Check out this excellent article on Lusaka Times, which puts forward policies the government could adopt.

    The Economy and Development in Zambia
    December 4, 2008

    ReplyDelete
  2. Cho,

    Inflation continues to eliminate any incentive towards personal savings beyond cutting one's losses it seems. A recent check of the rates paid by ZANACO for fixed deposits over ZK$1,000,000 reveals the maximum 12 month period yields a paltry 7% annual return, less than half the rate being experienced by consumers in the marketplace. It seems one would be better off converting to foreign currency, burying it somewhere for a year, and then digging it back up. With any luck you will at least break even, and on average should only suffer from the minimal inflation rates experienced by a Japanese or European consumer. Am I off base here?

    It seems to me that the safest, surest way to increase the volume of credit available in Zambian banks is to increase the savings deposit base, but I fail to see how that can happen as long as deposits are not protected from erosion due to inflation above interest.

    ReplyDelete
  3. MrK,

    I can see why you like that article!

    I suspect the author has dived into your manifesto. Point 4 is a new idea.

    In general I agree with role for chiefs and the need for fiscal displine. Although I suspect the author has not thought about the issues. Both aspects a lot more complicated than he has articulated.

    The issue of fiscal revenue for local areas is interesting as well. It appears he has recognised a point we discussed on Is fiscal decentralisation the answer?, to which Yakima and myself awaits your answer to our question.

    ReplyDelete
  4. Yakima,

    No you are not off the base! Higher inflation necessarily mean higher borrowing rates for consumers. That is why this new inflation is painful! If it is generated from external imports due to depreciating exchange rate and general incompetency (our failure to secure sustainable and cheap food). In the short term holding foreign cash is the best way, though perhaps one must be wise which currency they hold. As a holder of the British Pound, I can tell you life is tough these days! [A sidetrack : Incidentally inflation also hits on those of us remitting home - the money we send is now valued less, but thank God for the weak Kwacha..which works in the opposite direction for us!! Hopefully when the two should move in opposite direction].

    And yes, you are absolutely right. Increase domestic savings is always the way to expansion in domestic credit! Its as simple as that.

    ReplyDelete

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