WHAT SHOULD WE DO TO ARREST INFLATION?
By Sean Tembo – PeP President
- Last evening l wrote an article in which l condemned the decision by the central bank’s monetary policy committee to increase the monetary policy rate by 50 basis points from 8.5% to 9%, as a way of trying to arrest inflation. My argument was that such a measure was ill-advised because our inflation is largely cost-push and not demand-pull, and also that credit is not a major source of purchasing power in our economy as it accounts for less than 13% of GDP. I further went on to argue that increasing the MPR will have the detrimental effect of hindering economic growth as well as increasing the cost of living at household level. However, as l was going through some comments related to last evening’s article, l noticed a recurring theme in which readers requested that l provide alternative solutions of how to arrest inflation if not by increasing the MPR. This article seeks to do just that.
- As argued yesterday, our inflation here in Zambia (both food and non-food) is largely cost-push and not demand-pull. We can further sub-categorize this cost-push inflation into imported and domestic, of which imported cost-push inflation accounts for more than 80% of all the cost-push inflation. Why is this the case? Well, because we are an import-dependent country as we import everything from fuel to toothpicks. Even for the little manufacturing that we do, a large portion of the raw materials are often imported. This largely exposes us to an increase in prices on the world market. For instance, when the prices of oil go up on the world market, the pump prices of fuel has to go up, and fuel being a key production input, it will have a ripple effect as it will increase the cost of transport and generally adversely impact the cost of all goods and services.
- However, the larger component of our imported cost-push inflation arises from a depreciation of the local currency, the Kwacha. Since for us to import goods to this country, we cannot use the Kwacha but need to use hard currencies such as the US Dollar, when the exchange rate between the Kwacha and the US Dollar depreciates from say K16 to K17.5, as it has done in the past three months or so, then the cost of importing the same amount of goods will go up, even though the person from whom we are importing has not increased their prices. In this particular example, the cost of importing goods would have gone up by approximately 9% [(17.5-16)/16*100]. Suffice to mention that apart from the recent disruption to global supply chain systems due to the pandemic, prices of most goods are generally stable on the world market.
- So for us to effectively arrest the imported cost-push inflation, we need to address the issue of the depreciation of the Kwacha against major convertible currencies. There are a number of factors that influence the exchange rate of the Kwacha to other currencies which include market confidence, but the most significant is the supply and demand of the hard currencies. For instance, if there is more supply than demand for US$ on the forex market, the Kwacha will appreciate against US$. Now, you may wish to note that our demand for US$ is pretty stable. We need US$ to service our external debt, to import fuel etcetera. In other words, we can easily project with reasonable certainty how much US$ we shall need at what point in time.
- The supply side of US$ is also quite predictable. In as much as we have tried over the decades to promote non-traditional exports, we have not succeeded much and the mining sector still accounts for more than 90% of our forex supply. Every now and then, foreign direct investment (FDI) does compliment the mining sector, but the mining sector remains the backbone of forex supply. Now, the demand side of forex is largely cast in concrete and steel and we cannot really fiddle with it. I mean we have to service our external debt, whether we like it or not. Similarly, we need to import fuel whether we like it or not. So we cannot do much to manipulate the demand side of forex, but what about the supply side?
- Well, as a matter of fact, there is a lot that we as a nation can do to increase the total supply of forex into the economy. I have argued before in almost all the PeP Alternative National Budgets that we have prepared since 2017, that the mines remit less than 30 percent of the gross proceeds of mineral exports back to the country. What happens is that let us say XYZ mine (no relation to Slap D) exports $100 million worth of copper to a customer in China, when that customer pays, the $100 million will not land in XYZ mine’s bank account here in Zambia, no. The $100 million will go to XYZ mine’s parent company in Canada, India, Brazil, South Africa or any such country. And then the parent company of XYZ mine will only remit back to Zambia a small amount such as $20 million out of the $100 million to meet local expenses such as salaries, Zesco bills, etcetera. Meanwhile theoretically we are recording an export of $100 million and when we calculate the balance of payment position, we record a surplus. But that surplus is just on paper, in reality we have a perpetual deficit because the $100 million did not enter the Zambian banking system, only $20 million did.
- In order to address the problem outlined above, Government simply has to pass a regulation that will compel the mines to remit the gross proceeds of their mineral exports. If Slap D’s mine, XYZ exports $100 million worth or copper to China, then the customer has to remit the entire $100 million to XYZ mine’s bank account here in Zambia at Indo, Investrust, ZICB, Natsave or whichever commercial bank XYZ mine maintains an account with. Once the $100 million is remitted back to Zambia, XYZ mine can then make the payments that it needs to in order to sustain its operations, including foreign payments. At the end of the year, once XYZ mine prepares its financial statements, if it declares a profit, it can then proceed to declare a dividend and remit such a dividend to its parent company in Canada, India, Brazil, South Africa etcetera, of course after paying the requisite corporate tax on the profits and withholding tax on the dividends. The measure of compelling all mining companies to remit the gross proceeds of their mineral exports back to Zambia would not only be a game changer in terms of pushing down the exchange rate and addressing imported cost-push inflation, but it would also assist with addressing issues of tax compliance by the mines.
- So the question then becomes; why hasn’t any administration implemented this measure? Well, as a matter of fact Bashikulu Ba Sata’s administration did attempt to enforce this measure through Statutory Instrument No.55 that was issued through gazette notice number 419 on 25th June 2013. But it was haphazardly conceived and implemented as it sought to achieve too many things at once. The key thing about reforms is that you keep them simple and make them gradual over time, so that you learn as you go. The other challenge was that SI 55 focused largely on outward remittances from Zambia to the outside world, but the larger problem is with regard to inward remittances from the outside world to Zambia for Zambia’s exports.
- I actually envy most of Sata’s policies. I believe that he had a fair understanding of what the problem was in various sectors of the economy and perhaps his only challenge was that he wanted to achieve everything at once instead of having a gradual approach.
- Anyway, back to the issue at hand, the question remains; why hasn’t anyone made a sincere effort to compel the mines to remit the gross proceeds of their mineral exports back to Zambia, both in previous and current administrations? I personally believe that it is not an issue of competence. But rather, it is an issue of having the backbone to do it. I mean, one does not need to be an economist to see that if copper prices are shooting up on the world market, having recently crossed the $11,000/tonne all-time record, then why should the Kwacha be depreciating? Isn’t the value of the Kwacha also supposed to be at an all-time high? Why the opposite? So the technocrats in Government know where the problem is, and the political leadership is also equally aware. But the problem is that no one has the backbone to implement the necessary reforms to compel the mines to remit the gross proceeds of their mineral exports back to Zambia. This is because you are talking about billions of dollars here. So for each administration that comes into office, the mining companies can afford to open a numbered offshore bank account for each member of Cabinet and deposit a ka $30 million in each account. Then the issue will simply die a natural death, until a new administration goes into office, then the cycle is repeated. And while all this happens, our economy is damaged and the common Zambian is suffering from the ravaging effects of a high cost of living that is largely brought about by imported cost-push inflation which can easily be addressed by compelling mining companies to remit the gross proceeds of their mineral exports back to Zambia. The solution is right before our eyes and yet not reachable.