The Central Statistics Office (CSO) of Zambia released its latest monthly report on Thursday, November 28. Consumer price inflation rose in November, halting a three-month decline since reaching a y-t-d high of 7.3% y-o-y in June and July. The November consumer price index (CPI) inflation reading came in at 7% y-o-y, from 6.9% y-o-y in October. On a monthly basis, price pressures rose to 0.3% m-o-m from 0.0% m-o-m in October. The rise in the overall inflation rate was largely attributable to an increase in price pressures in the food and non-alcoholic beverages sub-index. The sub-index carries a weight of 53.49% in the CPI basket.
Finance Minister Alexander Chikwanda announced on November 27 that Zambia’s external borrowing ceiling was lifted to ZMK35bn, a substantial increase from a previous limit of ZMK20bn. The increase in the external borrowing capacity will allow the country to secure ZMK7.1bn in foreign financing, as outlined in the budget for the upcoming 2014 fiscal year (FY). The budget speech for the 2014 FY had a distinctly expansionary undercurrent, and projected total expenditure to rise by 32.5% to ZMK42.7bn, against projected domestic revenues of ZMK29.5bn and grants of ZMK2.6bn. Of the resultant shortfall of ZMK10.5bn, domestic sources are projected to contribute only ZMK3.5bn. The higher debt ceiling paves the way for the issuance of a second Eurobond, after the government stated earlier this year that various infrastructure funding requirements may be consolidated into a single debt market offering.
WHY DO WE CARE? Notwithstanding a conservative monetary policy – the benchmark interest rate was affirmed at a record high of 9.75% on October 31 – the upside risks to inflation remain significant. Our baseline projection is for food price inflation to rise over the near term as stock levels run dry and adverse weather conditions delay planting. The lean season spans November to February. In addition to atypical rainfall (early rains in the southern and westerns regions of the country whilst delayed in the northern region) bottlenecks in the distribution of subsidised seed and fertiliser impede planting. The Famine Early Warning Systems Network (FEWS NET) stated in their November report on Zambia that food prices will likely persist above the five-year average, increasing pressure on food relief actions. In addition to food price pressures, our expectation is for CPI inflation to rise over the near term as a result of public and private sector wage increases, fiscal overruns as well as the second round effects of the weakening kwacha exchange rate. Over the short term, we consider the strong fiscal spending programme, the net effect of the weakening current account position on the kwacha, and projected weakening of agricultural output to be key upside risks to inflation. Our baseline expectation is for inflation to average 7% in 2013, given a year-end projection of 7.3% y-o-y.
We are concerned that Zambia may over-extend its external debt capacity. The 2014 FY budget calls for a substantial rise in foreign borrowings (foreign financing was projected at ZMK4.08bn in the 2013 FY budget) at a time when foreign reserves are below target, the kwacha exchange rate exhibits considerable volatility, and capital flight risk looms over emerging markets. A depreciatory trend in the kwacha exchange rate, and an increasing shift towards funding on commercial rather than concessional terms, may result in a considerable increase in debt servicing costs over the short to medium term.
Analyst: Melissa Verreynne