(This Is In Response to a Press Query by Sunday times, 16th July, 20009.)

There are two key issues to inflation at the moment. One challenge is that inflation rate will certainly come down towards the end of the year to margins of 10 percent as projected. This is mainly because the inflation basket in Zambia is influenced by food. The delay by the Food Reserve Agency and millers to buy maize has built huge stocks leading to desperate selling especially by rural farmers who cannot hold stock in anticipation of high demand towards the end of the year. At this time of the year, there are food substitutes such as starches and these have also lowered the demand for mealie meal; and this includes individuals who have produced their own maize for domestic consumption.

The external market for exports is slimmer than last year as most countries did produce reasonably better maize than last seasons and this includes Zimbabwe. What we will experience is that the food prices (except for meat, poultry products) will come down. Since food prices account for over 50 percent of the food basket, it is very easy to slow down the rate of inflation to 10 percent at the moment. The challenge is the fact that food accounts for such a huge potion on the inflation rate in Zambia. It means the economy is not diversified enough and we have very weak insulation against inflation. Just a change in weather, impacting on food production, can easily destabilize the macro-economic variables in the country.

Zambian consumers will also notice that other prices are going up; this is in areas of rentals, properties prices, air fares, industrial transport but the impact on the rate of inflation is negligible. Most of these increases are not induced by demand but by perception and anxieties arising from the devaluation of the Kwacha. This is the reason rental charges will fall or stabilise by November. In other words, we will still experience rises in inflation in the coming months but the rate of increase will be lower. As a result the impact on the other variables such as interest rates will be very minimal. If anything, most banks have already started reducing base rates as they notice the rate of inflation is stabilizing.

On the other hand, the insistence by the government to increase salaries by 15 percent for civil servants has also helped stabilize market expectations. While it is regrettable government could not award higher wages for civil servants, the rejection may as well have a positive impact on the overall macro-economic indicators. I guess that for 2010, government will budget for higher salary increases for civil servants so that the salaries relate to what is prevailing in the private sector. On the same issue, most private companies increased salaries by slightly above 10 percent this year, contrary to what they offered last year. These below-inflation increases will help stabilise the inflation rate as well.

The issue affecting inflation rate negatively is the depreciation of the Kwacha. Zambia is an import dependant economy for both finished goods and raw materials. For this reason, most manufactures are in the process of increasing the prices of goods and services. Most of the imported goods, especially those coming from the appreciating Rand economy (South Africa) are rising. This will have an impact on government objectives of attaining single digit inflation. On the whole, Zambia still has a chance to recover in terms of output (GDP) and the attainment of at least 5.2 percent growth rate. Companies like Zambian Breweries have lately increased their investments and should double output by September. A number of other companies are doing the same as the impact of the global crisis is receding. In other words, despite the numerous challenges, Zambian manufacturer have confidence in the medium and long term stability of the economy and as a result, the levels of investments, capital inflows in the real economy, will continue to rise. This is provided the government sticks to fiscal and monetary discipline and a much more predictable policy frame work.