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Tuesday, August 16, 2022

What Should we do to Fight Inflation?

Columns What Should we do to Fight Inflation?

By Sean Tembo – PeP President

1. Last evening l wrote an article in which l condemned the decision by the central bank’s monetary policy committee to increase the monetary policy rate by 50 basis points from 8.5% to 9%, as a way of trying to arrest inflation. My argument was that such a measure was ill-advised because our inflation is largely cost-push and not demand-pull, and also that credit is not a major source of purchasing power in our economy as it accounts for less than 13% of GDP. I further went on to argue that increasing the MPR will have the detrimental effect of hindering economic growth as well as increasing the cost of living at household level. However, as l was going through some comments related to last evening’s article, l noticed a recurring theme in which readers requested that l provide alternative solutions of how to arrest inflation if not by increasing the MPR. This article seeks to do just that.

2. As argued yesterday, our inflation here in Zambia (both food and non-food) is largely cost-push and not demand-pull. We can further sub-categorize this cost-push inflation into imported and domestic, of which imported cost-push inflation accounts for more than 80% of all the cost-push inflation. Why is this the case? Well, because we are an import-dependent country as we import everything from fuel to toothpicks. Even for the little manufacturing that we do, a large portion of the raw materials are often imported. This largely exposes us to an increase in prices on the world market. For instance, when the prices of oil go up on the world market, the pump prices of fuel has to go up, and fuel being a key production input, it will have a ripple effect as it will increase the cost of transport and generally adversely impact the cost of all goods and services.

3. However, the larger component of our imported cost-push inflation arises from a depreciation of the local currency, the Kwacha. Since for us to import goods to this country, we cannot use the Kwacha but need to use hard currencies such as the US Dollar, when the exchange rate between the Kwacha and the US Dollar depreciates from say K16 to K17.5, as it has done in the past three months or so, then the cost of importing the same amount of goods will go up, even though the person from whom we are importing has not increased their prices. In this particular example, the cost of importing goods would have gone up by approximately 9% [(17.5-16)/16*100]. Suffice to mention that apart from the recent disruption to global supply chain systems due to COVID-19, prices of most goods are generally stable on the world market.

4. So for us to effectively arrest the imported cost-push inflation, we need to address the issue of the depreciation of the Kwacha against major convertible currencies. There are a number of factors that influence the exchange rate of the Kwacha to other currencies which include market confidence, but the most significant is the supply and demand of the hard currencies. For instance, if there is more supply than demand for US$ on the forex market, the Kwacha will appreciate against US$. Now, you may wish to note that our demand for US$ is pretty stable. We need US$ to service our external debt, to import fuel etcetera. In other words, we can easily project with reasonable certainty how much US$ we shall need at what point in time.

5. The supply side of US$ is also quite predictable. In as much as we have tried over the decades to promote non-traditional exports, we have not succeeded much and the mining sector still accounts for more than 90% of our forex supply. Every now and then, foreign direct investment (FDI) does compliment the mining sector, but the mining sector remains the backbone of forex supply. Now, the demand side of forex is largely cast in concrete and steel and we cannot really fiddle with it. I mean we have to service our external debt, whether we like it or not. Similarly, we need to import fuel whether we like it or not. So we cannot do much to manipulate the demand side of forex, but what about the supply side?

6. Well, as a matter of fact, there is a lot that we as a nation can do to increase the total supply of forex into the economy. I have argued before in almost all the PeP Alternative National Budgets that we have prepared since 2017, that the mines remit less than 30 percent of the gross proceeds of mineral exports back to the country. What happens is that let us say XYZ mine (no relation to Slap D) exports $100 million worth of copper to a customer in China, when that customer pays, the $100 million will not land in XYZ mine’s bank account here in Zambia, no. The $100 million will go to XYZ mine’s parent company in Canada, India, Brazil, South Africa or any such country. And then the parent company of XYZ mine will only remit back to Zambia a small amount such as $20 million out of the $100 million to meet local expenses such as salaries, Zesco bills, etcetera. Meanwhile theoretically we are recording an export of $100 million and when we calculate the balance of payment position, we record a surplus. But that surplus is just on paper, in reality we have a perpetual deficit because the $100 million did not enter the Zambian banking system, only $20 million did.

7. In order to address the problem outlined above, Government simply has to pass a regulation that will compel the mines to remit the gross proceeds of their mineral exports. If Slap D’s mine, XYZ exports $100 million worth or copper to China, then the customer has to remit the entire $100 million to XYZ mine’s bank account here in Zambia at Indo, Investrust, ZICB, Natsave or whichever commercial bank XYZ mine maintains an account with. Once the $100 million is remitted back to Zambia, XYZ mine can then make the payments that it needs to in order to sustain its operations, including foreign payments. At the end of the year, once XYZ mine prepares its financial statements, if it declares a profit, it can then proceed to declare a dividend and remit such a dividend to its parent company in Canada, India, Brazil, South Africa etcetera, of course after paying the requisite corporate tax on the profits and withholding tax on the dividends. The measure of compelling all mining companies to remit the gross proceeds of their mineral exports back to Zambia would not only be a game changer in terms of pushing down the exchange rate and addressing imported cost-push inflation, but it would also assist with addressing issues of tax compliance by the mines.

8. So the question then becomes; why hasn’t any administration implemented this measure? Well, as a matter of fact Bashikulu Ba Sata’s administration did attempt to enforce this measure through Statutory Instrument No.55 that was issued through gazette notice number 419 on 25th June 2013. But it was haphazardly conceived and implemented as it sought to achieve too many things at once. The key thing about reforms is that you keep them simple and make them gradual over time, so that you learn as you go. The other challenge was that SI 55 focused largely on outward remittances from Zambia to the outside world, but the larger problem is with regard to inward remittances from the outside world to Zambia for Zambia’s exports.

9. I actually envy most of Sata’s policies. I believe that he had a fair understanding of what the problem was in various sectors of the economy and perhaps his only challenge was that he wanted to achieve everything at once instead of having a gradual approach.

10. Anyway, back to the issue at hand, the question remains; why hasn’t anyone made a sincere effort to compel the mines to remit the gross proceeds of their mineral exports back to Zambia, both in previous and current administrations? I personally believe that it is not an issue of competence. But rather, it is an issue of having the backbone to do it. I mean, one does not need to be an economist to see that if copper prices are shooting up on the world market, having recently crossed the $11,000/tonne all-time record, then why should the Kwacha be depreciating? Isn’t the value of the Kwacha also supposed to be at an all-time high? Why the opposite? So the technocrats in Government know where the problem is, and the political leadership is also equally aware. But the problem is that no one has the backbone to implement the necessary reforms to compel the mines to remit the gross proceeds of their mineral exports back to Zambia. This is because you are talking about billions of dollars here. So for each administration that comes into office, the mining companies can afford to open a numbered offshore bank account for each member of Cabinet and deposit a ka $30 million in each account. Then the issue will simply die a natural death, until a new administration goes into office, then the cycle is repeated. And while all this happens, our economy is damaged and the common Zambian is suffering from the ravaging effects of a high cost of living that is largely brought about by imported cost-push inflation which can easily be addressed by compelling mining companies to remit the gross proceeds of their mineral exports back to Zambia. The solution is right before our eyes and yet not reachable.


  1. Mr Sean Tembo sir….you will be insulted by cult followers and HH’s loyalists….they don’t want anyone to criticize their small god HH….otherwise every sane Zambian is now worried the way things are going

  2. But HH is not the monetary policy committee of the Zambian central bank. How does his name come into it, Saulosi @3 above?

  3. Agreed. Zambia is a babazonke country. It’s not just the mines. Any investor can come in the country do business and repartriate everything. Talk of gross mismanagement, ZCCM-IH goes to invest in a loss making bank instead of consolidating it’s core business of investment in minerals development. IDC goes to invest in a troubled Chinese tile manufacturing company at hyperinflated valuation. The only thing I differ with Sean is his call for a strong Kwacha. A strong Kwacha would inhibit our efforts to diversify. A strong Kwacha make imports cheap and exports expensive. It only benefits the likes of ShopRite, PnP etc. It makes consumers happy with imported consumer goods when the forex is flowing in, but everything will come tumbling down when there is a forex shock. Another point not…

  4. @Nemwine
    That’s how HH rates himself…he’s Mr Know it all…..remember when he said there’s no need for Zambia to import electricity when he was in opposition…he claimed to have a solution….now he’s President some places going 4 days straight no electricity in Lusaka and it has been confirmed that South Africa is only supplying just a little bit of electricity to Zambia….but HH and his UPND minions lied that it is due to bad weather
    And FYI Mr Nemwine just be careful if you want to criticize HH otherwise Spaka will insult you….he’s been insulting fellow bloggers the whole week

  5. Tembo is just waffling…………..

    Trying to sound important………

    Even us who are not economists know the sulotion to zambias economic problems is to train more people to work In manufacturing and force the Chinese and others to move manufacturing to zambia.

    A good starting point is 90% of all consumables and light machinery used by the mines should be manufactured in zambia.

  6. #6  Saulosi 
    November 25, 2021 At 9:02 am

    “……remember when he said there’s no need for Zambia to import electricity when he was in opposition…he claimed to have a solution……… going 4 days straight no electricity in Lusaka and it has been confirmed that South …..”

    Your Lungu and PF lied about about spending billions on power generation, your lungu lied just 4 months ago how load shedding is a thing of the past…….

    All your PF was doing was stealing 24/7……

  7. On the mines zambia has very little leverage since we depend on them and they know it ………..

    Untill we derversify that dependence, they have us screwed ………..

    We all know we have to cut imports and manufacture more in zambia to create jobs and export ……….

    Instead of all that push pull put crap , tell us about solutions at what products to start manufacturing in zambia , …….

    We understand that even the base for poultry feed is imported ?? Look at solutions to that……..

  8. Another point not addressed by Sean is that of govt borrowing ( a major component of the local money market). How will the increase in MPR affect inflation vis a vis
    government borrowing?
    Finally an exchange of well grounded thoughts/alternatives is the way to go. Let’s not reduce politics to banter or a “game” of numbers. Politics is not a game. It is people’s lives and the future of generations to come AT STAKE!

  9. If only this guy could continue writing sober articles like this one, we will respect and listen to him. You do not need to be rude and vulgar to be effective.

  10. IMO economists are some of the most over rated people in developing countries like zambia……..

    Full of jargon like push pull cash pull crap…….

    Economists are mostly needed when the economy is already ticking over and money is being created by manufacturing and jobs have been created……..

    Right now we need hands on people to create manufacturing jobs to cut imports and boost exports ……..

    Then Mr tembos jargon can be heard…..

  11. These are the issues which Sean Enock Tembo is supposed to propagating not name calling like “VASCO DAGAMA”. This article is making a lot of sense. surely where is the problem if all the mining companies and others doing business in Zambia compelled to keep their hard currency in local banks even for 90 days will make a big difference in terms stabilizing our currency. The new dawn govt can buy into this idea to see if its workable.

  12. CONGRATULATIONS SIR SEAN TEMBO, A VERY WELL ARTICULATED ARTICLE, any lay man can see sense in it… HH is over rated, if not counseled properly he will be all talk and no action president. fOR EXAMPLE His fighting corruption in the media but these no proper court case against any of the purported corrupt PF Thieves. Was it a case of crying wolf by HH to gain sympathy from the gullible voters, time will tell.

  13. Days are counting, the timer is running down to six months in office by the new dawn government. As time goes by i fear that the UPND government is more likely to be a failed project. With the honeymoon period after inauguration slowing ending and people’s eyes begin to realize that HH is no savior or messiah. HH can not solve Zambia’s problems and i believe this is clear for all to see.
    Most ministers chosen by HH just don’t cut the cloth, voting for HH was an experiment that will backfire.

  14. Ba HH where is the cheap Petrol, you shouted corruption on top of the Hill not so long ago that PF were stealing through dubious middle men who were over inflated the price of the commodity.
    but the question now is, why haven’t you removed the middlemen up to now. is it safe to assume you now stealing with the same middle men?

  15. Another blunder by HH is the not so well thought after solution of taking 27million of CDF to be managed by ill qualified councils and councilors. Its a well known secret that most council secretaries/ town clerks are thieves and have enriched themselves through tender bidding process.
    Besides the corruption of council secretaries , it is a well known fact that procurement officers in councils are people who are well lubricated above all else through inflated quotes/ conniving with suppliers.
    you expect a councilor who gets a k3,000 to over see 27 million, how will that work???
    the same corrupt suppliers in Lusaka will simply migrate the districts and continue their plunder?
    we needed mechanisms and legislations to ensure council workers don’t simply open up companies by using…

  16. Don’t worry Sean, when we form govt in 2026 ( some morons will insult over this statement), when you form a coalition with other parties to unseat this Govt that will just mess us up as the seem not to know what they are doing, real economics will kick in. I would just want to advise the UPND that FICTION AND REALITY are two different things. What we need is a Govt that believes in REALITY and not FICTION. By the way Sean, Can you please author an article entitled REALITY VS FICTION so that some of these things can be put to bed. So many things they day dreamt of and promised but when we gave them the keys to the office, reality kicked in. Its like dreaming you are Hungry Lion eating pies when they don’t see pies there! SEAN you are doing it for this nation.

  17. Learned Sean Tembo, That’s a well researched article pregnant with meaning. It will provoke the minds in govt. for the first time am supporting your submission.

  18. This Sean tempo man is very intelligent..I didn’t know much about him. I will start listening and pay attention to him.No politician has articulated inflation issue like him. All I hear from other politician is corruption arrest this and than. Why inflation is High? Pf is corruption carders this and that….no substance..thanks mr tembo

  19. To battle inflation we should start fighting corruption. We should encourage the manufacturing of local products. Rwanda has no minerals but has its own agricultural products while we import GMOs that give our citizens complicated European diseases that we can’t treat.

  20. Does it mean the only answer UPND have for economic problems in Zambia is the ‘misrule’ of PF in the past 10 years. Does it mean when Zambians were voting out MMD, the economy was in tip top condition with jobs and every family managing 3 meals a day? UPND should know that Zambians already knew PF’s leadership challenges and that’s why they gave UPND the mandate but its we will keep hearing what wrongs PF did as an excuse to fulfilling campaign promises.

  21. Zambia is being “short-changed” by its exports. All exports must be paid back to Zambia. From Zambia the dividend or Management Accounts owing should be paid. Currently a huge amount of export cash is not coming back into Zambia. HH has to get tough to turn things around.

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