The Economist Intelligence Unit (EIU) has projected Malawi’s average inflation rate of 18.7 percent in 2014, a fall from 28.6 percent last year, countering the International Monetary Fund (IMF) single-digit target.
The influential global economic think-tank’s inflation forecast for Malawi is attributed to the falling global food prices and aid-funded subsidies for poor households.
But International Monetary Fund (IMF) envisioned the single-digit inflation in its statement issued last week after the completion of the third and fourth reviews of the three-year Extended Facility (ECF).
The EIU, nonetheless, expects inflation to moderate to an average of 8.6 percent in the period 2014 to 2017 as productivity increases and as rising oil prices are offset by easing food prices.
“However, the removal of fuel and electricity prices together with the depreciation of the currency, election-related spending and food shortages mean that inflationary pressures will still persist in the forecasting period.
“Inflationary pressures may ease after the harvest season starts in April. Inflation in 2013 had failed to reach the single digit as targeted in the Economic Recovery Plan and it is unlikely to do so in 2014,” says the EIU forecast quoted by Nico Asset Manager’s annual economic report for 2013 released on Wednesday.
Inflation is a monster that leads to higher prices and lowers disposable incomes for both businesses and households, and lead to higher cost of living and doing business.
Higher inflation rate, according to economists, also results in higher interest rates as people demand better returns. It also has a direct impact on lending rates which reduces the amount borrowed, resulting in a marked decline in savings and investment.
The Malawi Confederation of Chambers of Commerce and Industry (MCCCI) in their 2013 economic assessment noted that inflation is likely to be out of control this year when cashgate money starts vote buying and donations and gifts, even in excess of annual incomes of those making them.
“Malawians should, therefore, brace for tough times. Businesses are, therefore, likely to be at standstill. When customers cannot buy products, businesses find it difficult to thrive,” said the assessment.
Nico Asset Managers has attributed the rise in inflation to increasing food costs and fuel prices.
The investment advisory firm has forecast that prices of maize, the country’s staple grain and usually the main determinant of inflation, to go up if the grain produce trader Admarc maize stocks run out, leading to a further inflation rate rise.
The projected higher inflation rates may lead to a depreciation of the kwacha as the purchasing power decreases relative to the country’s trading partners while the exchange rate is expected to continue depreciating in the shortterm as the country is in the lean season, according to Nico Asset Managers.
Currently, Malawi is receiving foreign exchange inflows through exports other than tobacco and some aid inflows that are coming in directly to support the different sectors such as health.