Zambia’s central bank is expected to hike its policy rate for the third time this year on Wednesday, November 22, 2023, as the country grapples with a sharp depreciation of its currency and soaring inflation. The Bank of Zambia (BoZ) has already raised its benchmark rate by 250 basis points to 11.5% since June, but analysts say more tightening is needed to stem the kwacha’s slide and contain price pressures.
The kwacha has lost more than 30% of its value against the US dollar since September when the war in Ukraine sparked a global sell-off of emerging market assets and increased Zambia’s import bill. Zambia, Africa’s second-largest copper producer, relies heavily on imports of fuel, machinery, and consumer goods. The currency crisis has also raised the cost of servicing Zambia’s external debt, which stands at over 100% of GDP.
The kwacha’s slump has fueled inflation, which accelerated to 22.8% in October, the highest rate since 2016 and well above the central bank’s target range of 6-8%. The main drivers of inflation have been food and transport costs, which have risen due to poor harvests, higher fuel prices, and exchange rate pass-through. The BoZ has warned that inflation could reach 25% by the end of the year if no policy action is taken.
According to a Bloomberg survey, the median forecast among 11 economists is for the BoZ to raise its policy rate by 100 basis points to 12.5% on Wednesday. Some analysts expect a bigger hike of 150 or 200 basis points, while others predict a smaller increase of 50 basis points or no change at all. The BoZ will announce its decision at 10:00 a.m. local time (08:00 GMT).
The rate hike is likely to have a limited impact on the kwacha, which is more influenced by external factors such as copper prices, global risk appetite, and Zambia’s debt restructuring process. Zambia defaulted on its $3 billion of Eurobonds in November 2020 and has been negotiating with its creditors under the G20’s Common Framework for Debt Treatment. The government reached an agreement in principle with bondholders in October, but the deal was rejected by official creditors, including China, earlier this month. The creditors demanded more debt relief from bondholders and other commercial lenders before signing off on the deal.
Zambia’s economic outlook remains challenging, despite a rebound in growth this year after a contraction in 2020 due to the COVID-19 pandemic. The World Bank projects that Zambia’s GDP will grow by 4.6% in 2021 and 3.7% in 2022, supported by higher copper prices and output, improved electricity supply, and an IMF loan program. However, the recovery is fragile and depends on the successful resolution of the debt crisis, the containment of the pandemic, and the implementation of structural reforms to boost fiscal sustainability and private sector development.
Zambia’s new president, Hakainde Hichilema, who took office in August after a landslide victory over his predecessor Edgar Lungu, has pledged to restore macroeconomic stability, revive investor confidence, and reduce poverty and inequality. Hichilema, a former businessman and opposition leader, has appointed a new cabinet and central bank governor and has vowed to fight corruption and improve governance. He has also promised to diversify the economy away from copper and create more jobs for the country’s young and growing population.
Source: Bloomberg
