Zambians pay the price for government’s default as food prices spiral

By David Whitehouse
Posted on Monday, 19 April 2021 17:00

Justina Kabuli and her son Andrew, both HIV-positive, remove weeds from their field of sweet potato crops during a visit by a home-based care team to their home in Chiyobola
Justina Kabuli and her 12-year-old son Andrew, remove weeds from their field of sweet potato crops on February 21, 2015. REUTERS/Darrin Zammit Lupi

The population of Zambia is paying the price for Zambia’s sovereign default – when the government missed a payment on its debt – in November 2020. The most direct impact is in the form of higher food prices.

Overall annual inflation climbed to 22.8% in March from 22.2% in February, driven by food inflation, which jumped to 27.8%.

The higher prices result from a loss of confidence in the kwacha, says Shani Smit, an economist at NKC African Economics in South Africa. Since October, food-price inflation has soared by more than 13%, she notes. “One of the main drivers behind the rise in food price inflation was kwacha weakness.”

Headline inflation is likely to peak in April and then gradually slow, Smit says. Reasons for optimism are the harvest season starting in April and the government’s decision not to charge value-added tax on fuel imports, she says.

  • According to the Global Information and Early Warning System, Zambia’s maize output is projected to reach 3.5m tonnes this year, 20% higher than the five-year average.
  • Still, dangers of locust infestation pose downside risks to the food supply this year.
  • Swarms of African migratory locusts increased between January and March 2021, notably in areas where nearly 30% of the national maize output is produced, Smit says.
  • Cost-push pressures may also result from “quicker-than-expected recovery in global energy prices or value-chain disruptions related to lockdown restrictions,” she adds.

Improvement in maize stocks in the second half of 2020 have been offset by strong increases in the prices of meat, fruits and vegetables, according to a note from Yvonne Mhango, head of research for sub-Saharan Africa at Renaissance Capital in Johannesburg.

  • “We think strong imported price inflation due to a weak kwacha partly explains the increase in food inflation. And it is possible local producers are using the price of the imported equivalent product as a benchmark.”
  • Investment and household consumption are likely to be “subdued” this year, in part due to the erosion of real incomes due to inflation, Mhango writes.

Currency board

According to The Economist Intelligence Unit (EIU), Zambia’s inflation figures show that the central bank’s 0.5% increase in its policy interest rate in February was too small, and that rates will need to rise again at the next meeting on 17-18 May.

The kwacha will continue to “depreciate sharply” against the US dollar in 2021, the EIU says.

Zambians are “paying the price for an irresponsible central bank that is printing too much money,” says Steve Hanke, professor of applied economics at Johns Hopkins University in the US.

By Hanke’s own measure, which updates daily, Zambia’s annual inflation rate is currently 26% per year. The national elections in August mean that there is “virtually no chance that the central bank will slow down the printing presses,” he says.

The “best, proven way to smash inflation” in Zambia is to establish a currency board, like that which operated in the 1940s and 1950s, Hanke says.

  • A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange and must hold anchor-currency reserves to fully match its monetary liabilities. The removal of discretionary monetary powers means that “the domestic currency is a clone of its anchor currency,” Hanke says.
  • The adoption of such a board would “smash inflation in Zambia within 30 days”, says Hanke, who has served as chief economic adviser to the governments of Lithuania and Bulgaria.

Bottom line

Zambians will keep paying the price for default through their food bills until currency stability is achieved.

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