IMF 2014 inflation targets raised

Malawi’s 2014 inflation targets under the International Monetary Fund (IMF) Extended Credit Facility (ECF) have been raised, a reflection that this year’s prices will rise at a higher rate than expected.

According to Malawi’s IMF country report released last week, 2014 end of year inflation has been raised from 5.8 percent to 9.7 percent while the annual average has been increased from 8.1 percent to 15.1 percent.

But in view of the IMF inflation targets, experts have argued that the projections are too ambitious bearing in mind that this is an elections year where both government and political parties will raise their expenditures and increase money supply which will consequently push up inflation.

In the report the fund, however, notes that although inflation will be falling at a slower pace, single digit inflation remains the goal by end 2014.

“Inflation is programmed to fall, but the path for 2013-15 has been raised moderately to reflect the higher-than-projected outturn so far in 2013 and the likely impact of recent depreciation of the kwacha on non-food inflation in the next few months. The revised monetary programme is based on Reserve Bank of Malawi (RBM) tightening monetary policy over the next few months and more aggressively sterilising foreign exchange inflows when the tobacco season starts,” reads the IMF report in part.

Malawi’s inflation rose by 0.6 percentage points to 23.5 percent in December after peaking in February 2013 at 37.9 percent. The increase in the consumer price index pushed the 2013 average inflation to 28.6 percent compared to 21.4 percent in 2012.

However, the central bank recently projected that inflation would settle at 23.1 percent in December 2013 and fall below 15 percent by June 2014.

But the IMF notes that the RBM’s main monetary policy objective is to achieve a single-digit inflation. However against the background of high inflation the fund notes that the RBM said it will monitor commercial banks’ excess reserves through its liquidity forecasting framework and maintain a tight monetary stance and if needed, it will use open market operations to mop up excess liquidity in the banking system.

However, bearing in mind that this is an elections year, the IMF fears for policy reversals and loosening of macroeconomic policies which it has said it would likely be marked by reserve losses, exchange rate depreciation, and rising inflation, and would jeopardise the prospects for sustained growth.