CSO’s statement on Kwacha depreciation and inflation-worrying-CUTS International

Consumer Unity and Trust Society (CUTS) International would like to express deep concern with the view of the Central Statistics Office (CSO’s) in its statement made to print media on Tuesday, 27th March, 2012 alleging that the recent continuous depreciation of the Kwacha will not affect inflation rate figures.

The exchange rate is one of the macroeconomic fundamentals which significantly affect consumer price inflation. In a growing and relatively open economy such as the Zambia, there is a channel through which the exchange rate affects inflation which can in principle be monitored.

This is a “direct channel” whereby the exchange rate affects, with a relatively small lag, prices of imported goods, i.e. goods intended directly for the consumer market as well as raw materials and semi-manufactured (goods) intended for production of consumer goods of domestic origin. The exchange rate affects not only prices of imported goods, but also – indirectly via import arbitrage – prices of domestic goods which are under competitive pressure from imported goods.

Recent trade figures indicate that Zambia has been enjoying trade surpluses. However, Zambia’s main import commodities include Copper ores and concentrates; Petroleum oils and other oils obtained from bituminous materials; Cobalt ores and concentrates; as well as Minerals or chemical fertilizers with nitrogen in addition to retail goods all whose prices will be adversely affected by the continuous Kwacha depreciation as imports become more expensive due to the upward pressure created by a weak Kwacha.

Foreign made retail commodity prices will rise while Zambia also imports most of its production inputs which entails that an input price rise will lead to the end product price rising assuming that all other variables are held equal. The end effect is that consumer welfare will be negatively affected.

CSO has said that inflation will not be affected by the current exchange rate fall but this then brings into question the validity of the new method of Consumer Price Index (CPI) calculation.

The method of calculating inflation has been modified at CSO from the beginning of this year but no concrete reasons have been given for this change or how this affects the final inflation figure. This can create questions in civil society as to the accuracy of the official inflation figures or their comparative use with past figures as they now have different methods of generation.

The Central Statistics Office risks losing credibility with the public and could fuel suffocation of the economy if it provides inaccurate or skewed statistical data to the public.

We therefore urge CSO to acknowledge the inflationary effect that the weak Kwacha will have on commodity prices if it persists.