Inflation May Wreak Havoc in 2025
As we approach 2025, Zambia’s economic landscape stands on precarious ground, with inflation threatening to wreak havoc on the fiscal year ahead. The relentless rise in commodity prices, while not unexpected given current global and regional economic challenges, has become alarming in both speed and frequency.
What was once a predictable, gradual increase in costs has now spiraled into a concerning trend that could cripple Zambia’s fragile economy if not urgently addressed.
Commodity prices have skyrocketed, and this is no longer a trend to be ignored. The Central Bank has made significant efforts through a series of monetary policies to control inflation, but the results so far are underwhelming.
Instead of providing the relief the country desperately needs, we find ourselves in a liquidity-starved environment. High interest and lending rates have suffocated businesses and individuals alike, deterring borrowing from commercial banks.
To exacerbate this, these banks are burdened with heightened statutory reserve ratios, restricting their ability to lend and contribute meaningfully to economic growth.
While Zambia operates as a free market economy, there are limits to the effectiveness of unbridled capitalism, especially in an immature market like ours. Markets driven purely by supply and demand might function in well-established economies, but Zambia’s is still too delicate.
Essential commodities such as maize have a profound impact on the entire economic structure. When maize prices rise, so do the prices of mealie meal and its byproducts, with a ripple effect on household expenditures and broader inflationary pressures.
As a maize-dependent nation, this vulnerability is further exacerbated by increased demand from neighboring countries facing their own crises.
With climate change driving food insecurity in southern Africa, Zambia’s maize production becomes a critical resource, not just domestically but regionally. The resulting demand, however, could push food inflation to uncontrollable levels, creating further economic stress.
The inflationary trend is not limited to food commodities. Imported goods have also seen sharp price hikes, putting immense pressure on the kwacha. While the currency has commendably stabilized over the past three months, trading at around K26.4 to K27.00 against the US dollar, this stability is fragile.
With the festive season on the horizon, Zambia’s growing demand for foreign products could weaken the kwacha further, resulting in even higher prices for essential imports.
Cement, an essential commodity in the construction industry, has already seen price hikes exceeding 8%. This spells trouble for the housing market, with rental prices expected to surge, especially in January 2025. These increases place undue strain on household budgets, further stoking inflationary fires as landlords adjust prices to match rising costs.
The Bank of Zambia’s reliance on contractionary monetary policies has yet to deliver the desired results. While raising interest rates and tightening the money supply may have theoretical merit in controlling inflation, the practical impact in Zambia has been to stifle growth.
Our economy is too fragile to endure the continued application of these policies without breaking. As such, while the Central Bank may continue its efforts to curb inflation from breaching single-digit thresholds, the likelihood of success in 2025 seems slim. We predict inflation will peak at 21-22% by mid-year before gradually receding to 12-14% by the year’s end.
To mitigate this crisis, the government must acknowledge that inflation, though undesirable, is not the economy’s worst enemy. In certain situations, moderate inflation can be tolerated if it accompanies growth. Zambia might need to consider a shift in strategy, from purely contractionary policies to stimulus measures that can revive the economy.
However, the path forward is complicated by Zambia’s financial commitments, particularly the restrictions imposed by the International Monetary Fund (IMF) credit facility, which limits the flexibility needed to enact expansive fiscal policies.
Despite these constraints, there are avenues for improvement. Encouraging local value addition—particularly in our traditional export industries like mining—should be a priority. This can stimulate domestic production and reduce our reliance on imported goods, thereby alleviating some of the inflationary pressures caused by external market forces.
Moreover, diversifying and adding value to non-traditional exports, such as agricultural products, can bolster foreign exchange reserves and help stabilize the kwacha.
Furthermore, the government must be proactive in monitoring price increments across sectors. Price increases must fall within acceptable margins, especially for essential commodities.
While supply chain disruptions and the ongoing power crisis are realities we must contend with, they should not serve as excuses for price gouging or exploitation. The government needs to play a more assertive role in regulation to ensure that both businesses and citizens are protected from unchecked profiteering.
The current inflationary pressures highlight the flaws in Zambia’s overly liberalized market. Leaving critical sectors entirely exposed to global market forces has proven disastrous for a developing economy like ours.
Strategic protections are necessary to safeguard key industries from external shocks, enabling them to grow domestically before being thrust into the competitive global market.
The impending inflationary crisis of 2025 is a test of Zambia’s economic resilience and policy effectiveness. While there are no easy solutions, a combination of strategic government intervention, market regulation, and value addition could help mitigate the worst impacts.
The time for action is now—before inflation spirals out of control and wreaks havoc on the fiscal year and the broader economy.
