A journalist from Zambia News and Information Services on
Sunday 29th March, 2009 asked me about what I thought of
the announcement by the Central Statistics Office that inflation
(rate) had dropped in Zambia. Her view was that things were still very expensive and the poorer were becoming poorer.
My response (which was also given to an international news agency that interviewed me via phone):
It is true that many people, including myself will find it difficult to believe the inflation rate has indeed dropped in Zambia when we are experiencing the opposite. The CSO highlighted the reduction in air travel fares as having positively affected the inflation basket. There are not many Zambians who travel, and besides the airline industry has experienced a drop in travel.
The airlines have either not increased the prices in recent months while a few have reduced. One airline no longer exists and this may give an impression there has been an improvement in air travel costs. We needed a better context for the reduction in the rate so that we appreciated the overall impact this would have especially on the key items that have a significant impact on the inflation rate such as food prices, bus fairs, construction and fuel.
I was also asked on what would be the appropriate solution.
My response was that inflation is generally tackled from two fronts; fiscal incentives to industry that should encourage supply as well as monetary policy administered by the Bank of Zambia. The problem is that monetary policy is usually a short term measure as it uses interest rates to control money supply in the economy. The long term effect is that monetary has the potential of reducing output. The Zambian economy is not heating so; we do not need over-application of monetary policy. The experience has been that by targeting money supply, monetary policy has failed to arrest inflation triggered by food prices. There is a significant time lag between a reduction in money supply and consumer response on food in Zambia. People still consume where food is concerned.
The best way would be by identifying the transmission mechanism for inflation in Zambia, and as at now, the depreciation of the Kwacha appears to have accelerated the inflation rate. Zambia is an import dependent country for both raw materials and finished products, and prices for both finished products and raw materials have risen significantly.
Most manufacturing companies have for example adjusted prices except for those who market products that are highly sensitive to price changes; and in this case, companies will choose to manage the losses to maintain the volumes. But this goes with some cutting down on jobs. I am aware of many manufacturing companies that are responding this way. We have seen lately that by intervening in the foreign exchange market occasionally the Bank of Zambia manages to stabilise the inflation rate to tolerable margins, which is much more efficient than focusing on money supply. An injection of US $20 million in the market protects the Kwacha by about two basis points and this goes a long way in containing sharp price movements.
I was also asked a question on what I expect of inflation in near future:
My response was that all depended on four key items: the food harvest expected in May/June; the exchange rate, energy costs in view of the anticipated increase in electricity tariffs and the ongoing negotiations for salary increments by the public workers unions. The workers are already responding to the increase in the cost of living and they know inflation has been rising at higher margins. Household incomes have been impacted as we know and this is in part as a result of the economic crisis; and this will give added pressure for higher salary increases across industry.