IMF REP rues double digit inflation rate

New International Monetary Fund (IMF) country representative Jack Ree says the current double digit inflation rate is one of the key obstacles undercutting Malawi’s economic growth.

Malawi’s year-on-year headline inflation—largely pushed by maize, which has huge weight in the consumer price index at 50.2 percent—has since 2012 been in double digit lane, one of the highest in Southern Africa Development Community (Sadc) and Common Market for Eastern and Southern Africa (Comesa) trade blocs.

Ree, a South Korean national who has replaced Geoffrey Oestreicher whose tour of duty ended in August, said in an e-mail response to questions on Friday that high inflation rate is hitting hard the poor by eating away their disposable income as well as discouraging most Malawians to invest.

He said: “We need to bring down inflation, which has remained in double digits since 2012. Inflation cycles, once entrenched, are very difficult to break.

“People also don’t invest or save in an inflationary environment. [Economic] growth never comes until inflation gets reined in. Inflation also hurts the poor the most.”

To tackle high inflation rate and other macroeconomic variables such as foreign exchange imbalances, high interest rates and the growing budget deficit, Ree said government needs to address the root cause of the problem, which is fiscal

imbalance as a result of huge domestic borrowing.

“We already talked about the need to bite the bullet. Inflation, foreign exchange imbalances, high interest rates and budget deficits are different faces of the same dragon—that is monetary excess caused by government spending beyond the available means,” he said when asked to give his impression of the country economically and what authorities need to do to turn the corner in terms of economic growth, which has been revised downwards to 2.9 percent from the initial 5.1 percent in 2016.

The Reserve Bank of Malawi (RBM), which has been banking its hopes on government’s efforts to import food to help tapper down food prices coupled with tightening of monetary policy, pegged its year-end inflation rate projection at 22.9 percent.

RBM governor Charles Chuka, in a monetary policy statement issued in August this year, said the central bank will focus on containing second round effects from food inflation to headline inflation.

He said: “The central bank will intensify its communication on monetary policy issues to ensure a well informed decision-making process by market players to manage and contain inflationary pressures through ill-informed expectations.

“This will be supported by timely and efficient management of food situation as well as exercising prudence in government expenditure, which will ensure a declining inflation rate trajectory into 2017.”

To rein in expenditure, Minister of Finance, Economic Planning and Development Goodall Gondwe said government plans to cut about 30 percent of wasteful expenditure to jolt the economy into action.

Economic analysts say fiscal contraction by government could be key to bringing down the rate of inflation, which can then bring down interest rates and spur economic activity.

RBM policy pegsthe policy rate, or bank rate—the rate at which commercial bank borrow from the central bank—at above the inflation rate. The policy rate is currently at 27 percent.

Currently, donors, who withdrew their 40 percent direct budget support (DBS) in November 2013 amid concerns of Cashgate, which is the plunder of public funds at Capital Hill, have not yet unlocked their budget support to Malawi and have opted to finance the budget through off-budget support. n