Key Business Points
- Inflation control is crucial for Malawi’s economic stability, with the central bank playing a key role in keeping inflation below 10 percent.
- Fiscal deficit financing has been a major driver of inflation, with the government’s large deficits being financed by the Reserve Bank of Malawi (RBM), leading to excessive money supply growth.
- Monetary policy needs to be tightened to reduce inflation and stabilize the kwacha, with a focus on prudent fiscal and monetary policies to reduce the budget deficit.
The current state of Malawi’s economy is a pressing concern for the business community. As a young economist 25 years ago, I began writing about the economy, trying to understand the root causes of Malawi’s underperformance. One of my first articles, "Depreciation, inflation and trepidation," highlighted the issues of rising prices and a falling currency. Inflation, defined as the persistent rise in prices of domestic goods and services, has been a major challenge for Malawi. The country has experienced high inflation rates, driven by both internal and external shocks, including sharp increases in the price of key imports such as crude oil and droughts that push up food inflation.
The central bank, Reserve Bank of Malawi (RBM), plays a crucial role in determining inflation and the value of the kwacha. The bank’s monetary policy should aim to keep inflation low, ideally below 10 percent. However, the bank’s actions can sometimes contribute to inflationary pressures, particularly when there is excessive expansion of the money stock and credit. As the Chichewa phrase "kugula ndi kuzuzula" (buying and selling) suggests, the money creation process can be thought of as "printing money," which can lead to inflation if not managed properly.
The World Bank has reported that money supply growth in Malawi has been elevated over the period 2020 to 2025, driven partly by financing of the fiscal deficit by RBM. This rapid growth of money supply has contributed to persistent high inflation and macroeconomic instability. To reduce inflation and stabilize the kwacha, it is essential to focus on internal factors that can be controlled, such as prudent fiscal and monetary policies. This means telling governments to "zimva kwa mezani" (live within their means) so that they don’t resort to borrowing from the Reserve Bank or borrowing excessively from the private sector.
Malawi’s fiscal deficit has been very high, in excess of nine percent of gross domestic product (GDP), which is a full-blown fiscal crisis. The words I wrote 25 years ago still hold true today, and it is essential to understand that inflation hurts the poor most because they have no buffers or savings. Even the wealthy suffer because their pensions would be wiped out by hyperinflation. The economy’s performance is closely tied to the government’s policies, and it is crucial to prioritize "uchumi wa kuwala" (a stable economy) to ensure that the country can achieve sustainable economic growth.
Over the 2020 to 2025 period, Malawi has experienced very high money supply growth, often in the range of 38 to 47 percent annually, largely fueled by fiscal deficit financing and monetary expansion. The main drivers of inflation have been fiscal deficit financing, loose fiscal and monetary policies, and external shocks and climate events. The government’s responses to external shocks and the lack of tighter monetary policy have underpinned continued monetary expansion. As the famous novel "Things Fall Apart" by Chinua Achebe suggests, the center cannot hold when things fall apart, and it is essential to take corrective measures to stabilize the economy.
In summary, Malawi’s business community needs to be aware of the current economic challenges and the need for "chipongwe cha uchumi" (economic stability) to ensure that the country can achieve sustainable economic growth. The government and the central bank must work together to reduce the fiscal deficit, tighten monetary policy, and prioritize prudent fiscal and monetary policies to reduce inflation and stabilize the kwacha. By doing so, Malawi can create a favorable business environment that promotes economic growth, investment, and job creation.
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