USD80/bbl Crude threatens Zambia’s single digit inflation
Crude is pointing north and is determined to trade for USD100/bbl. as Saudi Arabia the de facto OPEC leader comes to the party committed to tighten supply that should give support to the commodity price. ICE Brent contracts are trading for USD79.57/bbl. while NYMEX WTI contracts trade for USD71/bbl. as at 13.10 (GMT+2) on 18 May. The last time Zambia effect a pump price adjustment crude traded for USD63/bbl. and a price of USD80/bbl. is 26.98% higher. With a Kwacha weakening to ZMW9.95/USD, Zambia could be ready for another upward adjustment to its fuel prices. In the Energy Regulation Board – ERB review it is expected that the pump price will be adjusted higher.
However, if this does happen then cost push pressures will mount on the inflation number which will surely rise to break the 6-8% target band. Inflation outlook in the medium to long term is bearish for Zambia. A key concern is how the Bank of Zambia and Ministry of Finance stick to the 6-8% band even when it is clear that Oil prices are rising fast on the international market. With fuel subsidies lifted the adjustment will cause a production and transport cost spiral that will result in the CPI rising higher which has potential to push yields on treasury bills and bonds higher as was the case after December 2015 when inflation jumped to 22.9% levels.
“One school of thought believes if ERB did stick to the 2-month review time lines the adjustment could have been effect already but then the delay could signal that the state is cushioning the impact and could explain why the national foreign exchange reserve levels have dwindled to USD1.8billion. Something is absorbing the fuel cost pressure,” Business Times Analyst said in a note.