Need to Buy an Aspirin? If You're a Zambian, It Will Cost You

  • Price of headache medication soars as currency fuels inflation
  • Borrowing costs set to rise amid slowest growth this century

The Bank of Zambia’s currency headache just got a lot more expensive.

The price of aspirin has climbed 34 percent in the past year as the currency’s plunge pushed up the cost of imports, according to the Zambian statistics agency. The annual consumer inflation rate jumped to 19.5 percent in November and is set to breach 25 percent next year, according to NKC African Economics. That means the Bank of Zambia, led by governor Denny Kalyalya, will need to keep tightening monetary policy, driving up borrowing costs even though the pace of economic growth is the slowest since 1998.

“2016 is going to be really hard for Zambia,” Irmgard Erasmus, an economist at Paarl, South Africa-based NKC, said by phone on Nov. 27. It’s an election year, and “obviously voters are not very happy with living costs escalating so much over the last few months.”

The price of copper, on which Zambia depends for 75 percent of foreign exchange inflows, has plunged to 6-year lows, and the El Nino weather phenomenon will probably worsen a drought, threatening to curb production of the staple corn crop for a second year. Lower rainfall also translates to less electricity generation in the country, which relies on hydro power for about 95 percent of supply. Yields on Zambia’s $1 billion of Eurobonds due April 2024 have climbed 269 basis points since the beginning of July, reaching a record 12.7 percent in October.

The central bank has used almost every tool at its disposal to bolster the currency of the nation that imports everything from drugs to steel sheets used for roofing. It’s raised its policy rate to a record 15.5 percent, increased the reserve ratio lenders must deposit with it to 18 percent, and lifted the cost it charges commercial banks for overnight loans to 25.5 percent. It has also sold more than $500 million this year to increase local dollar supplies.

These measures have only provided temporary relief. The kwacha has slumped 30 percent in the past six months, and with copper miners including Glencore Plc and Vedanta Resources Plc stopping production at some operations and the power crisis set to intensify, the currency is poised for more losses, according to Barclays Plc.

The kwacha could fall to 14.50 per dollar before recovering in 2016 as macroeconomic conditions improve and the central bank implements further monetary policy intervention, Barclays analysts Ridle Markus, Dumisani Ngwenya and Andreas Kolbe said in a Nov. 13 report. Aid from the International Monetary Fund would also be crucial, they wrote.

The currency, which fell to a record low of 14.6050 per dollar on Nov. 10, weakened 1.9 percent to 10.60 as of 3:39 p.m. in Lusaka on Wednesday.

‘Little Option’

A team from the Washington-based lender visited Zambia this month at the invitation of the government to assess the state of the economy and discuss responses to the fiscal issues facing the country. Neither the government nor the IMF mentioned the possibility of talks about an economic program in their statements at the end of the tour on Nov. 20.

“While the government has softened its stance on IMF engagement, no approach has yet been made,” the Barclays analysts wrote. “However, we believe that as growth pressures intensify and financing requirements grow, the government will be left with little option but to approach the Fund.”

Given the growth outlook, Zambia’s fiscal deficit may swell to 6 percent of gross domestic product in 2016, wider than the government’s target of 3.8 percent, adding to pressure on the country’s financing needs, the Barclays analysts wrote. While Zambia tapped the Eurobond market three times since 2012 to help plug the shortfall, the kwacha’s decline is making servicing that debt more expensive. 

Debt-service costs are set to rise to 20 percent of government revenue in 2016, pushing the ratio of debt to GDP above 50 percent, from 24 percent in 2012, Fitch Ratings said in October. The government probably doesn’t have the resolve to cut expenditure in an election year, leaving IMF aid as the only way of escape from the debt trap, according to NKC’s Erasmus.

“Our baseline scenario sees a further acceleration in CPI inflation over the short term,” she said. “We remain unconvinced that the fiscus will be able to introduce the unpopular expenditure cuts. This will necessitate further monetary policy tightening at the cost of economic growth.”

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