Zambia's annual inflation rate reached a 32-month high in August, driven by an El Niño-induced drought that continues to push food prices higher.

Consumer prices rose by 15.5% in August, up from 15.4% in July, according to Statistician-General Goodson Sinyenga on Thursday. The month-on-month rise in prices was 0.9%, slightly down from the 1% increase seen in July.

The severe drought has strained the economy, devastated crops, reduced hydropower generation, and caused a surge in expensive imports, weakening the Kwacha, Bloomberg reports.

Food prices, which account for more than half of the inflation basket, increased to 17.6% from 17.4% last month, while non-food price growth slowed to 12.5% compared to 12.6% in July.

The prolonged dry spell has hampered the central bank's efforts to reduce inflation to its 6% to 8% target range by next year, forcing it to maintain a higher key interest rate for an extended period.

Earlier this month, the bank held the rate steady at a seven-year high of 13.5% following six consecutive hikes totalling 450 basis points. 

In addition, it is working to finalise consultations on plans to limit the use of foreign currency in domestic transactions to strengthen the Kwacha.

Last week, the energy regulator rejected a request from state power utility Zesco Ltd. to increase electricity tariffs by up to 156% to cover the cost of emergency supplies. This move potentially prevented a further spike in inflation. 

Furthermore, in October 2020, Zambia defaulted on its external debt, which included $3 billion in Eurobonds. By June 2022, the official creditor committee (OCC) for Zambia, composed of bilateral government lenders, agreed to negotiate debt restructuring terms for bilateral non-commercial debt.

This agreement facilitated the signing of a funded IMF program in August 2022, valued at 980 million Special Drawing Rights or about $1.4 billion. So far, approximately $555 million of this amount has been disbursed.