Zambia Sees Inflation Rate Below 10 Percent After Subsidies Cut

Inflation in Zambia will remain below 10 percent even as the removal of fuel and corn subsidies cause “initial shocks,” Deputy Finance Minister Keith Mukata said.

Consumer prices accelerated to 7 percent in May from a year ago, compared with 6.5 percent a month earlier, the first increase in five months, after the government boosted fuel prices by more than 20 percent.

“Of course you’re going to have the initial shocks, but the long term benefits far outweigh this,” Mukata said in an interview yesterday in Lusaka, the capital. The government still sees the inflation rate remaining within “single” digits, he said. Mukata replaced Miles Sampa in the post, the Lusaka-based Zambia Daily Mail newspaper said May 9.

Africa’s largest copper producer removed subsidies on fuel on May 1 and the government said it will stop the practice of buying corn at higher prices than it sells to private millers to rather invest the money it saves into infrastructure such as roads, rail and power. The government is targeting an inflation rate of 6 percent by the end of the year, central bank Governor Michael Gondwe said on Feb. 21. Mukata didn’t say whether Zambia will stick to the target or if it is still reachable.

The country spent 6.1 billion kwacha ($1.1 billion) on fuel and corn subsidies from 2010 to 2012, according to Alexander Chikwanda, the finance minister. Petrol prices rose 21 percent and diesel climbed 22 percent on May 1 following government’s decision to stop artificially depressing the retail values of fuel.

Second-Round

While removing the support is “commendable,” Zambia should have rather done so in a more staggered manner, Paarl-based NKC Independent Economists said in a note yesterday.

“The removal of the fuel subsidy is yet to be fully determined, as the second-round effects of increased input costs have not completely materialized,” analyst Irmgard Erasmus said. “Given the upside risks to inflation posed by the expected upward momentum in food prices, coupled with the year-end target of 6 percent for headline inflation, a tightening of the monetary policy stance may be on the cards.”

Zambia’s central bank will announce its interest rate policy decision today, having held it steady at 9.25 percent for six straight months.

To contact the reporter on this story: Matthew Hill in Lusaka at mhill58@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net

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