IMF tips Malawi on taming inflation

IMF tips Malawi on taming inflation

Post was last updated: November 25, 2022

The International Monetary Fund (IMF) has urged authorities to ensure that the monetary policy framework aims at restoring price as well as financial stability to take the country out of its fragile economic state.

In a country report for Malawi released on Wednesday, the global lender faulted the Reserve Bank of Malawi’s (RBM) monetary policy, saying it is not fully working to control money supply growth.

The report comes at a time the RBM last month increased the policy rate, a key driver of interest rates on loans, from 14 percent to 18 percent to contain the runaway inflation rate, which is currently at 26.7 percent as of October this year, according to the National Statistical Office.

Reads the IMF report in part: “In this regard, the RBM needs to persist in its efforts to reduce inflation and anchor inflation expectations by containing reserve money growth and aligning the monetary policy rate with inflation to ensure positive

real returns on government securities, as well raising the required reserves if needed.

“The RBM should also remain vigilant to ensure financial sector stability given the banking sector’s large exposures to government securities and associated potential risks.”

Malawi’s year-on-year headline inflation rate has been on the rise, hitting 26.7 percent as of October, a jump from 12.1 percent recorded in January this year largely due to rising food and non-food items.

In an interview yesterday, economist Exley Silumbu, who is also former University of Malawi economics lecturer, said that price stability is critical, observing that high prices are dealing a heavy blow to consumers and enterprises

He, however, noted that inflationary pressures in Malawi are not pushed by growth in money supply, but low export

and manufacturing base, saying addressing these would help tame inflation and stabilise prices in the short to medium-term.

Said Silumbu: “The inflationary pressures we are facing are due to the fact that the supply side is sort of neglected. We do not have much to export and gain competitiveness as is theoretically purported.

“To this end, therefore, it must be noted that in Malawi, the economics which works is one of making sure that we do not bring in expensive imports that stifle the economy and welfare.

“What we have to do is implement supply side measures by growing exports.”

Meanwhile, the RBM has indicated that inflation outlook remains under pressure, but said the central bank remains committed to easing the pressure.

During the fourth Monetary Policy Committee meeting last month, RBM Governor Wilson Banda indicated that pressures on inflation are likely to continue mainly arising from a seasonal increase in prices of domestically produced food items and imported inflation.

He said the central bank now has no choice, but to tighten its monetary policy stance, adding that the central bank is committed to maintaining the real interest rate below the growth rate to support growth.

In its Monetary Policy Report for October 2022, the RBM said inflation pressures continue to heighten as evidenced by the upsurge in the average headline inflation to 25.3 percent in the third quarter (Q3) of this year from 19.4 percent in the second quarter of 2022 and compared to 8.7 percent for Q3 in 2021.

The central bank indicated that the outturn was driven by developments in both food and non-food prices.

Reads the report in part: “Looking ahead, inflationary pressures are expected to linger on fueled by the delayed pass-through of past increases in food and energy prices from global commodity markets to domestic consumer prices, persistent fiscal slippages, continued pass-through of exchange rate depreciation and seasonal increases in food prices, among others.”

As a result of these developments, RBM said the 2022 annual average inflation is projected to rise to 21.5 percent from 9.3 percent registered in 2021

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