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Zambia’s ability to attain 8% inflation is ‘dicey’ – Fundanga

Zambia’s ability to attain 8% inflation is ‘dicey’ – Fundanga
By Chiwoyu Sinyangwe and Mwape Chishimba
Fri 14 May 2010, 04:01 CAT

BANK of Zambia (BoZ) governor Dr Caleb Fundanga yesterday described as “dicey” the country’s ability to attain the targeted eight per cent annual inflation rate this year as energy costs continue to escalate. And Dr Fundanga attributed the weak performance of the kwacha against major convertibles in the last two weeks to the ongoing Greek financial crisis.

According to official data from BoZ, the annual inflation rate is expected to slow down during the second quarter of 2010, largely due to an increase in the supply of fresh food items with the onset of the 2009/2010 crop harvest period.

Dr Fundanga told journalists during this year’s first quarter media briefing that the gains made in the agriculture production this year might be reversed by the increases in fuel prices as well as the proposed electricity tariffs by Zesco.
However, Dr Fundanga supported the increases, saying subsidising the pump prices would distort the price while delaying to increase electricity tariffs to cost recovery levels might stifle future investments into the power generation facilities.

“Obviously the situation is a bit dicey now. Clearly, if you just look at the performance of agriculture, it did very well and we certainly expect more grain and other foods on the market,” Dr Fundanga said.

“So, the farmers have delivered but obviously there will be these other challenges like fuel prices. The hikes are coming after the whole production and we are at the harvesting period, what might happen is that farmers probably might start factoring in these increases for their next crop year… Obviously, we are going to have pressures. The price of maize because even transportation or even when they harvest, the fuel for moving the stuff to the market, the millers is going to go up and so forth. So, we you should expect some pressure arising from this and of course Zesco too has already announced and there is debate now on what is supposed to be done. So, you expect that to happen also.”

He said despite the current projections, the annual inflation rate for this year might be affected by other unseen circumstances.

“But each time the rate of inflation is announced, there will be pressures for increment and there will be pressures for reduction,” he said.

“What finally emerges is the balance between the two pressures. If the pressures for the price increases are stronger, you will eventually end up with an increase in inflation, but if pressures for the reduction are stronger, you will end up with the opposite.

“So, it is important that in any given situation, we can say there will be this but there will be other factors that will act in the opposite direction. Supposed to take into account the projected Zesco proposed increases and the ERB fuel increases and then you look at production and the likely reduction in inflation, which is the stronger? I would like to hope that for the forces for the lower levels of prices are going to be stronger if we are going to achieve the projected…besides, these are projections, we don’t know even where the price of oil will end. We might have an increase you can never know.”

And Dr Fundanga said the recent Greek financial crisis was impacting negatively on the performance of the kwacha on the domestic foreign exchange market.

“The Greek crisis is likely to impact on us, for instance last week, the stock prices fell by five per cent, a huge fall in most of the major economies,” he said.

“In fact, in the US they have even instituted an investigation to find out why this happened. And while this was happening, even the kwacha also depreciated during the same time because some of these portfolio investors who bring the money here are coming from those economies. They start withdrawing their money from here to take back to the headquarters in the same way we had seen similar development during the recent crisis.”

Dr Fundanga, who also feared that Chinese fiscal measures to counter growing inflation in the giant economy might negatively impact on copper prices, said BoZ was currently studying the likely implication of the developments in Europe with a view to finding mechanisms of insulating the domestic economy from the possible negative effects.

“The Greek crisis has raised a lot of concerns for everybody because it means that even demand has been projected to go down,” said Dr Fundanga.

“On the other hand, we have in China, which is a major customer for our copper, there has been a little bit of tightening on credit because of fears of inflationary pressures. So, they increased their interest rates a little bit so that people can spend less and obviously it translates also into lower demand for items using copper and so forth. So, part of the fall you have seen in the past one week or so in the price of copper is also explained by theses development in China apart from the developments in Europe and the fears are even beyond Greece as there are other countries facing similar fiscal challenges such as Italy, Spain and Portugal… We have to observe these developments very carefully and try to see what can be done here to shield ourselves from some of the possible negative implications.”

Labels: BOZ, CALEB FUNDANGA, INFLATION, NEOLIBERALISM

posted by MrK @ 4:19 AM