Zambia's Inflation Peak Presents Strategic Opportunities in Bonds and Equities

The stabilization of Zambia's inflation at 16.5% in April 2025—unchanged for two consecutive months—marks a pivotal moment for investors. After peaking at 16.8% in February, the respite in food prices driven by a bumper maize harvest has created a rare window of opportunity. This article argues that the convergence of agricultural recovery, monetary policy discipline, and favorable macroeconomic trends positions Zambian bonds and select equities as compelling buys ahead of projected declines toward the central bank's 6-8% target by early 2027.

The Inflation Dynamics: Food Prices Stabilize, Non-Food Pressures Persist

The 16.5% inflation rate as of April 2025 reflects a critical turning point. Food inflation, which constitutes 54% of Zambia's CPI basket, has dropped to 18.7% from 20.6% in February. This retreat is directly tied to a record maize harvest of 3.6 million metric tons, nearly double the drought-stricken 2023/24 season. Favorable rains and improved post-harvest management—critical to avoiding historical losses of 30-40%—have eased supply bottlenecks for staples like mealie meal and cereals.

However, non-food inflation has risen to 13.4%, driven by a weakening kwacha (down 14.9% annually against the dollar) and rising import costs for fuel, pharmaceuticals, and durable goods. The Bank of Zambia (BoZ) has responded by holding its policy rate at 14.5%, pausing its tightening cycle to assess the inflation trajectory. This pause signals confidence that food price stability will outweigh non-food pressures, particularly as global crude oil prices remain subdued.

Monetary Policy: A Dovish Turn Ahead?

The BoZ's decision to halt rate hikes in May 2025 is a strategic pivot. While non-food inflation remains elevated, the central bank's projections assume a 13.5% average inflation rate for 2025—a downward revision from its earlier 14.6% forecast. If realized, this could set the stage for gradual rate cuts by late 2025 or early 2026, as inflation trends toward the 6-8% target.

Investors should note that the BoZ's dovish bias is underpinned by three assumptions:
1. Post-harvest efficiency: Effective storage and distribution of maize will prevent a recurrence of crop losses.
2. Kwacha stability: A managed exchange rate will limit import-driven inflation.
3. Debt restructuring: Progress on Zambia's $13 billion external debt will ease fiscal pressures and stabilize investor sentiment.

Investment Opportunities: Bonds First, Equities Second

Zambian government bonds, particularly those denominated in hard currencies, present the clearest value proposition. The 2041 Eurobond (YTM: 10.5%), for instance, offers a premium yield while hedging against local currency risk. With inflation likely to trend downward, these bonds could benefit from a refinancing boom as the BoZ's policy rate declines.

In equities, agricultural and agribusiness firms are poised for a cyclical rebound. Companies like Zambeef Products (ZMBF), which dominates the mealie meal market, or Sable Chemicals, a fertilizer producer, could see margins expand as input costs stabilize. Meanwhile, inflation-linked securities, such as the BoZ's Zambian Inflation-Linked Bond (ZILB), offer direct exposure to the inflation slowdown.

Risks and Mitigants

The strategy hinges on mitigating three key risks:
1. Post-harvest inefficiencies: Investors should monitor crop storage data and engage with companies implementing cold storage solutions.
2. Kwacha depreciation: Pair bond investments with currency hedging instruments or focus on foreign-denominated debt.
3. Debt renegotiation delays: Track progress on Zambia's negotiations with the Paris Club and private creditors.

Conclusion: Act Now Before the Rally

Zambia's inflation peak has arrived, and the path to normalization is now visible. The stabilization of food prices, paired with the BoZ's pause in rate hikes, creates a compelling entry point for investors. Strategic allocations to hard-currency bonds and select equities in agriculture could yield double-digit returns as inflation declines and macro stability improves.

The window to capitalize on this inflection point is narrowing. Investors who act decisively now will position themselves to profit from Zambia's cyclical recovery—and the eventual normalization of monetary policy—before the market fully prices in these opportunities.