Malawi’s Fiscal Deficit: Navigating Challenges for a Resilient Economy

Key Business Points

• The Reserve Bank of Malawi (RBM) is facing pressure to manage inflation due to a growing fiscal deficit and money supply growth, making it risky to loosen monetary policy.
• The central bank is engaging with fiscal authorities to implement containment measures to reduce the fiscal deficit, which stood at K662 billion in the first quarter of the current fiscal year.
• Businesses can expect a tight monetary policy stance to continue, with the policy rate maintained at 26 percent, as the RBM aims to balance inflation management with economic growth.

The Reserve Bank of Malawi (RBM) is walking a fine line between managing inflation and supporting economic growth, as the country’s fiscal deficit and money supply growth put pressure on the central bank’s monetary policy decisions. According to the RBM’s Director of Financial Markets, Chakudza Linje, fiscal pressure is a major concern, driven by an 81 percent growth in the fiscal deficit year-on-year. This has resulted in a 45.8 percent growth in money supply in the second quarter, higher than the 42.6 percent growth in the corresponding quarter last year.

The RBM is comunidad ya mafuta (cautious) in its approach, maintaining a high policy rate of 26 percent to manage inflation, which is expected to hit 32.4 percent by December. While the central bank draws confidence from the lower inflation rate of 28.5 percent in the quarter, compared to 32.8 percent last year, economics expert Esmie Kanyumbu commends the RBM for its cautious approach but emphasizes the need for coordination between fiscal and monetary authorities to channel resources towards growth and export-oriented sectors.

The Economics Association of Malawi recommends mkati wa matumba (expenditure cuts) and coordination between the two authorities to manage inflation and support economic growth. As the RBM navigates these challenges, businesses can expect a tigth monetary policy stance to continue, with the policy rate maintained at 26 percent. This approach aims to balance inflation management with economic growth, providing a stable environment for businesses to operate. With the kutengera kwa chilembe (gradual easing) of inflation expected to continue, businesses can look forward to a more stable economic environment, but must remain vigilant and adapt to the changing economic landscape.

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